Bank of Marin Bancorp (BMRC) 2013 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 quarter ended September 30, 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 October 21, 2013.

Presenting this morning will be Russ Colombo, President and CEO and Tani Girton, Executive Vice President and Chief Financial Officer. You may access the information discussed from the press release, which went over the wire at 5 AM Pacific time this morning and on our website at BankofMarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that information discussed on this call is based on information that we know as of today, October 21, 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. And now I would like to turn the call over to Russ Colombo.

Thank you, Malin. Good morning, and welcome to the call. Before we get into the details of our quarterly results, I want to introduce Tani Girton, our Chief Financial Officer. Tani joined the bank in August with more than 25 years of experience in financial services, including risk management, and treasury and investment portfolio management. Most recently, she was Executive Vice President and Treasurer at Bank of the West and prior to that, she was Vice President of Treasury Capital Markets at Charles Schwab & Co. Tani is an excellent addition to our executive team and she will play a crucial role in our continued growth and expansion strategy.

As you saw in our release this morning, our earnings this quarter were $4 million as compared to $3.1 million in the second quarter. Overall, our earnings are solid with our continued focus on credit quality and maintaining the strength of our portfolio. As I mentioned to you on our call last quarter, it has been part of our long-term strategic plan to expand into the East Bay and the announced acquisition of NorCal Community Bancorp, parent company of Bank of Alameda, comes at a great time. It will add approximately $170 million in loans and $230 million in deposits and will provide us with great growth opportunities and it gives us a strong foothold in the East Bay.

I'd like to start this call with an update on the progress of the acquisition. In September, we received approval for the transaction from the California Department of Business Oversight, formerly the Department of Financial Institutions. On October 17, the shareholders of NorCal voted to approve the transaction. We are now awaiting the remainder of regulatory approvals from the FDIC and the Federal Reserve. We expect those to come through in the next month.

We are already working diligently on the plans for integration and all areas are moving forward according to plan. We have hired a project manager for the integration and identified the lead individual on each of our various subteams. We've already notified all employees of Bank of Alameda about their roles after the transaction closes. We are retaining the vast majority of the customer-facing employees.

On the systems and operational side, we have kicked off the conversion project with FIS and Fiserv and have a date of March 15 for the systems conversion. While our credit team cannot actively manage the underwriting process before the transaction closes, we have put oversight in place and we are very active in sharing the credit culture between the teams.

In regards to customer relationships, the Bank of Alameda team has already started to introduce us to customers, prospects, and members of the community. We have two customer meet-and-greet events coming up this week and while there's usually some runoff in any transaction, we are confident that we will be able to maintain most of the relationships. We expect to close the transaction in the fourth quarter. With that, let me hand it over to Tani for additional insights about our financial results.

Thank you, Russ. It's my pleasure to be on today's call with you and I'm also looking forward to meeting everyone in the analyst and investor community as I settle into my role here at Bank of Marin. A few comments on the bank's deposits before I dive into the detailed financials. Deposits totaled $1.3 billion compared to $1.2 billion last quarter. Non-interest-bearing deposits continued to increase and comprise approximately 42% of total deposits at the end of the quarter. Our cost of deposits in the third quarter was 11 basis points with our total cost of funds at 22 basis points.

In regards to the detailed financials, net interest income totaled $14 million in the third quarter compared to $14.3 million in the prior quarter. This is mainly a reflection of the continued low interest rate environment. The tax equivalent net interest margin was 3.99% compared to 4.30% for the prior quarter. In addition to continued interest rate pressure, elevated cash balances this quarter had an outsized impact on our net interest margin.

Our balances of cash due from banks are up from $32 million at the end of June to $99 million at the end of September, and this had a negative impact of almost 17 basis points on our margin. Some of that cash will be used to close the acquisition during the quarter and some likely reinvested into the securities portfolio. The tables on pages 2 and 3 of the release have a fair amount of detail regarding the impact on net interest margin by loans purchased from Charter Oak in 2011. As would be expected, the accretion and gains on payoffs continue to decline as that portfolio pays down over time.

While our 63% efficiency ratio looks high compared to historical measures, it is down slightly from 64% in the second quarter. We are doing a good job in holding the line on expenses in our existing business in advance of the acquisition integration. And relative to peers, we remain in a favorable position. We had acquisition-related expenses of approximately $200,000 this quarter and we estimate that about 85% of the total acquisition expenses will hit in 2013.

We have filled some key positions that were open in the first half of the year and these new hires will prepare us for the integration and for future growth. We are putting the infrastructure in place to support a larger bank and the results from the acquired operations, as well as growth in our existing markets, should absorb these expenses as we move into next year.

From a capital standpoint, we continue to be very well-capitalized with a total risk-based capital ratio of 14.1%. Tangible common equity to tangible assets was 10.9% at September 30. After the acquisition closes, the capital ratios are forecasted to stay well above the regulatory minimums for a well-capitalized institution. And with that, I'd like to turn it back over to you, Russ.

Thank you, Tani. A few comments on our loan portfolio and the asset quality. Total loans remained flat at $1.1 billion from the prior quarter despite funding $35.2 million in new outstandings in the quarter. Unfortunately, the new loans are offset by loans paid down from price-driven refinances, completed construction projects, properties being sold and paid off in full, as well as normal amortization.

Our underwriting fundamentals continue to be strong and we are committed to maintaining the same high-quality credit standards and proactive portfolio management in this highly competitive environment. Nonaccrual loans totaled $17.3 million or 1.58% of our loan portfolio at September 30 compared to $18.5 million or 1.69% at June 30. The decrease in nonaccrual loans from the prior quarter primarily relates to paydowns on one commercial real estate loan and one commercial loan. We saw an increase in the third quarter in accruing loans 30 to 89 days past due to $2.2 million as compared to $566,000 at June 30. This is due to a $1.7 million loan that was in the process of being renewed and has since been renewed in October. As a result of improved collateral values, a continued low level of net charge-offs, and a low level of newly identified nonperforming loans, $480,000 of the provision for loan losses was reversed in the third quarter.

Before we open it up to Q&A, I would like to share another couple of highlights from this quarter. On October 1, we launched mobile banking services for both personal and business banking, including check deposit capability. We are using the platform of our core processor, FIS, and it is fully integrated with our online banking platform. The reception among our customers has been very positive and we are expecting to see the penetration of mobile banking increase rapidly.

In this quarter, we also announced several strategic changes within our credit and commercial banking organizations. On this call in July, I mentioned that Kevin Coonan, our current Chief Credit Officer, is retiring and I introduced you to Beth Reizman, Senior Vice President and Senior Credit Administrator. Effective October 31, Beth will become the new Chief Credit Officer for Bank of Marin, and Kevin is officially retiring. This transition has been carefully orchestrated and we anticipate a very smooth transition for our team and for our customers.

To replace Beth, we promoted Tim Meyers in May to take 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. To replace Tim as the new Senior Vice President and Regional Manager for San Francisco, we have hired Charlie Clifford. He joins us from St. Louis where he was in a similar role with Carrollton Bank, a community bank of the same size and culture as Bank of Marin.

And finally, in Santa Rosa, we hired Glenn Stanley as Senior Vice President and Regional Manager. Glenn is a longtime Santa Rosa resident and brings more than 34 years of business banking experience, most recently as Senior Vice President at Citibank where he managed a San Francisco-based business banking team covering the Bay Area.

Last, but certainly not least, we are pleased to announce that we will be increasing our dividend to shareholders this quarter to $0.19 a share. This is the 34th consecutive quarter we have paid a cash dividend. Thank you for your time this morning and now we will open it up to answer your questions.

(Operator Instructions) Jeff Rulis, DA Davidson.

Russ, just a follow-up on your comments on loan growth, I guess sort of on pace for this year on an organic loan growth basis for the year, kind of low single digit sort of pace. I guess you spoke about some paydowns. I guess if you could broadly speak about your expectations for 2014 on the loan growth side in terms of what you're seeing on production and what you think I guess negating that production in the next year.

The production actually is pretty good. We had $35 million of new loans this quarter, yet we had $30 million something -- $31 million of payoffs. The problem right now is that we are seeing -- the good news is that we are seeing a lot of loan volume and all our business banking units seem to have a good pipeline. The other side of it is there just seems to be a continued focus on refinance for so many situations. And so you can see it in the margin, and you can see it just in the lack of total loan growth.

Interestingly enough, in the third quarter, we had payoffs -- total refinances of about $9 million. We had another $6.5 million where people were just -- loans were just paid off for cash. And then we had some other situations that were problems that we had paid off, and then there's about $3 million of construction projects that ran through their process and were paid off as they should. So it's a constant battle just to get growth even though we are seeing tremendous volume. My expectations for next year, I hope the refinance activity declines because rates are -- I don't know how much lower -- I don't think they can go any lower, I hope not.

Got it. Okay. And then maybe one for Tani on the margin side. I guess lots of moving pieces in there, but if you expect some deployment of the cash I guess in the transaction, and you put a bit into securities, and then absent sort of accretion on the PCI loans, I guess what's the readthrough on core margin? Is that expectations for a more positive core margin sequentially?

Yes, I think so, I think we are getting very close to the trough in the margin and absent these other factors, if you look at, as I said earlier, the excess cash accounting for about 17 basis points, the PCI was 6 basis points, so all other factors were about 8 basis points on the margin. If we look forward, all other things being equal, I think we hope to see a turn where the margins on the new volumes are outpacing the margins on the payouts.

Okay. That's helpful. Thanks. And then I guess maybe one last one on the expense, any kind of handle on looking at core expenses either taken on I guess a quarterly basis? You guys are approaching sort of $10 million legacy Bank of Marin and then you roll in NorCal. What are the expectations on the cost savings, if any, on the NorCal, and maybe combined quarterly expense run rate in a range?

When we made our presentation early on, we said that expense cost savings would be in the 35% million range. We still stand by that. As we look at people over there and we really have identified all the people that will be staying on permanently. We've also identified those people that will stay on until integration on March 15, and there are a few people that will leave at close. We are still sticking pretty much by the 35% cost save number. 33% actually was what we had in our presentation. So I still think that's a pretty good number and we are confident that we will hit that and that's kind of where we are.

Okay. Thank you.

Welcome.

Jacquelynne Chimera, KBW.

Hi. Good morning. I wonder if it's possible to quantify what the M&A charges were in the quarter, if you had a dollar amount for that?

So, they were roughly $200 million.

$200,000.

Sorry, $200,000 in the third quarter and for the full year were -- so far, we're looking at about $300,000 and we expect, obviously, significantly more charges to hit in the fourth quarter.

Okay.

Most of those charges up until this point are due diligence, discovery and legal fees and the other types of expenses will hit in this quarter.

Obviously, Jackie, at close, there's going to be significant charges, including the change control agreement, as well as the Fiserv cancellation, which won't actually -- we'll work with Fiserv right through the integration, but we will be charging in the fourth quarter the costs of that cancellation of that contract.

Okay. And you are still expecting total costs to be around $4.5 million?

After tax.

After tax?

After tax.

Okay.

It's closer to $7.5 million pre-tax.

Okay. Then I thought there was a little tickup in the other residential category. Is that some success you've been having with reentering some of the residential loans that you used to book?

Yes. The TIC business, we actually -- let's see, we did -- we have started that program up again and have done -- we've had success in two categories. One category, new deals, new opportunities that we've had and we've used the broker community to advertise the fact that we are in that business. And then we've also had success in refinancing some of the deals that -- some of the loans that we had that were planning on -- that had kind of hit the end of their term and were going to refinance, and likely refinance elsewhere. So by jumping back in the market, we save some loans, as well as added some.

So, in the past, if you had had an existing -- when you had stepped back from that market, if you had had an existing customer that was looking to refinance, would they typically refinance away and then that's not happening now?

Yes, that's correct. You still have refinances because there are some other players out there, but that's kind of down to a trickle and more of it is being refinanced with us.

Okay. And then I can't remember the exact terminology that you used to describe them, but the floating loans, not the loan themselves, but on the houseboats?

Yes. Flow [loan].

Yes, I knew it was something like that. Have you been doing more of those?

Well, actually we have not. We've hit a little bit of a roadblock in that respect because the Dodd-Frank regulations -- because the lease that these people have that have floating home loans -- that have floating homes -- because the lease they have at the harbor where they keep these houseboats, the lease doesn't go long enough, so we can only do five years and we have five years with a balloon and when you have what is considered to be a high-priced mortgage, you cannot have a balloon. So it effectively takes us out of the market.

Now we are trying to work through that and see if there's anything else we can do and reprice them accordingly, but that was a bit of a surprise to us, but we found that regulations now potentially causing us not to do any more of those going forward and we haven't done one since we -- I did report to you on this call a while back that we were going to get back in that business, but there's been a bit of a curveball thrown at us.

Okay. So is that something that was discovered on a recent exam then?

It wasn't an exam; it was as we were trying to structure the new loans, we found this out, that you couldn't do -- we determined that you couldn't do the fixed rate with a balloon, so --.

Interesting.

So we are out of that. We are still working on it to see if there's another way we can structure it to make it work, but we are not going to do deals that are in violation, certainly, of Dodd-Frank.

I wouldn't expect that. Okay, great. Thank you for the update.

Thanks, Jackie.

(Operator Instructions). Tim Coffey, FIG Partners.

Good morning, everybody. Russ, I was wondering if you could give me anything specific in terms of marketing towards [bringing] the deposits that transpired during the quarter?

Marketing towards deposits?

Any reason the deposit growth looked so good?

Because we have a tremendous franchise, Tim. There's nothing specific that we have done, but our branches are focused -- because the way we are operating, which really are the branch system, as well as the commercial banking offices, the branches are really focused on deposit growth. So despite the fact that deposits, they are theoretically at least not as valuable as they used to, I continue to maintain that the core of any -- the value of any franchise is the core deposit base. So we continue to work on these relationship deposits and we have that at 42% now, which is tremendous.

Now, clearly, when rates rise, we will have some runoff; we fully anticipate that. But even when you go back to the days when rates were much higher, we had demand deposits in the 25% to 27% range. So we are pretty happy about continued growth in core deposit's because we know, ultimately, that's going to be a real benefit to us as rates rise.

Okay. And if you could talk about the type of deposits you brought on this quarter, were they a big dollar amount, or was it just a lot more customers coming through?

It's hard to say. We have -- it's kind of across-the-board, so it's not one depositor. I know that in the fourth quarter I think there is a depositor that we think that will bring some more, bigger deposits, but for the most part, our deposit growth has been across-the-board through a number of branches and not any one significant borrower.

Okay. And then I want to follow up on the earlier question about loans during the quarter. I heard what you said about your borrowers being more opportunistic when it came to pricing during the quarter. I'm just wondering, we have heard from some other banks in the Bay Area so far this quarter that they've reported more of a softening of kind of loan demand and I'm wondering if you are seeing anything like that or anything that my concern you going forward.

Well, I think there's a concern across the industry about loan demand and we certainly share that. Most of the activity is refi type activity as opposed to a lot of new economic growth that there's new opportunities because of strong demand because of their business. So I share their concern. I definitely share their concern and I share the concern of other banks. And I would say that's an important reason why an acquisition like we're making for Bank of Alameda is so important because we can get into a new market, we have a new set of customers, and we think we can [uptier] those relationships because they have been held down because of the size of the bank they are dealing with. So if we do our job, and maintain those relationships, we think we will have great opportunities to grow existing relationships over in East Bay and build our loan portfolio from that.

So I think acquisitions are an important thing as you go forward. As you look at banks that are going to be successful, I think those that have an acquisition strategy probably are the ones that are going to be the most successful.

All right. Well, thank you. Those were all my questions.

Okay, thanks, Tim.

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

Good morning, Russ. Good morning, Tani. Hey, a follow-up on Tim's question. Were any of the deposits inflows this quarter temporary, like related to the sale of a client business or something?

I'm certainly not aware of anything like that. It's all been kind of ordinary course of business stuff.

So no reason to think they won't stick around?

No, I don't -- the interesting thing, Tim, is there seems to be a bit more volatility in the deposit base than there has been. We continue to grow and if you look at a graph of it, our growth -- loan deposits continue to grow, but there is more volatility in the day-to-day. So I think they will still be around. There's no reason to believe -- we don't know of any big deposits that are sitting out there that are going to be gone in 30 days. It's typically ordinary course of business.

Thanks, Russ. And, hey, thanks a lot for providing the origination figure. Any idea what the average yield was on the new production this quarter?

That's a darn good -- I -- I'd only be guessing. I can't guess on that; I don't have that number for you, Tim. Sorry.

That's alright. Let me back up more generally, Russ. Anything this quarter on the pricing side, the loan pricing side, that was a positive really? It seems like --.

A positive?

Yes, any positives on the loan pricing side? It seems like kind of across-the-board at least from the press release and what you've said on the call so far, there's not really any blue sky when it comes to loan pricing right now in your market.

No. I would say that the deposit -- I mean the loan pricing competition is very intense right now. We compete best we can, but you see some very long-term, very low rate financings that frankly, at some point, you've got to say we are not going to do it. It's kind of irrational in terms of what some banks are doing, and, at some point, you cannot mortgage the future of the bank; you have to say that's enough and we can only go to here and if we don't get the transaction at a certain price and a certain return, then you say good luck. And we've had to say that in a few -- we've had to say that on a couple of very long-term customers in the education space, long-term customers that we had good relationships with, and the rate pricing for end of term that they were offered were something that we had to say, I'm sorry, we can't that. We were pretty aggressive too, but we couldn't go where some banks would go. We have to make those decisions and I hope that rates begin to rise at some point, but, right now, there's still a lot of, in my opinion, irrational behavior out there.

Are you seeing -- is it getting worse? Are there more new entrants coming in, perhaps non-bank entrants, that you are seeing this quarter, or is it really primarily centered around bank competitors?

I would say the usual suspects, Tim, primarily bank competitors.

Big, little, both?

I'd tell you more big than little, all larger than us.

Got it. And then as far as -- so you talk about the costs being realized. None of the costs from the deal are going to be amortized; it's all going to be -- 85% is going to hit this quarter, it sounds like you are saying?

Yes, the Fiserv contract cancellation fee, as well as the change control agreement, those are all going to hit expenses in the fourth quarter. We are going to have a big number that we are going to expense in the fourth quarter, but it's the cost of doing the deal and that's going to be 85% of the total costs and then there's going to be continuing employees and we will pay them as they go until we close the deal and integrate the systems on March 15. And there will be a little -- probably a little fallover after that, but we expect all the costs will be driven through the organization if not by the end of the first quarter, certainly by the end of the second, but most of them will be in the fourth quarter.

Thanks, Russ. Last question, any increase in construction commitments? Is that a positive we are seeing here or --?

There is a little bit -- there is a little bit of construction activity. Nothing tremendous. Like I think I've said before, I think our construction portfolio is something like $30 million right now, and at the peak of our activity, we had $120 million outstanding. I think the current portfolio, we've got a little over $6 million of construction loans that we are (inaudible) in the fourth quarter and the third quarter that we did.

Thanks for all the color.

Sure.

There are no further questions at this time.

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