Bank of Marin Bancorp (BMRC) 2014 Q2 法說會逐字稿

Good morning. Thank you for joining us for Bank of Marin Bancorp' s earnings call for the quarter ended June 30, 2014. My name is Nancy Boatright. I'm Senior Vice President and Corporate Secretary for Bank of Marin.

(Operator Instructions)

As a reminder, this conference is being recorded on July 21, 2014. Presenting this morning will be Russ Colombo, President and CEO, and Tani Girton, 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 emphasis that this call is based on information that we know as of today, July 21, 2014, 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, Nancy. Good morning. Welcome to the call.

I am pleased to present our second-quarter results. We had a great quarter, reporting record earnings, and the outlook for the second half of the year is very strong.

First, I'd like to share some of the financial highlights for the quarter. Earnings were $5.2 million, a record quarter as compared to $4.5 million last quarter and $3 million a year ago. We experienced a strong loan growth of $60 million in the quarter, driven by significant, new loan volume from our commercial banking group.

The majority of loans booked in the quarter were C&I and commercial real estate loans. We are experiencing strong growth in construction lending from some of our long-time customers in San Francisco and the North Bay, plus Helios and TIC loans.

Core deposits totaled $1.6 billion at June 30, holding steady from the last quarter, with non-interest bearing deposits representing 45% of total deposits. The increase of 30.6% in deposits from one year ago reflects the acquired East Bay deposits as well as organic growth in the Marin and Petal markets.

Our credit quality improved in the quarter and continues to be very solid. Non-accrual loans represented 0.76% of total loans at June 30, down from 0.79% last quarter and 1.69% a year ago. Our provision for loan losses increased $600,000, which is aligned with the overall growth in the loan portfolio. Our Texas ratio at the end of the quarter stood at 5.43%, declining from 5.6% last quarter and 10.8% a year ago.

During the quarter, we made some strategic business decisions that included the discontinuation of the mortgage brokerage activity acquired from Bank of Alameda. We also relocated our Sausalito branch, which is part of a strategy to reduce square footage and lease expense. We also reinstated our floating home loan program as of July 1, and should see strong demand from the Sausalito market.

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

Thank you, Russ. I'll begin by saying that the Management team's sustained focus on delivering high-quality service to our customers shows in our results.

Return on assets climbed to a healthy 1.14% for the quarter, while measures of risk are down. Earnings per share of $0.86 translate to a return on equity of 10.96%.

With regard to expenses, in the quarter we saw a $1.4 million reduction in non-interest expense, primarily related to final acquisition expenses included in the first quarter and other miscellaneous cost savings in the second quarter. The increase in non-interest expense from the same quarter a year ago reflects the higher cost space associated with a larger-sized bank, expansion into the East Bay and increased lending staff in the North Bay.

As expected, our efficiency ratio declined nicely from last quarter to 56.6% from 63.9%. We continue to hold the line on expenses and make investments that directly impact and support growth in our core business.

Continuing on to net-interest margin, higher loan and investment balances helped to offset the continued pressure of lower interest rates and excess liquidity. The tax equivalent net-interest margin remained fairly stable at 4.23% in the quarter as compared to 4.25% last quarter and 4.30% a year ago. Accretion of interest and gains on pay-offs of acquired loans also bolstered the margin for the quarter. The benefits of our active investment portfolio management over the past year are evident in the improved portfolio yield, reduced risk and lower duration.

Our capital ratio continues to be comfortably above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio was 13.5% at quarter end. The ratio declined compared to the quarter a year ago due to $10.6 million in goodwill and intangibles related to the Nor Cal acquisition. The tangible common equities to tangible assets ratio totaled 9.9% at June 30 compared to 9.8% at the end of the prior quarter.

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

Thank you, Tani.

As we look ahead to the second half of the year, I am optimistic about our continued success. The Bay Area economy is strong and is positively impacting our business. Our long-term strategy to open commercial banking offices in key Bay Area markets positions us well to take advantage of the current business activity.

We are growing organically across the franchise, which speaks to our continued focus on building relationships. We're well poised for another acquisition, when there is a good opportunity, as we have proven that we have the capital and expertise to execute successfully.

We are seeing increased lending activity in many of our markets where we are experiencing demand for commercial real estate loans and a strong uptick in construction lending. We have a solid pipeline, and core deposits, the value of our franchise, continue to be strong and steady. We continue to reward our shareholders and are pleased to announce an increase in the dividend to $0.20 a share. This is the 37th consecutive quarter that we have paid a cash dividend.

Overall, we are in excellent financial condition. We have a great team and we continue to invest in top talent, relevant product, and key markets to meet the needs of our customers. I am confident that we will continue to deliver high value to all our shareholders throughout 2014 and beyond.

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

(Operator Instructions)

Jeff Rulis, DA Davidson.

The first question is a follow up from Tania's comments on nice sequential improvement on the expense line item. The branch relocation and the discontinuation of the mortgage unit, will that further impact costs, or are we at an expense base where that looks fairly normal as in no other one-timers that could come out? If you could comment on what those two, the branch and the mortgage decision, how that may impact expenses?

Sure. On the branch side, we're always looking to reduce costs in our branches and reduce size, frankly, of the branches in concert with the fact that most branch activity in all banks is dropping. We've moved our branch.

We've moved from a location that had about 3,000 square feet down to roughly 1,900 square feet and a less expensive per square foot location. So, we're saving between $5,000 and $6,000 a month, just with that move.

We look for those types of opportunities when leases are coming up. We don't try and do that in the middle of the lease, but if there's an opportunity as branches come to the end of a lease, we look at the location, we look at the size. If we can either give back space or if not, we move our location; we do that.

That has that kind of an impact. Every one we move is different because the size and the costs are different, but that one's going to save us $5,000 to $6,000 a month.

On the mortgage side, it's not going to have much of an impact, because there wasn't, frankly, much activity. We decided as an organization, and as we have always run our Bank, we try to stay away from activities which are commodity based. Really, the mortgage businesses relies on volume and we didn't see that we could get the volumes out of that.

It was just a -- we weren't booking loans. We were actually just doing the brokerage activity and then taking fees and, frankly, by getting rid of it it's reducing expenses because we were not making a lot of money, if any at all in that business.

Okay. So if I were to summarize, you've got some items that may modestly decrease expenses but I guess if you've got some growth initiatives, it may settle in around this expense base level for this quarter?

I think that's probably fair.

Okay.

This is a fairly normalized quarter for us. There were some reductions in miscellaneous expenses that caused us to lower our accruals a little bit going forward and so that's going to be a positive.

Then, some final true-ups on the acquisition expenses, but all those true-ups turned out to be in our favor. Going forward, I'd say this is pretty indicative.

Okay. Great. Thank you. Maybe another one.

I noticed that the yield on your interest bearing deposits ticked up in the quarter, not to over react, but I didn't know if there was anything afoot that given the strong loan growth, have you made a conscious decision to actively grow that interest-bearing base more or was that just a one-time quarter thing?

That was interest on transaction accounts and that went up 4 basis points. The reason behind that is we converted the Alameda deposits at March 31, and they had a significant balance of state bar, what we call IOLA accounts. These are accounts that fund pro bono work, and we get CRAW credit for those and they get paid a higher interest rate than standard deposits, because of that.

That significantly impacted the cost of those accounts. We didn't run any campaigns to raise our overall cost of deposit.

Got you. Great. That's helpful. Thanks.

One last one. Russ, you're pretty positive on the outlook for the second half. How does that translate on the loan pipeline? If you could comment on the growth you've seen so far in Q3?

The pipeline is pretty strong. I don't want to give you numbers, but we're confident that the growth both in C&I and commercial real estate continue to be very strong.

We're seeing some activity as we did in the first half in the construction area, primarily with existing customers that we've done business with in the past, not residential development land loans, but other types of construction. So, all of those look strong. If you look out the next quarter, and I hate to look out beyond that because you never know these things, I'm fairly confident about continued growth in our loan portfolio over the next quarter and hopefully the rest of the year.

Great. That's it from me. Thank you.

Jackie Chimera, KBW.

Russ, continuing on with the loan growth discussion, would you say that there were any timing issues that drove some of the growth in the quarter? Maybe some 1Q that trickled into 2Q or some 3Q that just closed a little bit early, or was it more just really solid growth during the quarter?

Pretty solid growth during the quarter. I will say this. If you talk to loan officers, the loan gets funded later than what they always say is going to happen.

Loan transactions just take longer it seems sometimes than you would expect, but there was nothing unusual in the second quarter that was just something that just ran over from first quarter. We just had a really solid second quarter, and third quarter is shaping up to be also very solid.

Okay. The floating loan, if you could just remind me, I know we talked about this in the past, there's a lot of legalities behind booking those and the different rules and regulations that Sausalito has with those. Did anything change on that front?

Actually, yes. Our standard product for floating home loans was a 5-year product with a 30-year amortization. But the pricing on that, under Dodd-Frank, for a five-year term, the borrower had to show the ability to repay at the end of five years, because of the balloon. But if you extend that to seven years, those same rules don't apply.

We changed our product to offer 7-year transactions with a 30-year amortization, and even 10 years, so that we could fall under the regulations of Dodd-Frank. We were able to get the program going again, just by making those changes. We're starting to see some activity. Actually, there's a pretty nice pipeline of loans because really there's not a lot of lenders in this market.

What kind of rates are you booking those at?

In the mid- to high-4%s, 4% to 4.5% range, maybe a little higher than that.

Then, you also mentioned the TIC lending is going very well?

TIC also. It was something you know we did in the past and we were out of the business for a while. Now, we're back in it, and we're seeing also good activity there. We're seeing good volumes of applications for that.

I ask this because I hear different chatter and everything about so many cash offers and things like that in homes. When you're booking the TICs, what's the loan to value on those then these days?

The standard product is maximum of 75% loan to value, but you often see much less than that. If you go back into the products that we've financed the construction, we've actually had a lot of people that have come in at the end of the construction and purchased TICs and just paid cash. There's a lot of cash buyers for the product.

But our loan to value, it's pretty standard. It's a little bit lower loan to value than the traditional mortgage, but pretty similar.

Okay. So there are still plenty of borrowers out there that are looking for loans for the product, it's not -- there's enough that aren't all cash, so you're getting good demand in that area?

There's still a lot of demand for TICs, as there is for other real estate in San Francisco. It's a very hot market right now.

Yes, don't I know it.

You know it. (laughter)

Lastly, is it a fair assumption that as you have really strong loan growth the provision will follow along accordingly?

Yes. That's the provision that we had this quarter which was $600,000, really was a function of loan growth as opposed to any comment on credit quality. It was strictly because of loan growth.

Okay. Yes, I figured that, with the nice recovery you had in the quarter.

Okay. Great. Thank you. I'll step back now.

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

Tani, quick question for you. Do you have the end-of-quarter balance for PC loans?

Yes. Let me get that for you and I'll answer it when I put my hands on it, okay?

Okay. Thanks. Then, another question.

Can you guys give a little bit of color on the margin outlook or what your sense is as far as pressures and ability to sustain the margin here going forward? Just thoughts on that.

I would say that, don't expect margins to increase. There's no pressure up at all. It's all down. I think it certainly has leveled off.

We've seen a leveling off over the last few quarters, but realistically until rates rise, we're going to see continued pressure on margins. At 4.23%, we're probably higher than most in the industry, but still it's not the old days of 5%.

Thanks, Russ. Last question, what was the largest credit you guys underwrote and booked this quarter, dollar-wise?

We had one that was $13 million. That was the largest credit we did.

What kind of credit was it, Russ?

I'm trying to determine how much information I can give you, but it was a tax-exempt funding for a municipality.

Great. I'm going to throw one more at you. Do you guys have the utilization rate on your C&I book and the change in the quarter?

I think the utilization was 42% for the quarter, and that was up slightly from last quarter, but at year-end it was sitting at about 38%.

42% is certainly better. We're making progress the right way.

Thanks, guys.

We're re-confirming the PC number, just to be sure.

We'll answer it when we finish the call.

(Operator Instructions)

Tim Coffey, FIG Partners.

Russ, you recognized a pretty good gain in the pay-offs of PC loans. I'm wondering, was that a surprise to you and the team?

Surprise? There's --

I'm assuming you got people working on it. I just want to know, did you have any inkling that something was going to come this quarter?

You never know. On PC loans unfortunately you never really know exactly when those are going to get paid off. You hope you can -- you're just doing the best you can.

I wasn't terribly surprised, but things happen every quarter, you never know. We're working hard on all the credits and trying to reduce problem issues and things like that. I wouldn't say I was surprised. I don't know.

Okay.

I don't have a better answer for you there.

No, that's helpful. Should I assume that the hard work is ongoing, then?

Of course. It's always ongoing. We have a person, actually two people now, that are assigned to work on problem credits. That's their job, and they have done a really good job.

Okay. Can we talk a little about capital adequacy and the dividend payment? Obviously, capital's increasing. You announced an increase in the equivalent dividend rate.

Do you anticipate using the potential increases in quarterly dividend to help you augment capital? Do you see that increasing dividend occurring more frequently or have you figured them out?

We typically increase the dividend, if we can, once a year. Our capital levels are healthy and we're trying to make sure that we're well positioned in case acquisition opportunities come up. We want to make sure that we're prepared for those.

Our payout ratio this quarter I think was around 22%. So, that falls in the target of where we like to be.

This increase in the dividend was actually one quarter early. It wasn't four quarters. It was three. But the previous year, we delayed it a quarter because of a credit issue we had last summer, if you remember.

We're back on the same track where we were, which is every four quarters to increase it $0.01. Like Tani said, we're trying to maintain capital levels at strong positions in the event there is an opportunity for an acquisition, because I think that's the -- this is in my opinion, this is a window, these few years, where there will be opportunities and we have to be prepared for them.

Okay. Following on that, the M&A question line, has the preference changed between M&A and De Novo branching?

The preference changed. Going into new markets I would say that the preference is M&A, because particularly from a de novo standpoint, it takes so long to build any kind of size where you're making money.

When we were right here in Marin and Sonoma county, De Novo was clearly the way we preferred. As you reach out into new markets, like Alameda, like Napa or anywhere else, I think that the preference probably is to buy someone because you can get to where you want to go a lot quicker.

It's that time, right now, it's a time when I think there are opportunities and you have to adjust your strategy according to the market. Right now, although the pricing seems to be going north in the M&A world, but it's the time when there should be opportunities and there's incentive for banks to sell right now. We're actively pursuing that type of activity, but until somebody decides they're going to sell, banks are sold not bought, I suppose.

Okay. Well, great. Thank you. Those are all my questions.

Following up on Tim O'Brien's question, the PC balance at the end of the quarter was $5.2 million.

Don Worthington, Raymond James.

Question in the lending area. I know you hired that team in the North Bay and you alluded to that as one of the reasons for the strong growth. Is that team ramping up as expected or ahead of schedule in terms of the lending there?

Don, the good news on that is that really most of this growth is not related to that team, but they are building a pipeline. It takes time to build a pipeline, and they are doing a great job of it.

They have some things that I think we expect to come on the next quarter or two. They're really doing well in terms of just building presence in the market. The good news about this growth that we've had, and what we expect in the next quarter, virtually none of it is out of that team.

When they start clicking in and their numbers start appearing, I think you'll see even better numbers. That's really the good news.

We're very happy with what they're doing in Napa. They have really a great, strong market presence in the wine business, tremendous reputation. We're seeing some opportunities with companies that, frankly, we wouldn't have had if we had not hired these people. So, very happy about the progress that they've made over the last number of months.

Okay. Great. Are you looking at possibly bringing on other lenders?

Do you know some? (laughter) Clearly, we'd love to. It is a very tough market to hire people these days.

The most difficult hire, I think right now, is finding qualified, commercial bankers and so we're looking. We'd like to augment our teams in the East Bay and maybe even San Francisco and in the North Bay, even Santa Rosa, because we want to build those markets and so we're looking actively. But it's tough, tough time to find people.

Okay. Thank you. Then on the non -- sorry, go ahead.

I was going to say, call me if you know some people that I should hire.

Okay. Sounds good. (laughter)

In terms of the non-interest bearing deposits, those went up linked quarter. Would that be attributed to new relationships or building of balances by existing customers, or I guess it could be both?

The balances were increased across the categories, but not huge increases in any one given category.

When we closed the Bank of Alameda acquisition, there was some interest-bearing accounts that we converted to non-interest bearing, so there was a little bump then. Now, it's running about 45% of non-interest bearing. I feel pretty comfortable that that's the run rate that we have going now.

Okay. Great.

You mentioned the construction loans not being residential. Are they typically multifamily or smaller commercial-type buildings?

I didn't -- if I said that, I misquoted. They're residential but they're not track development type loans. It's typically one-off, high net-worth type of big homes -- high-priced homes in -- I guess I would call them luxury homes in locations that are pretty attractive.

We're having opportunities to do that type of construction financing for single-family home but it might be a relatively large home in -- whether it's Tiburon or somewhere in San Francisco, something like that. We also are doing some multifamily type of activity.

Okay, great. Thanks for the additional color.

Jackie Chimera, KBW.

Hi, I have one last quick one for you, Tani. When I look at the accretion income is that primarily still from Charter Oaks or are you seeing a lot of Bank of Alameda flow in there as well?

Charter Oak has been on the decline. Most of what you're seeing there is Alameda.

Great. Thank you.

(Operator Instructions)

There appear to be no other questions at this time.

Alright. Well, thank you for joining us this morning. We look forward to talking to all of you again next quarter. Thank you very much.

Thank you.

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.