Bank of Marin Bancorp (BMRC) 2015 Q3 法說會逐字稿

Good morning, and thank you for joining us for the Bank of Marin Bancorp's earnings call for the quarter ended September 30, 2015. My name is Jarrod Gerhardt; I'm the Senior Vice President with Bank of Marin.

(Caller Instructions)

As a reminder, this conference is being recorded on October 16, 2015.

Presenting this morning will be Russ Colombo, President and CEO, and Tani Girton, Chief Financial Officer. You may access the information discussed on this call from the press release that went over the wire at 5:00 AM Pacific time this morning, or on our website at BankOfMarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that the discussion you hear on this call is based on information we know as of today, October 16, 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 earlier this morning, 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, Jarrod. Good morning, and welcome to the call. We are pleased to share our results for the third quarter, which reflects our strategic focus on relationship banking in our core markets. A great deal of hard work by our team has continued to generate momentum and position us well as we head into the fourth quarter.

Let's start with some key highlights from the quarter. New loan originations in the third quarter were strong at $57 million, making this the best quarter of the year so far, and the third straight quarterly increase. The strength of originations led to a $24-million net increase in total loans since June 30, 2015. New loans in the quarter were well distributed, both across our geographic markets and products. We continue to see growth in the Marin and Petaluma markets, where our presence is the strongest.

Loan payoffs, which have been a factor so far this year, were down for the quarter to approximately $37 million, with only a small percentage attributable to refinancing with competitors. Deposits totaled $1.6 billion at quarter end, growing $5 million from last quarter, and 5.4% since December 31, 2014. Non-interest-bearing deposits continued to grow in the third quarter. They increased to $752.3 million, an $11-million increase from June 30, 2015. Non-interest-bearing deposits are now 46% of total deposits, compared to 45.5% at June 30, 2015. Overall, our loan and deposit pipelines are healthy, and we look forward to the future with confidence.

As for detailed results from the quarter, earnings were $4.8 million, compared to $4.3 million last quarter, an 11% increase. Our 1% return on assets and 9% return on equity are supported by strong capital and liquidity, as well as disciplined expense management. Our already excellent credit quality continues to improve. Non-accrual loans represent only 0.19% of total loans at quarter end, down significantly from 0.53% at June 30, and 0.73% a year ago. A decrease in non-accrual loans primarily relates to a $2.7-million loan that was returned to accrual status, and the payoff of a $1.4-million loan. At quarter end, the Texas ratio stood at 1.41%, an improvement from 3.5% last quarter, and 5.14% 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. I'll start by saying that it is so rewarding to see our hard work reflected in many positive production and loan quality trends. We continued to perform at a high level, and we believe that we are well positioned to finish the year strong.

While we continue to experience deposit fluctuations related to seasonal activity and the new business ventures of some of our larger customers, balances are on an upward trend. Our loan-to-deposit ratio is sensitive to this deposit volatility, and rose to 83.4% on September 30, compared to 82.1% on June 30, as loan balances increased more quarter over quarter than did deposit balances. That said, our capital and liquidity positions are solid, and will support substantial growth, as well as the effects of potential changes in interest rates.

Turning to the income statement, diluted earnings per share for the quarter were $0.79, as compared to $0.71 per share in the second quarter. Net interest income grew to $16.9 million in the third quarter of 2015, compared to $16.5 million in the second quarter, primarily due to balance sheet growth and an additional day in the quarter. The decrease in net interest income relative to $17.5 million in the third quarter last year is due mostly to a lower level of income recognition on acquired loans, as well as rates on new loans and securities that are somewhat below rates on paid-off loans.

The third-quarter tax-equivalent net interest margin of 3.79% declined 7 and 24 basis points, respectively, from last quarter and from the third quarter of 2014. This is primarily due to a higher percentage of securities on the balance sheet, as average deposit levels outpaced loan growth. Additionally, income recognition on acquired loans continues to fall, and interest rates on new loans are lower than rates on some of the loans that are paid off. There was no need for loan loss provision this quarter, as improvements in credit quality bolstered the existing loan loss reserve.

You may recall that there were several non-recurring items that contributed to net interest income and expense in the second quarter, including a $305,000 special dividend from the Federal Home Loan Bank, and that accounts for the decline in non-interest income between the second and third quarters of this year. In addition to the $337,000 one-time accounting adjustments in the second quarter, several other items, including lower salary and benefits, contributed to the decrease in non-interest expense.

Reductions in expenses were partially offset by a $324,000 increase in the provision for loan losses on off-balance-sheet liabilities, related to an increase in unfunded loan commitments. As a result, non-interest expense declined $681,000 from last quarter, and the efficiency ratio fell to 61% for the third quarter. So, overall, key metrics such as our efficiency ratio, return on assets and return on equity are at expected levels, reflective of the current interest rate and regulatory environment.

Finally, the cash-less exercise of a warrant to purchase common stock resulted in a net increase of 70,591 shares of common stock outstanding in September. The warrant was issued to the US Treasury under the United States Department of the Treasury capital purchase program in 2008, and later sold to institutional investors.

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. As Tani mentioned, the trends we are experiencing across the Business are positive. Loan origination, deposit growth, credit quality and earnings continued to improve. Given the healthy economics of the markets where we operate, there is no predicting loan payoff; however, the Bank was able to take advantage of a slight easing of payoffs in the third quarter.

We remain disciplined on the credit side because, as you know, bad loans are very often made during good times. A solid performing loan portfolio is hard earned and priceless in any market condition. Maintaining a high ratio of non-interest-bearing deposits continues to be an emphasis for us. As with our focus on loan originations, this is an important trend which reinforces our relationship-based approach.

Overall, we are pleased with our performance this quarter, which makes us optimistic about the future. Thank you for your time this morning, and now we will open it up to your questions.

(Operator Instructions)

And our first question comes from Jeff Rulis with D.A. Davidson.

You mentioned payoff activity, obviously tough to predict, but is there any sort of planned payoff that you can see into 2016, versus 2015? Was there inherently just more planned payoffs that you can see at this point, to say that well, it should be a lighter year in 2016 from a payoff perspective, or is that not the case?

Well, Jeff, as you know, it's really hard to predict. The ones you don't want to see are customers refinancing with other banks, which was a relatively small piece of what we had in terms of payoffs. There are planned payoffs, which are primarily related to our construction portfolio. We want those to pay off, because a project is completed and you can look at our construction portfolio, and anticipate that there's about an 18-month life to those projects, and then they get paid off, so we do have that.

For the most part, the rest is very difficult to anticipate, and we're just working hard to make sure that none of the payoffs are related to refinances outside the bank and we're maintaining our existing relationships and then growing the portfolio. The other thing, we had a couple, especially in the second quarter, we had two businesses that sold, and they were big loans on our portfolio, so you never know when that's going to happen. That's the ones you really have to work hard to make up for, because what can you do about that?

Got it. Okay. And just maybe on strategy of the securities purchases, deploying that cash balance, was that a tipping point on just waiting for rate hikes, and putting some to play or was -- I guess thoughts on additional securities purchases, or are you comfortable with that cash balance where it sits?

So we're definitely comfortable with the cash balance where it's sitting. We continue to get increases in deposit balances. We look forward at what our cash flows coming off of the portfolio are going to look like, so we're very comfortable that, as we have loan growth, that we'll be able to fund that with other cash coming in, or existing deposits. So what we've done though, to the extent that the cash to invest has exceeded any expectations, is that we make sure we put them in highly liquid, shorter duration securities, so that if loan growth picks up faster than expected, that we will also be able to convert securities to loans.

Okay. Then maybe one quick last one. Just on the reserving on the provision line in 2016, I guess, if you see positive loan growth next year, could we expect maybe a pickup in that provision line?

Yes. As we have loan growth, we will be provisioning. So you can certainly expect that. And --

And do you have an absolute level on the reserve to loans or is it just a -- as you approach 1%, any trigger there?

Well, no, we're actually implementing a new ALLL model, which has been more robust than what we've used historically, and that drives that provisioning. And we don't really have a target. You don't see many banks that are below 1%, so I think that's fair to say that we're going to keep it above that number. But it's driven by the types of loans you're making, the loss experience in those certain areas.

You can look at our Bank, and you can see that we have a big percentage of commercial real estate. Yet historically, if you look at our history, we've had only about $2.2 million, $2.3 million of losses, of net losses in commercial real estate in 25 years. That's total. So provisioning commercial real estate, it's a reflection of your experience. That's the way the models work.

Okay. Thanks, Russ.

Our next question comes from Timothy Coffey from FIG Partners. Please proceed with your question.

Russ, deposit growth seemed to be a little light this quarter. Is that just a one-off event or is the economy -- your market starting to experience a little slowing?

It's interesting you asked that, because during the quarter, we have a fair amount of volatility in that number, and we had some big depositors that utilized their deposit balances, and sometimes you go $20 million swing on a daily basis. It's really interesting.

During the quarter, and it's the standard, if you look at the quarterly results, if you look at them month by month, you would see there's almost a bell curve, and it seems to be at the end of every quarter, there seems to be a decline. In the middle of the quarter, we're substantially up. That will happen almost every quarter.

But I don't read anything negative. Actually, if you look across relationships and you look across the pipeline of the branches that are working on all these deposit relationships, it's healthy, and we're optimistic about where our deposits will continue to go. The most important number for us that non-interest bearing account, the demand deposits which continues to grow, and that's an indication that we're building relationships.

And to your point, I see your average interest-bearing deposits were actually up 2% in the quarter. And then the other question I had, had to do with the expenses and the salary and benefit line item. That was obviously lower than we've seen previous quarters. Is that a sustainable run rate?

We actually had slightly lower FTEs in the third quarter, and so as we fill positions, we just had a slight dip. I think that number's probably a little bit below what we're going to have going forward, just because our FTEs were down for the quarter.

The other thing is that every second quarter, we have a true-up on the vesting of our stock options, and so that true-up was a positive number last quarter. So without that true-up, expenses on the salary and benefits line went down somewhat.

Okay. All right. Thank you. Those were my questions. Appreciate it.

We do have another question from Tim O'Brien from Sandler O'Neill & Partners. Please proceed with your question.

First question, do you happen -- Tani, do you have the unfunded commitments at quarter end for the third quarter, and then for the second quarter also, just by offhand right there?

So the number I have is -- the unfunded commitments went up by roughly $28 million. But you have to remember that there is new loans coming in and out of the portfolio, and so the utilization rate which might be the other factor that you're looking at to tighten up your numbers, was 42% at the end of the quarter.

That's a little lower than normal. You have borrowings on lines of credit that affect that, obviously, and historically, it's around 45%. So when you have that drop, when you have more unfunded commitments, and then we did a reserve for unfunded commitments in the quarter of $300,000-plus. So that number, it's volatile based on the borrowing needs of our clients.

So is the utilization rate, the 42% utilization rate, a blended rate that includes construction, or is that specific to commercial?

That's everything. That includes construction.

All right. And Tani, do you happen to have the unfunded commitment number at the end of -- what are the totals unfunded commitments at the end of the third quarter and the second quarter?

I don't have those numbers in front of me, Tim. I think we'll have to get back to you with that.

You're the best. And then another question for you is, Russ, you mentioned implementation of a new ALLL model. Is that implementation going to be completed this quarter, or is that something that's going to carry into next year? I know the model will be implemented, but is it going to be up and running this quarter, or next year?

Next year. First quarter next year.

First quarter next year. And at that time, like at the end of the first quarter, will there be kind of a true-up in reserves to reflect the model reality?

The model's different than what we're using, but we don't expect there to be a significant difference in where we are. It's just, much more details to it, and much more robust in terms of the types of things that it's measuring and applying numbers to the model. I don't expect there's going to be a huge true-up. If there is any, it will be relatively modest.

Last question for you all is, Russ, did you see an uptick in aggressive pricing around real estate this quarter from any of the big banks that you had to navigate around?

We've seen -- it's been all year, Tim. We've seen -- we've been surprised from time to time by a big bank who might price something relatively -- I mean, pretty aggressively with a long-term, particularly in commercial real estate. But it's what's been happening for a while. I don't see that it's a huge difference from most recently. There's a lot of banks going very long with very aggressive pricing on commercial real estate loans.

Okay. Thanks.

Tim, I can give you the numbers on unfunded commitments now. The unfunded commitment as of September 30 was $375 million. And as of June 30, it was $348 million, rounded up.

Tani, thanks very much. One other question for you, Russ. And that is as far as the economy in your market is concerned, what do you think is most noteworthy at this point in time, end of third quarter, coming in towards year-end, what do you think is the most compelling or concerning thing out there, that has caught your eye, that you're keeping track of, that we might not know about, as far as kind of the overall Bay area economy?

You probably know about it, but it's both compelling and concerning, and it's technology, which is driving commercial real estate prices through the roof. It starts in San Francisco and the Peninsula but there's definitely a spillover to the East Bay these days. There's a spillover into Marin County now. You're seeing that, and so the concerning thing is that if you're driving -- these prices are getting driven up, you're lending against higher valued commercial properties. And we are very cognizant of that, and being very careful about advance rates against properties today, because these prices have gone through the roof.

So that to me is a concern, and we're watching it very, very carefully, and it definitely had an impact in Marin here, certainly not to the extent that it had an impact in San Francisco and down the Peninsula and Silicon Valley. And in the East Bay, definitely, we're seeing the impact in Oakland, and you're seeing technology companies who are signing big leases for lots of space in the East Bay, and there's talk of technology companies coming up our way, too. Marin has become somewhat the affordable alternative, which is almost laughable. But it is, because commercial properties are so valuable now in San Francisco and the Peninsula.

Thanks for answering my questions.

(Operator Instructions)

And our next question comes from Don Worthington from Raymond James. Please proceed with your question.

This may be kind of the same issue that Tim was asking about a minute ago, but in terms of competition through your commentary, it suggests you didn't lose as many relationships to other lenders. Is that due to any pullback by the competition in terms of pricing, or is Bank of Marin being more competitive in what you're offering, to match what competitors are offering on loans?

Don, I really like to think that we're really spending a lot of time focused on building and maintaining our relationships. The best defense against losing relationships isn't pricing, it's being proactive with our accounts, making sure we're seeing them, making sure we have a term of institutionalizing our credits to the bank, and if we do that we can -- we'll be way more successful at maintaining relationships than trying to match pricing against a large bank. That being said, we're certainly trying to be competitive where we can, but sometimes, you have to make the decision to walk away from a relationship, if the pricing is too aggressive. But I think we've done -- we've done a good job and we're doing a better job of working the relationships than maybe we might have in the past.

Okay. Great. Thank you. And then, you mentioned in the press release the 30- to 89-day delinquencies subsequently paying off after quarter end. Is there anything common in terms of type of loan? Sounds like there were five of them that were resolved after quarter end.

We had one -- there was five loans related, and they all -- they paid off after the -- that they were refinanced, and so we have resolved those. Those showed up in the end of the quarter, but now they've been resolved.

These were all loans with one relationship or --?

One relationship.

Okay. Great. Thank you.

We refinanced them here. This was a -- it wasn't a problem of them not paying. We did a refinance, and they're still here. It's one --

Okay.

One relationship, five loans.

Okay. Great. Thanks for the clarification.

Okay.

That's all I've got.

We have no further phone questions at this time.

Okay. Well, thank you all for your time this morning. We appreciate you taking the time to listen to the call, and we look forward to talking to you again next quarter. Thank you.