Bank of Marin Bancorp (BMRC) 2014 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, 2014. My name is Fabia Butler, and I am Vice President Community and Public Relations Manager for Bank of Marin.

(Caller Instructions)

As a reminder, this conference is being recorded on October 20, 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 www.bankofmarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that this call is based on information that we know as of today, October 20, 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 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 their prepared remarks, our team will be available for questions. And now, I'd like to turn the call over to Russ Colombo.

Thank you, Fabia. Good morning, and welcome to the call. I am pleased to present our third-quarter results. We had another strong quarter.

First, let me share some of the financial highlights from the quarter. Earnings were $5.4 million, a record quarter, as compared to $5.2 million last quarter and $4 million a year ago.

We are pleased to increase the dividend from $0.20 per share to $0.22 this quarter. This is the 38th consecutive quarter we have paid a cash dividend, and this increase is an indication of our confidence in the future of our organization.

On September 30, total loans were $1.4 billion, up from $1.1 billion a year ago, reflecting organic growth and the NorCal acquisition. Net loans grew $22 million in the third quarter, a 1.7% increase from last quarter, and up 24.5% from a year ago.

This quarter, the majority of our loan growth was in C&I and related owner occupied commercial real estate loans, with the highest growth coming from our Marin, Oakland and NAPA offices. In addition to our core markets of Marin and Petaluma, we are seeing strong results in Oakland as we deliver on the promise of expanded lending capacity and financial services to meet the needs of our larger customers. In Napa, the investment in new commercial lending staff is beginning to pay offs as we see increased loan activity including line related loans.

Specific to Napa, none of our customers experienced any material impact from the September earthquake. We conducted the appropriate due diligence and were thankful that none of our customers were negatively affected. We're also pleased to donate $20,000 to earthquake disaster relief efforts.

Deposits totaled $1.6 billion at September 30, dipping slightly from last quarter, reflecting normal business activity among several large clients. Non-interest bearing deposits represent 46% of total deposits, indicating the strength of our core deposit base. The $279 million increase in deposits from a year ago reflects the Bank's expansion into the Eastern Market as well as organic growth in Marin and Sonoma.

Our credit quality improved in the quarter and continues to be very solid. Non-accrual loans represented 0.73% of total loans at September 30, down from 0.76% last quarter, and 1.58% a year ago.

While classified loans were up $5.8 million, they all are well secured, and we do not anticipate any loss. There are no new provisions for loan losses this quarter compared to $600,000 in the prior quarter.

The ratio of loan loss reserve to total loans remains unchanged from last quarter at 1.11%. Our Texas ratio at quarter end stood at 5.14%, declining from 5.43% last quarter, and 9.85% a year ago.

During the quarter, we made several strategic business decisions that include the closure of our Emeryville branch at month end which we acquired in the NorCal deal. With the vast majority of our Emeryville clients serviced out of the Oakland branch, this office was underutilized. This decision also fits with our strategy to reduce branch square footage and lease expense.

We also have hired several new commercial bankers throughout the footprint including in Oakland, where we are laying a good foundation in that market, which we view as an exceptional area for growth for our business. Now let me turn it over to Tani for additional discussion about our financial results.

Thank you, Russ. I will begin by saying that our earnings of $15.1 million is a record for the nine month period. Return on assets rose to 1.15% for the quarter as compared to 1.07% a year ago.

Diluted earnings per share was $0.89, and return on equity was 10.98% this quarter compared to $0.86 and 10.96% last quarter. The increases in both ROA and ROE were driven by strong earnings.

With regard to net interest margin, net interest income totaled $17.5 million in the third quarter, compared to $17.9 million in the prior quarter and $14 million in the same quarter a year ago. The increase this quarter compared to a year ago relates to higher balances on loans and investments as well as accretion on acquired loans.

The year-to-date tax equivalent net interest margin was 4.17% and compared to 4.25% a year ago. The third quarter decrease of 20 basis points and the tax equivalent net interest margin from 4.23% to 4.03% primarily relates to the absence of gains on payoff of acquired credit impaired loans as can be seen in the table on page 3 of the press release.

Looking at expenses, with the one-time costs of the NorCal acquisition successfully behind us, we are experiencing savings ahead of projections. While non-interest expense was down slightly from the prior quarter, it was up $1.3 million from the third quarter a year ago. This relates to the higher cost base associated with the larger size bank, expansion into the East Bay and additional lending staff.

Our efficiency ratio increased slightly to 57.23% from 56.6% last quarter. We continue to hold the line on expenses and make investments that directly impact and support the growth in our core businesses.

Capital ratios continue to be comfortably above regulatory requirements for well-capitalized institutions. The total risk based capital ratio was 13.6% at quarter end, compared to 13.5% last quarter.

The tangible common equity to tangible assets totaled 10.3% at September 30, compared to 9.9% at the end of the prior quarter. And with that, I'd like to turn it back over to you, Russ, for some additional comments about the outlook for the remainder of the year.

Thank you, Tani. While we are experiencing a very competitive lending environment in the Bay Area, we will continue our disciplined approach and prudent growth strategy. Our two-pronged approach of deposit-driven retail branches paired with commercial banking offices in key growth markets positions us well to take advantage of the current business activity.

While second quarter showed exceptional loan growth and third quarter was also very strong, we are experiencing some unanticipated payoffs due primarily to the sale of business assets by some of our customers. Our team is well positioned for any future acquisition opportunity that presents itself. We have a solid pipeline in core deposits, the value of our franchise, continue to be high at 46% of total deposits.

Our financial condition is excellent. We have strong capital ratios, and our disciplined credit practices remain a core value.

I am confident that we will continue to deliver high value to 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.

Thank you.

(Operator Instructions)

And our first audio question comes from the line of Jeff Rulis from DA Davidson. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

Good morning.

A question on the -- on the core margin, relatively stable if back out the gains in there and the other accretion, but how are yields on new loans that you booked in the quarter, how do those compare to the legacy book?

I'd say that they're -- if you compare it to legacy book, certainly they're less. The margins are down from history. But they're pretty much leveling off over the last year or so.

It's very competitive. When you look at commercial real estate, you have banks that are offering relatively long-term loans with pretty low rates. So it's difficult to compete with that.

That being said, we do the best we can, and clearly you can see that there has been margin compression because of that. There's not a lot of room to go much lower, really.

Sure. Okay. So the competition really is on both rate and structure?

Yes. We don't give up on structure, and we compete the best we can on interest rate. But we're very mindful and disciplined about the fact that we're not going to bet the future on short-term results. So sometimes when customers are offered low rates, you have to -- you sometimes have to pass.

That being said, if we're doing our job, managing our relationships and being proactive with our customers, it never should get to that, because if customers are shopping their deals, it's because we're not doing our job. So we're really being proactive. Our commercial lenders are out there with our clients and trying to keep -- make sure that we add value, which doesn't translate into the lowest rate around.

So looks like the C&I and commercial real estate, the bulk of the overall growth, but on a percentage basis the consumer installment segment had the biggest increases. Anything going on in the quarter there? Is that a segment that's picking up?

We're seeing some growth in -- certainly in the consumer side, both in personal loans, but home equity loans and our TIC program, both of those show -- we saw $4 million, $5 million of increase in each one of those. We've seen some increase in the construction side, and we've also seen a small -- we started a program in what we call floating home loans which are homes -- which are loans for houseboats in Sausalito. We've seen a little bit of that too.

The reality is, in the quarter, we've actually -- we actually had a pretty significant increase in the amount of C&I lending. That was the biggest component of our new loan volume.

That being said, there was some payoffs relative to not re-fi's with other banks primarily, but we've had some customers who have either sold their business or sold property and then we get paid off. So we're actually seeing some good results, particularly in C&I.

So just a last one on that front. I guess -- production is still pretty solid; it's been payoffs as you say eating into the net number. I guess as you look going forward, you can't really time the payoffs but the pipeline or the production, that still looks fairly solid into the final quarter here?

Pipeline's looking pretty good. I can't say that we're going to have significant gains every single quarter because like you just said, you can't plan the timing, but we're seeing a good pipeline out of Napa, out of our San Francisco office, out of Oakland, which is great. And also here in Marin, Marin Petaluma, our middle market area, we're seeing some good -- some nice pipeline growth.

So I'm of confident about the growth in the future, and as we go forward, it's all about really what we talked about, what I talked about before, which is making sure that we're out with our clients, understanding their needs and taking advantage of the opportunities they have.

Okay. Thanks, Russ.

Thanks, Jeff.

Thank you. And our next audio question comes from the line of Tim Coffey with FIG Partners. Please proceed.

Thank you. Good morning, everybody.

Hi, Tim.

The pipeline's looking good like you were talking with Jeff about. Does that encourage or discourage you from making additional hires in terms of producers?

No, we're actively hiring people. We brought on three lenders I think in the last couple of weeks, actually.

In Oakland, one here in Marin, and one in San Francisco. And so we are -- I think it's important to always be actively looking for talent, and we are doing that, because it's -- producers, you never have enough good producers.

What does that tell us about the potential run rate on your non-interest expenses? I ask because there's a lot of moving parts right now.

We have -- as we hire, obviously our run rate is going to go up a little bit. We have had some vacancies that have taken some time to fill, so we hope that, as we increase those resources, that they will have a direct impact in terms of producing revenues as well. But I think you hit the nail on the head, Tim.

Any other planned branch closures or branch consolidations?

None at this time. That was just one -- since the time we acquired Bank of Alameda, we were looking at the Emeryville office, very small office, and most of those relationships that were actually banking there were being handled out of Oakland anyway.

And so it just was fortuitous for us to close it at this time. We're not looking at any other closures right now.

Okay. And on the deposit side, you plan on doing any promotions or new marketing initiatives you haven't done in the past?

Well, we're not -- we certainly don't do like CD specials and things like that. Our deposit base continues to be real strong, and as you can see with 46% demand deposits, that's a function of our relationship-based banking.

And we're not really working to try and attract deposits which might be based on rate. We really want to attract deposits because we bank them and it's a relationship, and that's worked pretty well.

That being said, our demand deposits have been very steady. Where you're seeing fluctuations is some of the money market accounts and also some of the CDs that we have a lot of run-off of CDs from our NorCal acquisition because they were priced pretty high.

And then when we repriced those, they went out, which tells you those are just rate driven, not relationship. So that's the approach we have.

All right. Great. Those are all my questions.

Thanks, Tim.

Thank you. And our next question comes from the line of Tim O'Brien with Sandler O'Neill & Partners. Please proceed.

Good morning.

Good morning, Tim.

Hey, Tani, I'm going to belabor the margin a little bit, following on Jeff's question.

So by my calculation the loan yields were down 26 basis points sequentially from last quarter. 14 basis points was related to the PCI loan payoff that you talked about. So that leaves a few other basis points compression in the core number, and it looks like from that nice table you put in on acquired loans and accretable yield and stuff that the impact there was not substantial. So the impact on the core margin came someplace else.

Can you provide a little qualitative color on what happened there, what was behind that? That would be great.

Sure. So with rates down, we had a small mark on the interest rate swaps in the portfolio, and then the more important piece of that was that the securities portfolio was down and the yield on the portfolio was down by about 12 basis points. So I think that was the more significant contributor to the remaining 6 basis points in the compression.

But it looked like the yield on loans fell from 5.04% to 4.78%. Take out the 14 basis points from that, the payoff of PCI loans, that leaves some compression there in a much larger piece of your earning asset base.

What was behind that? I guess one question for you is was there anything last quarter where you guys had a payoff of non -- of a legacy loan that caused some prepayment collection or something like that, or was there something there one-time in nature that caused this little bit of compression in the core yield on your loan book this quarter?

So no significant payoff there. I think, again, when you're looking at the 14 basis points in the table, that's telling you what the impact is on the earning asset margin, on the net interest margin, which is based on earning assets.

So it would be that component or those three components that are there, the 3 basis points, the 17 and then the zero this month. Those are actually -- would be larger if you were just looking at --

I got you. That accounts for all of it.

Yes.

There wasn't anything else? I guess the pressure on loan yields is reflected to a large extent by what happened in that PCI table. That accounts for most of the pressure on loan yields that's reflected in the rate and yield table.

Yes.

Okay. Great. Thanks for that. And then go ahead, Russ.

Go ahead.

And then one other question for you. As far as the P&L is concerned, was there anything one-time in nature this quarter either on the fee income side or on the cost side that either won't appear -- won't recur in the fourth quarter or -- you alluded to this.

There's going to be some incidental higher comp costs associated with the hiring that you just did. Was there anything one-time in nature this quarter also?

Nothing significant. We've made some hires, and occasionally when we make a hire, we have a fee that goes to a search firm, but they're so small that it really doesn't impact. I don't think anything in these numbers is unusual or will have any impact at all.

And then last question. You talked about the decline in deposits resulting from some moves by some big clients.

Right.

Can you tell us a little bit more about what happened there, and is that -- so those -- more broadly speaking, Russ, what's your anticipated outlook? I'm not looking for guidance, but was this an anomaly that deposits were down this quarter in your mind? Given the nature of your business and what you're seeing out there, is that going to change here directionally?

There's a portion of deposits -- it's not a huge portion, but it has an impact because it sits on the top. We have a number of clients who have fairly large balances that are somewhat volatile.

As an example, we have a couple of contractors that do a lot of municipal work. And so they will get huge cash flows that come in, when they sign a contract, and then that money goes out as they do the work. And two in particular, which are -- actually three which are involved in municipal work that we see that happening.

We also have a firm that does some -- a customer that does some work with -- that does work for political advertising type programs, so money will come in relative to political campaigns and then the money will get paid out as they fund the different advertising things like that. You have a run-up pre-campaigns and elections and then you have a runoff as you get close to the election and after the election.

Obviously, we're close to an election. They're seeing some rundown in those numbers. That clearly has happened. Those deposits will build back up again.

It's just normal ebb and flow.

Yes. None of these are because they left the bank. They're all because they're normal ebb and flow of their particular type of business, and we do have that up and down.

The good news is on the demand side, demand/deposit side, that's pretty stable, which is the relationship deposits. So that's the number I always look at.

We're sitting at 46%, which is a big number relative to total deposits. Clearly if and when rates rise, that number will decline because there will be other alternatives. But we look at that as a pretty good number because, when you compare that to other organizations, that's at the high end for most banks.

I'm just going to ask one more question. And you alluded to this, Russ, talking about the strength of your C&I business. So were unfunded commitments up nicely this quarter as well, that aren't reflected in actual footing?

Yes, we have -- actually it's a good question. We have up in one of our -- up in Napa office, we have a situation where we have an unfunded commitment for a winery-based relationships. We will see funding for that over the next quarter.

So we are starting to see -- as you build -- the thing about C&I is you get the loan balances typically from the owner occupied real estate loan associated with the line of credit. Sometimes the line of credit isn't fully funded.

So as we build relationships, we tend to -- we have growth in C&I, but it's a little bit slower than the real estate side. So we are starting to see -- we have a number of relationships where we have unfunded commitments, which we will see drawings on over the next couple quarters.

Thanks for the color.

Okay. You're welcome.

Thank you. And our next question comes from the line of Jacque Chimera with KBW. Please proceed.

Hi, good morning, guys.

Good morning.

Touching on the C&I still, so did utilization in this current quarter, did that tick up at all, the rate on lines?

44% is where it was. So just a little bit.

Okay.

Historically, that number used to run closer to 50%, but as we got into the recession, that dropped dramatically. And now we're starting to see slight gains every quarter, but still about 44%.

Okay. So it will probably take us some time, more consumer confidence to get back up to that 50% level?

I suppose. As utilization of lines of credit by businesses, that's a reflection of business activity. And the recovery's been somewhat weak, so it's really not -- we really haven't seen a big bump in utilization there.

Okay. Tani, this is probably a question for you. As I look at the -- I'm looking at end of period cash balances.

I know average cash was fairly flat in the quarter. Was that a function of just the loan growth in the quarter and some of the deposit outflows or was it more active management?

No, that's exactly right, we allowed the cash to flow into lending rather than to replenish maturing securities, and as we had outflows and deposits that would have reduced the securities balances as well, so that's it.

So is that a level that you're gearing towards going forward or is it something that we will just see fluctuate with lending and deposits and normal business?

I'd say that that's probably right around the normal cash balance, maybe a little bit higher than that, if we could target a balance. But when we have big movements in deposits, it's hard to target it precisely. That's the general area, the September 30 number.

That's helpful. Thank you.

And then just lastly, Russ, if you could comment to the extent you can, just a little bit on the -- you mentioned M&A in your prepared remarks and just the pace of discussions, whether they've increased or decreased over the last couple of months and are there still pricing discrepancies, that type of information?

There are always pricing discrepancies.

Is there narrowing I guess is my question.

Well, I think they are. The reality is, in Northern California, there's not that many banks. So you could go around the Bay and look at the potential, and we keep in touch with everybody. And until somebody decides they're going to sell, they don't sell.

Obviously, we had a big -- there was a big deal announced over in the East Bay with mechanics. And their claim is that they're going to be quite active in the market too. But there's just not that many.

Northern California, there's not that many banks. And I did see where I think Bank of Sacramento announced a deal with America West. There are deals being done and, we're keeping our -- in touch with banks. We definitely are ready to do something else if and when the opportunity presents itself.

And I think the reality is that the prices are coming back. The range is starting to narrow a bit, which is good.

Now, is it narrowing because people are becoming more realistic or is it narrowing just as the economy improves and so valuations themselves are lifting?

They're becoming more realistic but also the buyers are also -- the prices are going up a bit, I think. What I've seen is that prices are a little bit higher than they were a year ago. But not where the sellers -- not where maybe the sellers thought they might be. So I think there's a narrowing of the gap, both coming down on one side and moving up a little bit on the other.

Okay. Thank you. That was helpful. Everything else I had was already answered.

Thanks, Jacque.

Thank you. And our next question comes from the line of Don Worthington from Raymond James Financial. Please proceed.

Good morning.

Good morning, Don.

Just follow up a little further on the deposit discussion. Looks like perhaps some of these larger outflows happened at near quarter end, just because --

Right.

Average deposits were up fairly healthy in the quarter, so was more of a quarter end type thing. Okay.

Yes. We've had swings of -- on a daily basis, $20 million, $30 million. That's pretty big for us. And so depending on the day, the number could be up or down.

But as you say, the average deposits have been higher. So there's a bit of volatility there, but we really understand what's going on because there are half a dozen clients that we can point to and say, okay, this is where it's happening for the most part.

Okay. Thanks.

And then in terms of the -- you mentioned Oakland, Napa being strong quarters, in terms of lending. How did the San Francisco market do in the third quarter?

San Francisco actually did well too. There was about $4 million of new -- business volume out of San Francisco, which is good. They've been very solid in San Francisco. If I didn't mention them, I meant to.

Across the middle market lending side, we've done -- we've had some really nice, not only growth, but pipeline growth across all those markets that I talked about. It's starting -- because we've been building the teams in each one of these markets, we're starting to see the results of that.

And the active calling program that they have and their really attention to the relationship management is really paying off. And we're seeing opportunities not only new customers, but with existing clients to do -- as an example, over in Oakland, we booked in the quarter a fairly significant loan to a customer who was an old customer of Bank of Alameda.

But the size of the deal could not be done by them because of the size of it, the transaction, the size of the bank. We were able to easily do that deal.

That's the thing that we've been focusing on, trying to build our relationships and show the value of the larger organization to these clients of our East Bay client. And San Francisco continues -- we've been in San Francisco now for six or seven years. The consistent approach that we've had there is really paying off, and that office is growing very nicely and frankly very profitably.

Okay. Great. Thanks.

I guess lastly, you may have mentioned it, but what were the gross loan originations in the quarter?

I don't think we did mention it. The gross --

Trying to get a feel for --

We can give you the gross loan originations were almost -- just under $47 million.

Okay.

That's across the Bank. That's across the Bank and includes all commercial banking as well as retail and construction.

All right. Great. Thanks.

All right.

Thank you. There are no further questions at this time.

All right. Well, I want to thank everyone for joining us this morning and look forward to talking to you again at the -- after the end of the year. Thank you.