Bank of Marin Bancorp (BMRC) 2015 Q2 法說會逐字稿

Good morning and thank you for joining us for Bank of Marin Bancorp earnings call for the quarter ended June 30, 2015. My name is Fabia Butler, I'm Vice President community and public relations manager for Bank of Marin.

(Caller Instructions)

As a reminder, this conference is being recorded on July 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, July 20, 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. And now, I'd like to turn the call over to Russ Colombo.

Thank you, Fabia. Good morning, and welcome to the call. We are pleased to share our results for the second quarter. These results reflect our commitment to doing the right thing to grow our business in what continues to be a very active market in the Bay area.

Before we get into the details, let's start with some key highlights for the quarter. New loan originations were strong at approximately $52 million, nearly double the prior quarter, making this one of the best quarters to date for loan origination. Several positive events led to payoffs of $55 million for the quarter, such as the successful completion of a number of large construction projects, the profitable sale of two customer businesses, and the resolution of a problem credit.

Our construction loan pipeline is strong, with substantial unfunded commitments that will replace construction payoffs to date. The commercial real estate market in the Bay area is very hot, which is driving sales of commercial properties. We conduct significant business with commercial real estate investors, and we're seeing the results of this dynamic market.

Our relationship banking model allows us to work with all of these clients on an ongoing basis, and we expect to finance their future opportunities. We experienced strong loan growth in Napa from several new wine industry customers, aligning with our long-term strategy to diversify and grow that area of our business. Our commitment to this market is paying off after two years of significant investment. Overall, our loan and deposit pipelines are robust, and should yield strong results for the second half of the year. Deposits totaled $1.6 billion at quarter-end, growing $45 million for the quarter, and non-interest bearing deposits represent 46% of the total.

As for detailed results from the quarter, earnings were $4.3 million compared to $4.5 million last quarter. The combination of low interest rates, significantly compressed margins, and demanding regulatory environment continued to affect earnings. Keeping these factors in perspective, we remain committed to disciplined credit practices and relationship banking. We continue to perform at a high level with strong capital and excellent credit quality, with non-accrual loans represent only 0.53% of total loans at quarter end, down from 0.7% at March 31, and 0.76% a year ago. The decrease in non-accrual loans primarily relates to the second-quarter sale of a residential tract development loan made in 2008, resulting in an $839,000 charge-off that was absorbed by our existing loan loss reserve. At quarter end, our Texas ratio stood at 3.54%, improving from 4.71% last quarter, and 5.43% a year ago.

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

Thank you, Russ, and good morning, everyone. As Russ indicated, we are performing at a high level, and are well positioned for a strong second half of the year. We continue to produce solid earnings without compromising credit quality or aggressively pricing loans. Earnings per share for the quarter were $0.71, compared to $0.74 in the first quarter, and $0.86 a year ago.

Let me begin with the quality of our balance sheet. Our loan to deposit ratio is a healthy 82%. While we continue to experience deposit fluctuations related to seasonal activity and the new business ventures of some of our larger customers, average and period end balances are on an upward trend. Our liquidity position is solid, and will support substantial growth, as well as the effects of potential changes in interest rates.

Turning to the income statement, the tax equivalent net interest margin of 3.86% represents a 14 basis point decline from last quarter, primarily due to a higher concentration of cash on the balance sheet, and to a lesser extent, lower rates on securities and loans. Net interest income totaled $16.5 million in the second quarter of 2015, compared to $16.6 million in the prior quarter, and $17.9 million in the same quarter last year. The decrease in net interest income relative to a year ago is primarily due to a lower level of income recognition on acquired loans, as well as lower interest rates on loans and securities.

There were some one-time events in the quarter that increased both non-interest income and non-interest expense. Non-interest income included a $305,000 special dividend from the Federal Home Loan Bank and a $147,000 bankruptcy claim payment, related to a Bank of Alameda loan that had been written off prior to the acquisition. Non-interest expense included $337,000 in accounting adjustments for leases. Overall, key metrics such as our efficiency ratio, return on assets, and return on equity, are at levels that are reflective of the continued low interest rate environment.

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. The quality of our portfolio is excellent. We also expect significant loan originations and deposit growth through year-end. Our credit quality remains strong, with no loan loss provision in this quarter.

We are relentless about adhering to consistent credit practices that benefit the long-term growth and viability of the business. Non-interest bearing deposits, the value of our franchise, are at a very healthy level, at 46% of total deposits. Our deposit pipeline looks strong across all of our markets. We are declaring a dividend of $0.22 per share this quarter, marking the 41st consecutive quarter we have paid a cash dividend. Overall, given our financial condition, high levels of capital, and excellent credit quality, we are well-poised and fully staffed to handle additional growth. We are ready to take advantage of new opportunities as they arise.

Before we break for questions, we also wanted to let you know that Bank of Marin will be ringing the closing bell at NASDAQ on July 30, Thursday, in recognition of our 25th anniversary. We will be in New York for the KBW conference, and look forward to participating in the NASDAQ event, as well.

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

(Operator Instructions)

And our first question comes from the line of Jeff Rulis with D.A. Davidson. Please proceed.

You talked about -- well, on the paydowns, I guess, is there any seasonality typically within the loan book? I know that paydowns can come at any point, but looking at timing of the portfolio, is there anything to suggest that they could be lumpy in certain quarters?

Not really. We had, in that group of $55 million, we had some pretty significant [paydowns]. We had one project that we had financed on the construction side, which you always like to see the projects go through to conclusion and sale. It was a condo development, and they sold a few of the condos for frankly a lot higher than they had anticipated and paid off the project early, which was great for them, and we encourage it, and we'll hopefully do more business with, it's a term long client, so we expect we will. And there were two businesses that were sold during the quarter and we got paid off, and there's not a lot -- both of them were at significant premiums and they collected and paid us off. I don't really see anything that's seasonal about any of the payoffs.

Okay. But maybe just timing wise, does it feel like that was a higher than average quarter in the terms of payoff? I don't know how the payoff number's been running sequentially, but this was on the high side.

It was definitely on the high side. Certainly when you have two businesses that are big customers sell, and you have one of the largest construction projects in our portfolio pay off, that's hopefully going to be bigger than most. You wouldn't expect that two of your good clients get sold in the same quarter. So I don't expect the payoffs to be that large, but the problem -- the thing that's difficult to predict in our portfolio is that we do finance a lot of commercial real estate investors, and investors buy and sell commercial real estate.

And sometimes they buy, and in markets like this, where the valuations are so strong in the Bay area these days, that there's a fair amount of profit-taking going on, selling properties at these high valuations, and taking some money off the table. That's the bad news, I suppose, from our perspective, but the good news is, these are long-term clients that we fully expect to finance other opportunities for them in the future. So it's really -- maybe it's timing. Maybe it's seasonal, but we really expect that we won't have that number of payoffs next quarter, and we'll have new opportunities, too.

And Russ, did those high valuations, do those concern you? Is it a point where you look at the market and think it's a little overheated, or where do you stand on the market valuations?

Certainly, have you to be a little bit concerned about these valuations. It's driven -- it's interesting, in the Bay area, it's driven primarily by technology, even those that are not technology-related businesses or property. But technology companies on the peninsula and now in San Francisco, to a great degree, there's spillover to Marin and to the East Bay, and so the values are pretty high because they're looking for space.

Space in San Francisco is at a tremendous premium. So yes, it concerns me a little bit, but we haven't seen any signs of things cooling off in the tech business. You know how that is. There's definitely a cyclicality to that.

Right. Okay. Maybe one last one. On the deposit growth, pretty strong. Any promotions driving that? And I guess not only what you put up in Q2, but your discussion that the pipeline looks solid as well, is there anything driving that growth in promotions?

No, not doing promotions. We don't really chase those kinds of dollars. Our deposit gatherers are branches, primarily in Marin County, are doing a tremendous job of really building a pipeline of new deposit opportunities. We have brought on a couple of nice new relationships. The 46% of the demand deposits is really driven by relationships, and it's not hot money. It's all building new relationships and expanding and getting new business from existing clients, so that's really a real bright spot for the quarter, that deposits grow, and not only total deposits, but more importantly, the demand deposits.

Great. Thanks.

Thanks, Jeff.

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

I have a question on the occupancy accrual. I understand it was a one-time item in the quarter. Will that have any future impact on how you accrue for occupancy in the future?

So it wasn't really an accrual. There were a couple of items that happened. We had three branches that had not been converted to straight line amortization on their leases. That was a past adjustment that we finally decided just to go ahead and true that up. So a small reduction in rents going forward for them, but not meaningful. The other piece was final true-up related to the closure of the old Sausalito branch, and the lease associated with that one. Again, that was a one time deal, and won't affect future -- well, it just will reduce, because we brought forward all of the future lease payments on that one.

So very, very small future positive impact.

Yes.

Both of those. Okay. And then looking at the securities purchases in the quarter, what generally did you purchase, and what was the timing of those purchases?

Yes, so we purchased pretty vanilla securities, short durations, agency, MBS and debt. We do some longer-term municipal purchases, and the purchases were focused towards the latter of half of the quarter, because rates were higher at that level, and so we got a little bit more active at that point. So hopefully we'll see the benefit of those purchases for the full impact in the next quarter.

If it wasn't the purchases then what -- just looking at the average, what drove the majority of that in-quarter decline in investment security yields?

The decline in the security yields?

Yes. I understand the excess cash and the impact that had, but I'm wondering, the securities yield dropped from 2.47% last quarter to 2.31% this quarter.

Right. So a lot of the securities that -- we've got a lot of turnover in the portfolio this year, and a lot of those securities were longer-term municipals with calls, call provisions in them, and when we redeploy those, they're going into securities at current rates, so turnover in the --

It's the decline impact from prior quarters, then?

Yes.

Okay, that's helpful. Just one last quick one. The new wine customers that you mentioned, Russ, in the press release, what's deposit impact from those, if there is one?

Honestly, I can't answer that right now. Both of them -- we just booked the loan relationships. We're obviously getting all their operating accounts, too. But they're borrowing a fair amount of money, so the deposit is not -- deposits aren't going to be significant, because they have operating lines that we're going to be paying down lines, they pay down lines with excess cash, and then re-borrow. So there's not going to be substantial accounts there. It's going to be a bigger impact on the loan side.

Okay. Thanks. Thank you. I appreciate the added color.

Our next question comes from the line of Tim O'Brien with Sandler O'Neill & Partners. Please proceed.

So a question for you, Russ. On the two businesses that were sold, did they -- with the proceeds from those sales, did they leave those proceeds with you in accounts?

Some of it. To explain, one of the businesses -- I can't go into specifics because of the privacy here, but the business was a foreign buyer, and so most of the deposits from the business went overseas. The personal accounts, however, some of the personal account money stayed with the bank, and actually some of it went into our wealth management area. So that was a good -- we had a real good relationship with this particular organization.

So yes, to a certain extent. Not to the same levels that the business had. On the other one, most of the money went away, although there are some deposits, personal deposits with that particular business, too. And actually the owner of that business still remains engaged with the Bank, and is still on one of our advisory boards.

So suffice to say that strong deposit growth this quarter, those sales didn't temporarily spike deposits in any way?

Actually it had the opposite impact because in one case, one of the two businesses that was sold carried -- while they had borrowings for facilities, they also carried substantial deposits, and most of the deposits went away, because of the buyer. So those really didn't have a positive impact on our deposit side. The deposit side was really impacted by across the board, if you looked at every one of our branches, we had nice deposit growth, some bigger than others, but nice deposit growth, almost across every branch. It was really a good quarter from that perspective.

Thanks, Russ. And then a question for you, Tani. You referred to this when you were answering Jacque's question about securities. On the muni -- the called muni securities, not this quarter but in previous quarters, perhaps last quarter, were they called at -- did you collect any call benefit, that benefited interest beyond what would normally have impacted you, just because of the -- how the bonds were called from a timing standpoint? Were they called at a premium?

So it really -- yes, it really depends on the individual bond. I don't think you could make a broad statement on those, in general. But I'd say the longer term bonds that are getting called were just issued at higher rates. When they get called, they come back -- the principal comes back at par, and I'd say on average, because a large part of our portfolio was purchased near the end of 2012, they were purchased at higher interest rates than we have today. So on balance, probably premium -- some premiums on those bonds.

Okay, great. And then I noticed depreciation and amortization costs were up. Was that what you were referring to? It was $650,000 this quarter, relative to prior run rate, considerably lower. Is that a new norm or is that -- was that related?

That $200,000 difference in occupancy -- or in the depreciation and amortization is related to the final true-up on the Sausalito lease.

Got it. One time. Normalized rate is around [$400,000] or a little above, probably?

Yes.

Great. And then just one more question about the wine loans you're putting on. Those are predominantly then -- are they tied to real property holdings? Are you financing buildings, construction, those sorts of things? I'm sure you're not financing vineyard. Is that right, Russ?

For the most part, that's right. We will occasionally finance vineyards for estate properties for wineries, if they have vineyards that they own, we'll occasionally finance those. For the most part, we're not financing people who are just growing grapes and selling them to someone else. In most of this, the two that we brought on were primarily related to facilities, working capital lines for inventory and receivables, that type of thing. That's the typical thing we do, working capital as well as the winery facility and occasionally, there is a little bit in this one, we are doing some financing for vineyards, but they're estate properties for the winery itself.

Okay, and then last question, Russ, is there any special consideration for you in underwriting loans to that sector, given the drought situation?

No. You mean that we would give these borrowers?

I don't know, maybe it just affects how you look at the credit, evaluate the credit, risk profile of those loans with water issues.

Right. And that's pretty important now. Remember, if we're financing a winery itself and not the vineyard side, the risk -- and that's where the risks really go, on the vineyard financing. That's why we're not doing it, for the most part, because vineyards, when you're just growing grapes, those are the guys that really get impacted dramatically by water issues.

The wineries themselves, they're contracting with -- for the most part, they're contracting with others who grow grapes to deliver those grapes, and that's going to affect the price certainly, because production costs are higher when you have access to water issues. But we obviously look at it, every time we finance a winery and what their access to water is, but it hasn't been a huge issue so far.

Good. Thanks for answering my questions.

Sure. No problem.

(Operator Instructions)

Our next question comes from the line of Don Worthington with Raymond James. Please proceed.

Just wanted to go back to the deposit growth a bit. Was there any, say, large deposit that was included in that linked quarter growth?

Not really. For the most part, we have had nice growth across our different branches. So while we have brought in a couple of new accounts, frankly the two biggest new accounts that we have brought on haven't even really funded all their deposits yet. They'll probably fund in the third quarter. So really, other than on a negative -- from a negative perspective, like I said, those two businesses that were sold, and all the deposits for the most part disappeared, with some exception, it's been pretty consistent across most of our branches.

Okay.

That said, Don, we do -- we have spoken about how the deposit levels fluctuate, because we do have some large businesses that have large inflows and outflows of their accounts, that is normal activity for those businesses. So that does impact the balances sometimes between the average and the ending balances, but it doesn't mean that deposits are necessarily leaving the bank. It's just normal activity.

Okay.

We haven't had any significant depositors leave the bank.

Yes. And then how about the tenant in common market in San Francisco, are you getting some good growth there?

We're getting some. There's really only a couple of -- the nice thing about that is there's really not a lot of banks that are involved in the business. We're getting some growth, and that continues to be a great asset class. There's been no defaults in our portfolio in the 11 years-plus that we've been in the business, but I don't think we've had a huge amount of volume, but we've had some growth in that, so.

Okay. And then I guess lastly, any update on the M&A market, discussions there, and maybe regions where you might be looking?

Yes, the market -- we're sensing that there's going to be a little pickup in this market, that there are opportunities out there, potentially. We're very active in talking to everybody, all the -- we keep close contact with all the investment banks, and we -- I'm out there talking to banks all the time. I wish I had something to report, there's nothing to report, but I think you'll see more consolidation, primarily with smaller banks, under $500 million. It's pretty tough for those banks of that size in this market. As you see with our numbers, we see margin compression and the expenses going up relative to -- just from the compliance side, regulatory oversight. So I know we've been saying this for a while, but I'm confident that you'll see an uptick in M&A over the next 6 to 12 months.

Okay. Great. Thank you.

You're welcome.

(Operator Instructions)

And Mr. Colombo, there are no further questions at this time. I'll turn the call back to you.

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