Bank of Marin Bancorp (BMRC) 2014 Q1 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 March 31, 2014. My name is Malin Clark. I am the Senior Vice President of Marketing for Bank of Marin. (Operator Instructions). As a reminder, this conference is being recorded on April 23, 2014.

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, April 23, 2014, and may contain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forward in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings press release 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'd like to turn the call over to Russ Colombo.

Thank you, Malin. Good morning and welcome to the call. I'm very pleased to be with you this morning and present our results for the first quarter of 2014. We're off to a solid start and the outlook for the rest of the year is promising.

Before we get into the detailed financial results, I'd like to share some of the highlights from this quarter. We successfully completed the Bank of Alameda system conversion with a tremendous team effort across the entire organization. While the conversion is behind us, we continue to focus on integrating the team and building customer relationships.

The East Bay is an important part of the Bank's long-term growth strategy. And while we realize it won't happen overnight, we are working hard to ensure that the culture, processes, and approach to relationship management are consistent across our entire organization.

In any acquisition you would expect a certain amount of deposit run off and so far it has been limited. Bank of Alameda had a small population of higher-priced deposits and some of these with the bank when we re-priced at conversion. Tani will show detail on the acquisition-related expenses a little later, but I just wanted to highlight that we are not anticipating any significant additional one-time expenses after this quarter. We are actively working on subleasing the former Bank of Alameda corporate offices, and we may see a reduction in expenses from that sometime later in the year.

We continue to focus on growth in the North Bay, and we are seeing increased activity levels throughout all of our markets. This quarter we made a significant investment in Napa, hiring a successful team of four commercial lenders and a credit analyst to complement the existing team. While this is a long-term investment, there is already a strong pipeline in this market, and we expect to see positive results in 2014. We have also added a business development officer in Santa Rosa, who will focus on the wine industry in Sonoma and Napa counties.

We have added a new face to our board this month. Jim Hale is currently general partner of FTV Capital and has over 35 years of experience in financial services and M&A. As a financial expert for the board, Jim steps into the big shoes left by Tom Foster, our board member who passed away in late 2013.

Now some of the highlights for the results for the first quarter. Our earnings were $4.5 million compared to $2.3 million last quarter. As we discussed in our last call, we had pretax acquisition-related expenses of $3.4 million in the fourth quarter, which obviously had a significant impact on earnings. This quarter that number dropped to $746,000. Deposits continue to be a strength for the Bank of Marin franchise and our branches do a tremendous job of generating demand deposits.

Post-conversion, our noninterest-bearing deposits totaled 44.5% of deposits compared to 40.8% at the end of the year. The primary driver of this increase is a segment of Bank of Alameda interest-bearing accounts that converted to noninterest-bearing Bank of Marin accounts.

Our credit quality continues to be very solid and improving, including the acquired portfolio. Non-accrual loans were 0.79% of total loans this quarter end, down from 0.92% at year end. Our Texas ratio at the end of the quarter stood at 5.6%, dropping from 6.6% last quarter and 9.1% a year ago.

Now let me turn it over to Tani for additional insights about our financial results.

Thank you, Russ. Earnings of $4.5 million represented the first full quarter with Alameda results while wrapping up the conversion and final one-time acquisition expenses.

Let me start out with the nonrecurring expenses. As Russ mentioned in the first quarter, we incurred a total of $746,000 pre-tax one-time acquisition expenses associated with data processing conversion fees and personnel severance costs. This is close to the estimate we shared in our last call of $800,000. And the total one-time expenses for the acquisition have come in lower than we originally projected.

Other nonrecurring, noninterest-expense items included the cost of temporary employees to assist with the conversion and the reversal of excess 2013 bonus accruals. The net impact of these nonrecurring expenses was a $0.05 reduction in diluted earnings per share.

As can be expected, these nonrecurring expenses also impacted our efficiency ratio in the first quarter. Taking them out, the efficiency ratio would have been 61% compared to the 64% reported and compared to 57% a year ago.

Going forward, expenses will stabilize at levels somewhat higher than prior to acquisition due to the addition of Alameda and Napa employees, related occupancy expenses, and higher transaction volumes. We continue to hold the line on expenses and make investments that will directly impact the growth in our business.

Continuing on to net interest margin, the tax equivalent net interest margin for the first quarter increased to 4.25% compared to 4.05% for the prior quarter. The table on page 3 of the press release summarizes the impact on net interest margin of the acquisition, but let me summarize the key drivers of the 22 basis point increase.

For the quarter, accretion on loans acquired from Bank of Alameda added 22 basis points while the benefit of loans acquired from Charter Oak fell 5 basis points. Redeployment of cash to new investments and loans contributed 7 basis points to the increase. So even though there were some nonrecurring components that boosted the net interest margin this quarter, we do anticipate a deceleration in the margin compression going forward after such one-time events.

As forecasted, the capital ratios have stayed strong after the acquisition. Our total risk-based capital ratio was 13.5% at quarter end compared to 13.2% in the previous quarter and 14% a year ago. The decline from a year ago is due to $10.7 million in goodwill and intangibles related to the NorCal acquisition, which is excluded from regulatory capital. Our capital continues to be well above regulatory requirements for a well-capitalized bank.

The tangible common equity to tangible assets was 9.8% at March 31 compared to 9.5% at year end.

And with that, I'd like to turn it back over to Russ for some additional comments about our outlook for the year.

Thank you, Tani. As we look ahead, I am very optimistic about 2014 for a variety of reasons. Bank of Marin is better positioned than many competitors to take advantage of the opportunities presented by the changing banking landscape. We are growing organically in all of our markets throughout the North and East Bay, and we have proven we can execute on acquisitions with our second one completed this year. We are well poised for another acquisition if there is a good opportunity. We have the capital and expertise to do it.

We are seeing a lot of activity in commercial lending, and our pipeline is very strong across the Bank. In particular in San Francisco where we are well established after seven years in the market and the economy is booming, we are seeing great commercial lending opportunities and really good construction projects.

Core deposits, the value of our franchise, continue to grow as our branches are doing a tremendous job building and maintaining customer relationships. We continue to reward our shareholders, and we are pleased to announce a dividend of $0.19 a share. This is the 36 consecutive quarter for us to pay a cash dividend. Overall, we are in excellent financial condition. We have a great team and we continue to invest in top talent. I am confident we will deliver value to our shareholders in 2014 and beyond.

And with that, I'd like to thank you for your time this morning, and now we will open it up to answer your questions.

Jeff Rulis.

Tani, I guess a question, I might have missed this. Was there a positive offset to the one-time costs from I guess the $746,000? I may have missed that.

Okay. We had an access accrual in 2013 for our 2013 bonuses, so that was reversed in the first quarter, which somewhat offset the additional expenses on a one-time basis from the acquisition. So there were positives and negatives in the quarter.

Okay. And so the net pretax number was like $500,000, or what was that?

Yes, in terms of the positive effect, it was a little bit under the $500,000 mark.

Okay, and so I guess if we were to back that out of expenses going forward, just trying to touch that with your comments in the release about stabilizing at higher levels. If we just back out that $500,000 or so, is that the new level? And would these conversions, at least the one that just occurred and then the upcoming on NorCal, would those impact the line item?

So yes, it is a little bit complicated because there are a lot of moving parts this quarter. But I would say that somewhere maybe a little bit more than $500,000. If you look at operating expenses steady-state, we will be a little bit lower between maybe $500,000 to $1 million lower per quarter going forward, but still higher than pre acquisition expense levels. So if you look back to the second quarter of 2013, somewhere between that level and where we were in the first quarter would be a rough starting point for steady-state.

Great. That's helpful, thanks. And then maybe just a comment. I'm trying to track non-acquisition loan production in Q4 versus Q1. We obviously have got the net numbers but I just wanted to see how production has trended in Q4 and Q1, if you have those numbers or just rough thoughts on that.

So the production numbers in Q4 and Q1 were fairly strong. We did have some payoffs in both quarters that offset the production. However, the payoffs that we saw in the first quarter continue to be payoffs of loans from the East Bay that may not necessarily be within our standard appetite, anyway. So if you look -- one of the statements that we had in the release was that we have got strong both organic growth and growth from the acquisition. And on the loan side -- between Q1 2013 and Q1 2014, we had organic growth of roughly $62 million on the loan side.

Got you.

Jeff, it is Russ. I could add just a little bit to that. And that is, in the first quarter we had pretty significant loan volume. We did have a couple of payoffs. We had, as Tani mentioned, there were some of the Bank of Alameda loans have paid off. There's a couple construction loans. There was one troubled borrower over there that paid off. But we also had one large payoff in the Bank of Marin portfolio of a credit that we had for a large private school that we had financed. And they refinanced out to a very long-term, very low-rate transaction that they got.

All that being said, the good news is we still had loan growth. And as I look at the pipeline and I look at the opportunities going forward for us, I am pretty confident about the growth that we're going to show going forward because if you look at the offices -- our commercial banking offices, San Francisco in particular, San Francisco has -- it has been around now for seven years. And we have an office that has about $110 million in outstandings and a really strong pipeline.

And in addition to that, now we also, during the past few months we have brought on an entire team of lenders in Napa, four lenders plus an analyst that we hired from another organization. And all of them have significant lending experience in the wine industry.

In addition to those five, we also hired a business development officer for the wine industry, who is going to work primarily out of Santa Rosa, but also work the Napa Valley market, too. So we're set up here for some pretty significant growth.

The lenders that we brought over, the entire team, came from the same bank. They had managed a pretty significant loan portfolio where they were. And you can never expect that everything they had managed is going to come over, but over time we are highly confident. They were very successful in their last organization. And we're very confident about the success that they will have at Bank of Marin.

Sounds good. I appreciate the feedback. That's it for me. Thanks.

Tim Coffey, FIG Partners.

Just to follow up on some of the expenses, line of questions from Jeff, do you have a target efficiency ratio or a target overhead ratio that you will be looking towards in 2014 given that with the bigger balance sheet perhaps what we were looking at in previous years isn't as applicable going forward.

I would say that it is probably lower than where we were for the quarter, lower than the 64%, but once again, higher than where we were operating at pre acquisition levels, which was in the mid-50%'s. Is that helpful?

Yes, it is.

So I think it is really important to understand that we have made a big investment in our people, as Russ was saying. And those are the folks that are going to be on the line building our business going forward. And we're in a process of integration right now but on our expenses that is where we focused our spending is in areas where we can really drive the business.

Sure, I understand.

Tim, I could just add one thing to that. The expense line in terms of the acquisition and acquisition-related expenses, second quarter, are gone. However, we did make some big investments in people.

And so those people, the six people up in the North Bay will certainly add a lot of expense on the short-term, but long term we're very confident that those six people and the revenue they are going to produce are going to have a significant impact on the results for the Bank.

But is there going to be a little blip? Certainly, six people, that's a lot of people. But we've done a really good job in getting our costs for the Alameda-Oakland area down to where we want and the number of people down to the number we want. So going forward, that is pretty much done.

The only real benefits that are left or cost cutting that we can do is as we try to re-lease or sublease the space that Alameda had for their headquarters, which now is empty. And so we've got that on the market. And also trying to make sure that all our leases are appropriately priced and things like that, whatever we can do within Alameda. So there are potentially some benefits on the expense side in Alameda. But for the most part, the second quarter is going to be pretty clean in that respect.

Okay. I appreciate that.

And then the new hires in the North Bay, how long do you think it's going to take for them to get up and running? Is it going to be the traditional nine months?

You know, it's a tough question. We have these people who have had a tremendous following in a -- all of them, actually had a number of years at their former employer.

We are seeing a pipeline that is being built already and we are actually -- they are underwriting transactions already. So to get the full value of those people -- you are never really going to get that until they have been in the Bank and they understand the culture and we integrate them in.

And then the customers, they don't immediately move. It takes time. So I would say between six and 12 months is probably a pretty good estimate that you can see some real significant impact. But it could be shorter; it could be a little bit longer. But any commercial banker knows that it takes time to get those customers to move. We are working real hard on that, but we don't plan on the revenue growth for a minimum of six months.

Okay. And then a year-over-year comparison on loan growth. Your first quarter of 2013, Bank of Marin got off to a slow start and then had a great rest of the year. Just following on your comments about outlook on the pipeline, are you seeing a similar situation develop this year question or is it too early?

In terms of the -- a good pipeline --

Growth.

-- and the stronger growth.

Yes, organic loan growth, yes.

I would say the pipeline is very strong. We had said that all along, and I have to say, of course, pipeline is just that until it turns to new business, so you always need a very large pipeline. It's kind of like a funnel. You need a big pipeline to produce a small amount at the bottom. But I'm pretty confident about the pipeline we are seeing. And so more so than I have been in the last couple of years. So that is the good news.

And I really believe that you will see in second and third and fourth quarters, you will see good loan growth out of our Bank because we are building a strong pipeline.

Okay, all right, great. Well, thank you. Those are all my questions.

Tim O'Brien, Sandler.

Russ and Tani, just a follow-up, first of all. Tani, and you gave some color on this, as far as accretable yield contribution -- so my sense was you had some payoffs out of NCAL this quarter that were probably performing credits and augmented that $1.3 million interest contribution that you guys had on the table. And then you said that -- you kind of suggested that going forward margin compression related to any declines in accretable -- at least the outlook here -- is that's going to be less impactful going forward. Did I hear that right?

Yes, so there again, we are in a situation where the go-forward margin is stabilizing at higher levels than pre acquisition. However, we did have some unusual items. We had interest recoveries on the non-accrual loans that were resolved as well as some fees on the payoffs, as you mentioned. So those probably inflated the margin by roughly 10 basis points on a quarterly basis.

So if you correct for that, then I would say going forward we are -- the point I was trying to make is that the deceleration in margin compression from lower rates is what we are expecting. We won't see the kind of margin compression that we saw between 2012 and 2013.

That is very helpful. Thanks, I appreciate that.

And then a follow-on also. In looking at that table my sense was maybe not a lot of the Bank of Alameda loans came in or were classified as credit impaired, just based on the interest contribution that you guys had relative to last quarter. Is that a fair assumption or am I off there, missing something?

Yes. Their loan portfolio was pretty healthy, and so there were not a lot of credit impairments coming in.

And then do you have, changing gears, the end of quarter FTE count? And also just for reference sake, what it was at year end?

I do.

Sorry to do that to you, but what the heck.

That is all right.

I think the number is around 287.

Yes, so 277 for March and 281 for December. They are at the bottom of the financial highlights.

Oh, great. That is great. Thanks, I missed that.

And then as far as that 277 number, does that fully reflect all of the changes or will that number -- do you anticipate looking out where we are in the second quarter that there's going to be any significant change here in the second quarter when you report quarter-end results?

I don't expect it to be. I would say that the --

A good ballpark?

Yes, it's a good ballpark. We don't -- most of the employees that were retained through the conversion were gone by the end of March. And so I don't think that there's -- that number is not going to change substantially either way in the next quarter.

And then last question, back to loan production, net loan growth, I guess I will ask you, Russ.

Yes.

So was the production this quarter comparable to what you expected but impacted by relatively high payoffs in part or substantially tied to loans that left from the deal that you might have intended for them to leave? And is the benefit -- your incrementally more positive outlook here in the second quarter and going forward, based on the idea that payoffs and paydowns are going to come down and so the net number will rise here going forward, with production being equal? Or are we seeing a ramp up in production, as well?

We are seeing a ramp up in production. And also I would anticipate a slowdown in payoffs. There's always going to be payoffs. That's part of the business, right? There is run off; there is refinancing, things of that nature. But I just don't -- in the first quarter we had a couple of big -- some payoffs in the East Bay which were expected -- construction loans and things like that. We did have, like I said, we had one big -- it was over $6 million, one deal that was paid off in Marin back early in the quarter.

So as I look at the pipeline and the anticipated payoffs, there's still anticipated payoffs, but I am confident that the loan growth, there will be acceleration in production and a deceleration in payoffs, how is that?

That's great. Hey, that team that you hired (multiple speakers)

And if I could add to that a little bit, also our utilization levels were up this quarter a little bit. We were at 38.7% in December, and were around 48.5% in March. So that is also a positive trend.

Tani, was that C&I or was that construction or both?

Both.

Well, utilization is typically C&I type of business --

But what the heck.

It was also construction this time around.

We do have some good -- it's an interesting thing, we have some really good construction projects that were -- we have them on the books that we are starting to fund that are primarily in San Francisco. San Francisco is a very, very strong market right now, primarily driven by technology, but it is affecting all projects.

And so I anticipate utilization of those construction loans that we have booked but they don't fund right away. So that is going to make our utilization numbers increase.

I am going to throw one more question at you guys, too. And that is great color.

That team -- are all those wine industry-oriented employees that you guys have picked up, the five it sounds like, did they have also an impact on DDA that was pretty meaningful and substantial? Are they really primarily focused on the lending side? Or is it relationship business? And what kind of deposit book did they bring to the Bank?

First of all, the answer is they are relationship lenders. And when you talk about relationship lenders, that means not just loan side but the deposit side, also. And any business they bring on -- not any but primarily the business that they bring over will be relationship business, which includes both. So we anticipate impact on both sides of the business. More on the loan side than the deposit side just because the nature of the wine business is tremendous capital requirements. And so that is going to impact our lending side more than deposits, which is okay right now because we have a lot of excess deposits.

But you're not going to see any impact, as I think when Tim Coffey asked a question -- we're not going to see a huge impact immediately. It's going to take a little time. But over time you will see that -- the loan book in Napa and Santa Rosa grow primarily in the wine industry, but it's not all wine business, by the way. They do have other relationships which are C&I based, not wineries, that we expect that we are going to be able to develop into big relationships with the bank.

Thanks for answering all my questions.

Jacque Chimera, KBW.

Tani, I wondered if you could touch a little bit on the cash deployment during the quarter, the timing of it, if you see any future deployment in 2Q happening?

Sure. So we tried to manage the cash deployment in the context of the fluctuations in the deposits. And this is a season, as you know, where deposits tend to fluctuate more than other quarters, but also in the context of the loan pipeline. So we tried to deploy early where we knew we had the excess cash to do that, but also maintaining enough cushion to make sure that we have cash to deploy into the loans. Because as Russ said, we are anticipating significant funding so we want to make sure we had that available.

Okay, so if I am understanding you correctly, then the level of cash that you have now, you will just deploy. It's not something that you are looking at for securities deployment or anything like that; it's more just to fund ongoing loan growth?

Exactly. And to the extent that we can deploy the cash because we know we have other cash flows coming in that can fund the loan growth, we will do that because obviously, we don't want to maintain too much in excess cash. So we manage that pretty actively on a day-to-day basis.

Okay. So you don't have what you would consider to be an access level right now.

I would say we are a little higher than -- the quarter-end number in the cash was a little higher than we would like to be, so we will continue to try to make sure that we bring that down.

Okay, fair enough.

Jacque, we would love to build the loan portfolio so that we didn't have so much cash, that is for sure.

Well, there are plenty of construction projects in San Francisco for you. (laughter) Anyway, that makes perfect sense.

And a second question for you, Russ. You mentioned that you expect a deceleration in the payoffs. How is, just looking from payoffs due to competition, you said I think it was in your prepared remarks, about the loan that you had lost that had a really long term and a really low rate. Are you still seeing a lot of that in the market or has it come back in as demand has increased?

We are seeing less of it. The one in particular was extremely long -- I mean 25 years -- very low rate. And it was -- I would say it is more targeted than anything. There's reasons why that one was targeted by the other financial institution that took it. And so I don't think we're going to see as much of that going forward. And I even -- in fact, that same institution that we're competing with on another deal who had -- on another transaction with another -- it was actually a school, actually backed away from that type of financing.

Okay.

So I am confident -- well, I'm not confident, but I am encouraged that we won't have to see that type of financing, those types of rates and terms because it's just not -- it's not healthy long term, and we don't want to be doing that type of financing.

Okay, no, definitely understood. Everything else that I had was answered. Thank you both very much.

And there are no other questions at this time. I turn the call over, back to you.

So we did have a call from one of the webcast participants requesting information on what our peak profitability potential might be versus our current profitability levels and whether we need to recruit lenders to drive the loan portfolio significantly higher from here.

So Russ, do you want to answer that question?

Sure. That is exactly why we recruited the people up in Napa, in Santa Rosa. And clearly we can grow the loan portfolio; it's a much better use of our cash than investing in securities or putting it overnight with the Fed. It will drive growth in our net interest margin and obviously, profitability.

So we're working really hard to build our commercial loan offices. Oakland is an important part of that strategy. And as we integrate that office into our culture and our underwriting and things of that nature, it's going to have a significant impact on what we do as an organization in the loan growth that we have.

And so now with San Francisco, Oakland, Napa, Santa Rosa, and Novato, we have a nice ring of the North Bay with commercial loan offices, which will have an impact on our loan portfolio. So we're executing on that strategy.

And clearly, as we build those offices and we are able to grow transactions out of each one of those offices, our profitability is going to improve, there's no question about it.

Okay, were there any other questions?

(Operator Instructions). And there are no other questions over the phone lines at this time.

Okay. Before we conclude the call, I would like to mention to those analysts and shareholders who are listening in, of the Bank, who are local and would like to attend our shareholders' meeting, it is scheduled for Tuesday, May 13 in San Rafael, California at the Marin Civic Center. The meeting is by invitation only and advanced registration is required. For more information about it please visit our website. And if you are not a shareholder and you would like to attend, please contact us, and you should be able to come to the meeting.

That concludes Bank of Marin Bancorp's first-quarter earnings call. Please refer to our website for more information if you would like to hear the webcast. Thank you for joining us this morning. We look forward to talking to you again next quarter. Thank you.

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.