Bank of Marin Bancorp (BMRC) 2015 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, 2015. My name is Fabia Butler. I'm Vice President Community and Public Relations Manager for Bank of Marin.

(Operator Instructions)

As a reminder, this conference is being recorded on April 20, 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 5:00 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 this call is based on information that we know as of today, April 20, 2015, and may contain certain forward-looking statements that involve risks and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings press release we issued today, as well as Bank of Marin Bancorp's SEC filings.

Following the prepared remarks our team will be available for questions and now, I'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 results for the first quarter. Following a record year, this was a good quarter and we remain in strong financial condition.

Before we get into the detailed results, let's start with some key updates from the quarter. Net loan totals were flat at $1.3 billion. We had approximately $30 million in new loan originations, but they were offset by payoffs largely due to the sale of four sizable commercial properties. Our originations continue to be strong, while at the same time many of our customers are taking advantage of high real estate valuations in the Bay area and selling their commercial properties. In spite of payoff, our loan to deposit pipelines are robust and should yield strong results in the second quarter.

We continue to experience growth in construction lending, up $9 million from last quarter and $25 million from a year ago, driven primarily by long-time customers financing high end, single family and multifamily projects in San Francisco and Southern Marin. In commercial banking, our Marin Petaluma, East Bay and Santa Rosa offices performed well this past quarter. We see the Marin East Bay, Napa and San Francisco regions contributing heavily to the pipeline. Essentially, we are seeing growth prospects in all our markets.

As for detailed results, earnings this quarter were a solid $4.5 million, particularly without the benefit of accretion we saw in the prior year from the Bank of Alameda acquisition. Earnings growth was hindered by payoff and increased non-interest expense as we filled key positions in audit, compliance and marketing. These hires reflect our commitment to a growth strategy and response to the changing regulatory environment including the increased accounting complexity for acquisition related activity. Deposits totaled $1.6 billion at March 31, growing $33.5 million from the last quarter.

Non-interest bearing deposits totaled $716.7 million or 45% of total deposits at March 31. This is an indication of our continued focus on relationship banking. Overall, our credit quality is excellent and non-accrual loans at $9.5 million representing only 0.7% of total loans at quarter end. Our Texas ratio at quarter end stood at 4.71%, improving from 4.79% last quarter and 5.57% a year ago.

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

Thank you, Russ.

As Russ indicated, EPS of $0.74 this quarter represents solid core operating earnings. The tax equivalent net interest margin remains strong at 4%, holding steady from 3.99% last quarter and down from 4.25% a year ago. The decline from a year ago reflects lower income recognition on acquired loans, as well as lower average balances on investments.

Comparing this quarter to the fourth quarter last year, net interest income of $16.6 million was lower, primarily due to fewer days in the first quarter. While the yield on average loans came down 8 basis points, the total interest earning asset yield went up by 2 basis points, due to higher loan balances offset by lower cash and investments.

For the quarter, non-interest expense totaled $11.8 million, up slightly from $11.6 million last quarter and down from $12.8 million a year ago. The current level reflects a more normalized run rate, and we will continue to hold the line on expenses. At 63% for the quarter, our efficiency ratio was higher than the previous quarter, partially due to the staffing expenses that Russ mentioned earlier, but mostly due to lower interest income from fewer days.

After several Basel III changes taking effect on January 1, our capital ratios continue to be strong and comfortably above regulatory requirements for well capitalized institutions, which positions us well for future acquisitions. While return on assets continues to hold at 1%, both ROA and return on equity are reflective of the continued low interest rate environment and the cost structure to support a larger growing bank.

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.

While we expect the competitive lending environment in the Bay area to continue, our disciplined and focused approach is paying off. With accretion now at more normalized levels, we're operating at a more usual run rate with continued focus on maintaining and growing strong customer relationships. We are relentless about maintaining high credit quality and continue to adhere to consistent credit practices that benefit the long-term growth and viability of our Business.

Core deposits, the value of our franchise, continue to be at healthy level at 45.2% of total deposit. Our deposit pipeline looks strong across all of our markets. With a dividend of $0.22 per share this quarter, this marks the 40th consecutive quarter we have paid a cash dividend. Overall, we remain in excellent financial condition with high levels of capital. We are well poised and fully staffed to handle additional growth and expect to take advantage of opportunities as they arise.

I would just say that you should remember that this is a marathon, not a sprint. We are positioning ourselves for the long term. On one last note, on May 14, we will hold our annual shareholder meeting in San Rafael, if you would like to attend. Information can be found on the website.

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)

And our first question is from Jeff Rulis with D.A. Davidson. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

Good morning, Jeff.

Russ, on the loan, I guess net loan growth outlook, you have indicated that you might see some more payoff activity. So the first question would be the net of that or the balance of the year, how do you see loan totals from here? There's four large payoffs in the quarter, but given what the origination pipeline looks like and what other projects are out there, any kind of color on net growth outlook for the year.

Well, we can't give you percentage growth that we expect but, our pipeline's very strong. What's been affecting us and I think that it's affecting almost every bank across the country is that valuations are higher, particularly in this region.

Activity is very strong and cap rates continue to come down on commercial properties. Weekly, we hear about very low single digit cap rates, 3% and 4% cap rates. And so, when you hear that, investors who own commercial properties have to consider taking some money off the table. And so we're seeing some of that.

In addition, we've seen some of our customers, long time businesses, who have been offered a lot of money for their business which will affect loan totals in the second quarter. So, I still believe there's going to be -- there's still going to be loan growth for this quarter and for the year, but you can never tell about loan payoffs. It's kind of the wild card these days. But do I expect us to be at least what we were last year? Certainly, at least what we were last year. But you never know because loan payoffs can have significant impact on that.

And Russ, to your comments about the high valuations I guess in the footprint, does that -- anything that or particular areas that you think kind of overheated or do you think it's sort of supply demand based and you feel comfortable with the trend of real estate valuations?

Well, I think what's happened is that this is all a function of the technology boom. And if you go down on the peninsula, real estate's ridiculous right now and that has certainly spread to San Francisco because a lot of the tech companies are headquartering there. Twitter and a few others have big operations there. And so, that puts a lot of pressure on all of commercial real estate.

And so what's happened is there's a lot of spillover to the East Bay because of BART. They can easily get to Oakland. Now we're starting to see valuations in the East Bay rising and it has an impact in Marin too. Certainly has an impact on the residential side. San Francisco's now the highest priced city in the country for living expense, more than New York City. And that's all driven by that.

Everything M&A from technology in terms of the valuations. So the other side of that is we have to be very careful about our advance rates and be cognizant of that if this is a bubble, not saying it is, but if it is, we have to be prepared for that and we have to make sure that we do a good job underwriting our commercial real estate portfolio and also making sure that we have guarantors and guarantors with liquidity. It's the other side of it. We have this tremendous activity going on but if that stalls or goes the other direction, you don't want to be in a position where you're overadvanced on your portfolio. So we're being extremely careful about that.

And frankly, one of the problems that it's creating is that you're getting a lot of banks who are very, very aggressive. We're seeing literally 25 year financing, full payout, 25 year financing below 4%. And how do you compete with that? I don't know what's going to happen in 25 years, let alone five years. So it's a difficult time because you have to compete, yet the competition is pressing the term and pressing the rate quite a bit.

Sure. And then maybe one last one for Tani. Just on the core margin, looks like if you back out accretion gain impact, looks like core margin's up a basis point. The sustainability of what's pushing and pulling on margin, your expectations, either not specific but just broadly speaking on the margin front?

Well, there continues to be pressure as Russ alluded to in terms of the competition on loan pricing. On the other hand, we do still have a fair amount of cash to put to work. So to the extent that we move out of cash and into loans or securities, then that will tend to counter and affect some of that impact.

So on net, it's just sort of a treading water is going to be a challenge plus or minus a few basis points?

Yes, I think 4% is probably -- it seems to be settled at that level and like Tani said, if we can put more of the cash we have available to work, that's going to have a positive impact on that. Because that's not earning much. So --

Got it. Okay, thank you.

Thank you, Jeff.

(Operator Instructions)

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

Good morning.

Good morning, Tim.

Good morning.

One question, Tani, was there any prepayment penalty on those property loan payoffs?

No. The answer is no on those. One of them -- I'm not going to go through each one specifically, but one of them was a big construction loan. So that was expected. And then the other three were situations that didn't -- they had gone beyond the prepayment penalty.

And I was just -- the purpose for me asking is just kind of to look at the margin situation and see if there was anything that supported the margin there. As far as those four loans were concerned, Russ, would you characterize them? Were they legacy Bank of Marin loans or were they East Bay loans?

All of them were Bank of Marin.

Okay.

And it was kind of interesting because one -- again, I don't want to go into specifics on the deals, but they're all old Bank of Marin legacy loans, different types of situations on each one of them.

And then big uptick in non-interest bearing deposits this quarter. Was that a reflection -- was that because of these payoffs in part or were your clients keeping money temporarily in their DEA accounts?

No. The deposit side is -- we have some volatility that bounces those numbers around a bit. We've got a few large depositors who on a regular basis their deposits can swing many million dollars in a single day. So -- and it's kind of -- so it's just kind of the normal swings of those few customers.

For the most part, deposits in our branches have been growing consistently across the board on the demand deposit side. We've had more volatility on money market and stuff but our demand deposits have been exceptionally strong across the board in every one of our offices.

And then Tani, on salary and benefit cost, it looked like it came in at about $6.8 million. Is that -- does that carry a bit of kind of nonrecurring seasonal either payroll or workman's comp cost or anything in that? And if so, can you give me a dollar amount?

So there was a little bit of an increase due to the turn of the year and payroll taxes not being at their caps yet. That was not a huge number. Mostly, it's because we had several positions that were vacant for the quarter last year that we have now filled.

Then there were some offsetting entries, for instance, recruiting costs that hit in the first quarter that won't recur next quarter. But I'd say in general it's a pretty good run rate.

How much was --

I'm sorry, Tim. We have as of January -- first of January we had a new marketing director, a new compliance director, and new chief auditor. All those people started January 2 or whatever it was. Right around the end of the year. So that's reflective in those numbers. So it's a good run rate, I think.

Congratulations I guess, on that. So what were the recruiting costs that you referred to, Tani, that were one-time?

Well, you know, you mean the dollar amount?

Yes, dollar amount. Just so we can take that out.

It was roughly $100,000. Maybe a little more than $100,000.

Great. And so a year ago between first quarter and second quarter, salary and benefit costs came down pretty substantially, close to about $700,000 decline. If what I'm hearing on this call today is accurate, that's not probably going to happen. We're more at kind of a sustainable run rate here at the $6.8 million number, less a little bit from the recruiting standpoint, maybe a nominal amount from seasonal factors?

That's right. Because last year we had the conversion going on from the acquisition in the first quarter and so all of the conversion related employees were no longer with the Company after April.

Thanks for answering all my questions, guys.

Thank you, Tim.

And our next question is from Jackie Chimera with KBW. Please proceeded.

Hi, Russ. Hi, Tani.

Good morning, Jackie.

Wondering if you could touch a little bit on M&A discussions? Just the pace of those, what you're hearing in the market, if that's picked up at all? Maybe if other smaller banks are experiencing, to the extent they're experiencing the same thing that you are in terms of payoffs and just expanded valuations, if that's making them more willing to partner up?

The answer is, I think they're more willing to partner up but then they read about something like PacWest or Western Financial, the buying bridge, and they look at those valuations and they say wow, we maybe we're worth 2.2 times book or 2.4.

And then you'll have to talk them off a ledge.

Yes. Well, those are different. Those are both unique situations. So I think the answer is they are experiencing the same types of payoffs that we are and I think a lot of community banks, small community banks, are keeping their loan growth up by buying participations which we don't do. I think that's -- as you talk to other banks and smaller banks, there's participations in larger syndicated credits, nationwide credits, going on that some community banks buy which we think is a bad idea. But that's where they're trying to fill the gap.

So I think you are -- you will see more consolidation. We keep in touch with everyone and there is discussions going on, but I wish we could tell you there was something we could report. We don't have anything to report. I think smaller banks are getting serious and they're seeing that their margins continue to erode and returns in a 5% or 6% returns. That's probably not adequate for their shareholders. We've been kind of saying that, but the activity seems like it's picking up a bit.

Okay. And then in terms of some of what you've been working on building out the East Bay footprint that you have, how is that comparing to how the San Francisco footprint was at that point in its life cycle?

Well, it's different, because in Oakland we had a portfolio which we inherited from Bank of Alameda. That being said, we've had some personnel changes there which have been good. We've added some more middle market type lenders which takes us into larger companies with larger credits and things of that nature. So that's -- and San Francisco's been very, and the people from San Francisco have been very helpful with that transition. And the guy that runs our San Francisco office has been, has provided an oversight for that because they understand the focus of what Bank of Marin does versus maybe what Bank of Alameda might have done. But it's coming a along nicely. I think our team there is real solid now and looking forward to some nice growth out of that office going forward.

Okay, great. Thank you for all the color, Russ. I appreciate it.

Thank you, Jackie.

(Operator Instructions)

And we have a question from Tim Coffey with FIG Partners. Please proceed.

Thanks. Good morning, Russ. Good morning, Tani.

Good morning, Tim.

Russ, if we were looking at the prospect of a slightly slower growing balance sheet in 2015, is there any thoughts on increasing the cash dividend or somehow better managing your strong capital position?

We increased it a little bit a couple quarters ago, we increased it $0.02. Now our payout ratio is around 30% I think this quarter. The answer to the question is really no, because we view ourselves as a buyer long term and that we're keeping capital available to put us in a good position if we can make an acquisition.

And we are -- the question earlier was about that. We are actively talking to lots of different banks. It's just we haven't been able to find the right situation. So at risk of having maybe being a return being slightly below what we could if we did a repurchase or increased the dividend a lot, we're prepared to live with a little bit higher capital levels so that if there's an acquisition that presents itself to us, then we're in a better position to make that purchase.

Okay. That was my only question. Thank you.

Okay, great. Thanks, Tim.

And we have a follow-up question from the line of Tim O'Brien with Sandler O'Neill & Partners. Please proceed.

Russ, could you give a little color on why you guys reentered the theater or restarted the theaters deposit gathering?

Yes, that was mainly because we do see -- we have seen higher volatility in our deposit balances because of our larger customers being so active. And so we had some balances that we had already put out to seeders and we just converted those to reciprocal, meaning we would get balances back in exchange as opposed to just doing one way sells. That really was to counteract a little of the volatility in the transaction account.

Thanks, Tani.

And there are no further questions on the phones.

Well, I want to thank everyone for joining the call this morning and I look forward to talking to all of you again next quarter. Thank you very much.