Bank of Marin Bancorp (BMRC) 2014 Q4 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 December 31, 2014. My name is Fabia Butler. I am Vice President, Community and Public Relations Manager for Bank of Marin. During the presentation, all participants will be in 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 January 26, 2015. 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 a.m. Pacific time this morning, and on our website at bankofmarin.com where this call is also being webcast.

Before we get started, I want to emphasize that this call is based on information that we know as of today, January 26, 2015, 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 their prepared remarks, our team will be available for questions. Now I'd like to turn the call over to Russ Colombo.

Thank you, Fabia. Good morning, and welcome to the call. I'm pleased to be with you this morning, and to present our results for the fourth quarter and for the full year. The bank is in great financial condition, and we look forward to another strong year in 2015.

Before we get into the detailed results, I'd like to highlight several key milestones for the year. Our annual earnings totaled $19.8 million, as compared to $14.3 million a year ago, reflecting a 39% increase. We completed a successful integration of Bank of Alameda customers and staff, and are poised for growth in the East Bay. At year end, total loans were $1.4 billion, an increase of $94 million, or 7.4%, from $1.3 billion a year ago. Net increases were primarily C&I loans and investor-owned commercial real estate. Our credit quality remains excellent, with a $124,000 net recovery for the year.

As for the quarterly results, earnings for the quarter were $4.7 million, down from $5.4 million in the previous quarter, reflecting lower interest accretion on acquired loans, and an increase in reserve for un-utilized loan commitments.

New loan volume was strong at $35 million, but was offset by payoffs related mostly to the sale of underlying assets. We experienced strong growth in C&I and related owner-occupied commercial real estate loans, which comprise the majority of new outstandings booked in the quarter. Our strategy of balancing growth in new markets while remaining committed to our core markets of Marin and Petaluma was evident, as new loan volume in the quarter was split evenly between two regions.

In Napa, the investment in our new commercial banking team is paying off, as they generated $30 million in new loan commitments in the second half of 2014. Virtually all new loans in this market were C&I and owner-user commercial real estate, with a substantial portion in the wine industry.

We've made several strategic new hires this quarter, including Jarrod Gerhardt as Senior Vice President and Director of Marketing. He brings extensive marketing experience to the bank, including expertise in mergers and acquisitions. Previously, Jarrod was the West Coast Marketing Director for Boston Private Bank, a $6-billion bank based in Boston that has several locations throughout California. We've also hired several new commercial lenders based in the East Bay, San Francisco, and Marin, plus a new market manager with strong sales and relationship management skills in the important southern Marin region.

Deposits held steady at $1.6 billion at December 31. Non-interest bearing deposits were $671 million, up from $648 million a year ago. The increase of $23 million is the result of our continued focus on relationships.

Credit quality continues to be very strong. Non-accrual loans totaled $9.4 million, or 0.69% of our loan portfolio, a ratio that has declined the past two quarters. Our Texas ratio at quarter end stood at 4.79%, declining from 5.14% last quarter, and 6.58% a year ago. Now let me turn it over to Tani for additional insights about our financial results.

Thank you, Russ. I'll begin by saying that our 2014 earnings of $19.8 million marked a new record for the bank. Return on equity was 10.31% for the year, compared to 8.86% in 2013. Return on assets rose to 1.08%, versus 96 basis points a year ago. Year-over-year increases in both ROA and ROE were driven by strong earnings resulting from the successful integration of Bank of Alameda, and ongoing relationship management.

Diluted earnings per share increased 28% to $3.29 for the year, up from $2.57 a year ago. Adjusting for one-time acquisition costs in 2013 and 2014, EPS growth of 11% reflects expense savings on the acquisition greater than originally projected. With regards to net interest income, $17.1 million in the fourth quarter compares to $15.6 million a year ago, as a result of higher loan and investment balances.

Net interest margin of 3.99% for the quarter is down 6 basis points year over year, primarily due to lower interest rates on new and renewed loans. Net interest income and net interest margin were down in Q4 from the prior quarter, primarily due to the decrease in accretion on acquired loans that Russ mentioned earlier.

Looking at expenses, for the quarter, non-interest expense totaled $11.6 million, which compares to $11.4 million last quarter, and $13.9 million a year ago. The $323,000 increase in reserves on un-funded commitments this quarter was the result of an update to the methodology used in our estimation process. Our 2014 efficiency ratio of 59.46% remains one of the best in the industry. While slightly higher than it's been historically, we are staffing for growth in lending and credit administration, and building a strong foundation for future opportunities.

We continue to hold the line on expenses, and make investments that directly impact and support growth in our core businesses. Liquidity is strong, and capital ratios continue to be comfortably above regulatory requirements for well-capitalized institutions. The total risk-based capital ratio was 13.9% at quarter end, compared to 13.6% last quarter. The tangible common equity ratio totaled 10.7% at December 31, compared to 10.3% at the end of September, and 9.5% a year ago. With that, I'd like to turn it back over to you, Russ, for some additional comments.

Thank you, Tani. While we expect the competitive lending environment in the Bay area to continue, our disciplined approach and prudent growth strategies are paying off. Non-interest bearing core deposits, the value of the franchise, continue to be at a healthy level, at 43% of total deposits. We are making strategic investments in the business, including hiring experienced commercial lenders to drive future growth. With a dividend of $0.22 per share this quarter, this marks the 39th consecutive quarter we have paid a cash dividend. We continue to adhere to disciplined credit practices.

Overall, we remain in excellent financial condition, with high levels of capital. On Friday, January 23, we celebrated our 25th anniversary in business. We are optimistic about the future, and we are confident that we will continue to deliver high value to our shareholders throughout 2015 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)

Our first question comes from the line of Mr. Jeff Rulis from D.A. Davidson. Please proceed, sir.

Thanks. Good morning, and congrats on the 25th anniversary.

Thank you. Good morning, Jeff.

Question on the payoff activity that you outlined, Russ. $44 million this quarter, what was that in the prior quarter?

In the prior quarter? I don't know -- I can't remember, sorry. I can get back to you, Jeff, but I don't know the answer to that, sorry.

A broader question, I guess. Do you view payoff activity in 2014 -- any sense that, that would subside in next year, in terms of how those matured or business conditions drove that? I guess the outlook for 2015 and if you say that originations still remain strong, what's your view of the coming year?

Well, originations are still strong. One of the things that drove a lot of the payoff activity is that valuations, particularly in the Bay area, have risen dramatically. Rents have been -- frankly, it's kind of interesting. It's been driven primarily from the peninsula and San Francisco, but as it goes out around the Bay area because of technology. T

here's a lot of sale -- a lot of the payoff activity was related to sale of properties, and we got paid off because they sold the property, as opposed to refinancing. I think there was something like 17% of our payoff activity was actually refinancing, but the rest was either sale of property or sale of business.

We had last year, substantially for the full year, around $180 million of new loan activity, but we had half that again in payoff due to either sale of property, sale of business, and some refinancing activity. Do I think that's going to continue? Well, it's part of the business.

When you do a lot of commercial real estate financing, part of the business is that investors sell property. For us, we have to generate a substantial volume of new business to just see growth.

Fourth quarter we had quite a bit of, again, quite a bit of new volume; but unfortunately, we had a lot of payoff activity too. We're looking forward.

We think we're optimistic about the next year, but we know that's part of our business so we have to generate a big volume in order to continue to show the growth. For the year, we showed a net growth of 7.4%.

Right, okay. On the -- as accretion income eventually wanes, any thought on attacking the funding side, pre-paying borrowings or retiring some debt? Is anything in place to maybe look at the funding side in the coming year?

We're paying a lot of attention to the funding side. We don't have a lot of debt on the balance sheet right now. We're mostly funded with deposits. Our core deposit ratio, our non-interest bearing actually went up year over year. I think everybody is looking to make sure that we grow the deposit base in the appropriate areas to fund the future growth of the Company.

Got you. If I read you right, the cost of funds is pretty low. I guess if -- additional progress there is going to be difficult. The outlook for the margin as accretion comes in is going to be tough to keep that up, or the margin read-through would be what?

Well, I think you're going to -- it's not going to get a whole lot wider right now until rates rise. We're in a -- obviously we have a cost of funds of 10 basis points -- can't go much lower. As we generate a lot of new loan volume, these are -- the margins are pretty thin.

That's the reality. It's important for us to generate loan growth because of the shrinking margin. I don't see that changing until rates rise, and I don't know that -- I'm not an economist, but I don't know that's going to be in the very near future.

Got you. Okay, appreciate it. Thank you.

Thanks, Jeff.

Thank you. Our next question comes from the line of Mr. Tim Coffey from FIG Partners. Please proceed, sir.

Thank you. Good morning, and congratulations on the 25th anniversary.

Thank you, Tim.

My question -- my first question has to do with deposit balances. It looks like they've come down the last two quarters. Is that just repositioning within the deposit portfolio, or is there something else going on?

There's a couple things going on. First of all, if you look at our deposit mix, non-interest-bearing deposits actually continue to increase, which is what we call our relationship deposits.

We're very focused on building relationships. We do not try to attract interest-rate-sensitive type deposits. In other words, we're not chasing deposits with rate.

We've been pretty disciplined about that. We talk about discipline all the time, and the primary thing one thinks about is discipline in our lending policy. We're also very disciplined in our deposit side.

We have not done anything to try to attract interest-rate-sensitive deposits. What's happened is we have some volatility; but it's okay because we're so liquid, we've been focused on building the relationship side.

In the fourth quarter there's always volatility, and we have a few customers who have large balances who are always volatile. Frankly, at the end of the year we always see a slight decline, whether that's related to tax payments or whatever, who knows.

But there's a bit of volatility in those accounts. There's nothing unusual going on, other than the fact that we're not trying to attract the rate chasers, so to speak.

When we acquired Bank of Alameda, we re-priced -- they had a lot of high-rate deposits, which we re-priced, and frankly, a lot of it moved out of the bank immediately. It's fine. It tells you they were not relationship deposits. That's our philosophy, and that's the way we go.

As we go, as rate -- if and when rates rise, obviously we have to make some adjustments. We're in really good shape on the deposit side, primarily because our non-interest-bearing deposits are 43% of the total.

Right. No, the mix is very good. Okay, I appreciate that color. T

he other question I had was on the new employee additions that you're making. You made a couple of good hires it sounds like this past quarter. How far are you into the process in bringing on new lenders?

Do you -- how long do you expect this to go on, the investment in people to go on? Is that going to be a 2015 issue?

No. Well, we hired a few people that came on right at the beginning of the year, including Jarrod Gerhardt, our Marketing Director. We also added a new audit manager and a new compliance manager, both of whom joined this month, in January.

We've also added -- we continue to -- we've added some lenders. We strengthened our business banking team in Marin. We've also added in the East Bay, we've added a couple of lenders, and in San Francisco we've added one, also. We're in really good shape as far as lenders go.

If there's an opportunistic situation where we have someone that we know that's really great, we might bring them on. But right now we're pretty good in terms of the staffing. I

'm optimistic going forward, because we have a really great team now that we'll go forward with and show some growth from that. I don't think you'll see -- you'll see some in the first quarter just because we did them in January, but you won't see a lot after that.

Okay, sounds good. Russ, I appreciate it. Thank you.

Sure.

Thank you. The next question comes from the line of Mr. Don Worthington from Raymond James. Please proceed, sir.

Maybe a little more follow-up on the deposits. You mentioned some seasonality in the fourth quarter non-interest-bearing number. Would you expect to get some of that back in the first quarter?

Maybe. Some of our larger-deposit accounts are quite volatile because of their businesses that they're in. I won't go into what the businesses are.

We do see some seasonality to what they do. Typically, we see a run-up starting kind of the April 15 and beyond, and then we see near the end of the year a decline. You might see some seasonality there.

Frankly, what we're trying -- we continue to try to build is more stability with relationship deposits. The bigger accounts, they're kind of the good news/bad news. They give you nice strong growth sometimes, but they also can -- they also can fall off.

The relationships with the middle-market businesses that we bank that bring lending and deposits -- it's the core deposits, the dollars they use every day in their business -- that's what we're trying to build. An indication of that is that demand deposit number. I continue to watch that closer than anything, because that says we're doing the right things with our customers.

Okay, thank you. In terms of the additions to the lending staff, do you typically draw those from other community banks, or larger banks, or both?

Kind of a mixture. We've had some good success with attracting people from other community banks. Primarily, to give you as an example up in Napa, where we hired a team up there, they all came from an East Bay community bank. We hired five people.

A lender that we hired in San Francisco -- East Bay was also from a community bank in East Bay. We like banks that are similarly positioned to us, because they understand the way we operate as a community bank. We've had really good success with those people.

That being said, it's great when we have a lender that might be available from one of the larger banks, because they understand discipline and process and things like that. We're pretty happy with the team we're building.

Here in Marin we hired a couple of people, one as the head of our business banking area, who comes from a larger bank, who has brought great amount of discipline and knowledge of commercial lending. The woman that we hired has been a tremendous asset. Because of that, she's attracted others that have joined us in business banking -- business banking meaning the lower middle market.

What I'm finding amazing now, or what -- amazing's not the right word. What's impressive about what's going on now, we are really starting to attract some real quality people on our lending staff, which is raising the game, so to speak.

We've hired people from -- and I can kind of go down the list. Well, I shouldn't probably do that. But anyway, across the board with a number of banks, and we continue to attract people to our institution.

Okay, great. That's good additional color. Thank you.

Sure.

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

Looking at the -- Tani, this one's a question for you. Was there anything unusual in the tax rate in the quarter?

No. Actually, when we trued up the taxes for the full year, there was not a big adjustment.

Okay. Were there any interest recoveries, or maybe some interest reversals in the prior quarter for the loan yields?

Over the course of the year we had a little bit, but not anything material in the fourth quarter.

Okay. I know that I used a different day-count annualization factor than you guys do in the press release. I'm just wondering, for the last three quarters my calculations have showed it being -- we're nearing a more stable level.

I feel like a large drop-off has ebbed, especially in the last quarter. Are we hitting a point where what you're putting on is pretty close to what's already on the books?

I'm not sure I understand the question, Jacque.

The new loans -- are we hitting a point where the loan yields are starting to stabilize, where large fall-offs are starting to be a thing of the past, where the new loans that you're booking are close to what is the overall loan yield on the portfolio?

Yes, I'll answer that, Jacque. Yes, in fact, that's exactly what's happening. It is stabilizing. We're putting on transactions that are pretty close to what our margin is, our net interest margin is, that we're showing for the full portfolio.

Is that, realizing that we're very early in the quarter, is that still the case, even with what rates have been doing over the last couple of weeks?

Yes, that hasn't changed.

Okay, that's good to hear. Looking at just where cash balances are now, and obviously the desire would be to put them into loans and not into securities, but as you look at your cash ebbs and flows, is there any interest in buying securities now, or is it something where they'll run off, and cash will continue to build if rates don't move upward?

What we will always do is first put our cash into loans, and if we needed to shrink the securities portfolio in order to make sure that the loans are getting the first piece of the liquidity, that's what we'll do. You can see that over the course of the year that's exactly what's happened, the securities portfolio did shrink, and we have a bigger proportion of the balance sheet in loans now. We will continue that, as long as the loan-to-deposit ratio is below what our threshold is or our targets are, we won't see significant securities portfolio growth.

Okay. That was all I had. Thank you very much.

Thanks, Jacque.

Thank you.

There are no further questions at this time.

We got one question that came in. I'll read that, and then I'll answer it. It says can you speak about the success rate of the hires that you've made over the past two years, and any market where you need to add bodies?

I can talk about -- let me start with Napa. I bring Napa up a lot, but I think it's a good example.

We hired five people in Napa about a year ago or so, and they have done a tremendous job. The first year, it takes time certainly to get settled and start attracting business.

They booked over $30 million in new commitments this past year, and not all of that has been funded. A lot of that is un-funded at this point.

They have a great pipeline, too. They've been a tremendous success thus far. We look forward to that being an important part of our growth engine, the Napa market. That's an example of adding people that have been a great success.

Now, another -- I'll mention another person that we added here in Novato in the business banking side. That person brought in some real discipline about not only the credit side, but also the relationship management and really being in front of your clients.

We reversed a trend of having -- of seeing some shrinking loan volume out of that, out of our smaller market here in Marin, and they actually turned that around and have growth. That's been a terrific hire, and we've also acquired other people because of that person being here.

When you're hiring new people it's always tricky, but we've had great success with our lending staff and the people that we've attracted to the bank. I think that's a reflection of our success and the desire to be at the bank, because we've been showing growth and have been successful over the last number of years.

We didn't have any other questions coming in. Was there any other --?

There are no questions at this time over the phone.

Thank you for joining us this morning, and we will talk to all of you again next quarter. Thank you.