Bank of Marin Bancorp (BMRC) 2015 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 fourth quarter and year end December 31, 2015. My name is Jerrod Gerhardt. I'm a Senior Vice President with Bank of Marin.

(Caller Instructions)

As a reminder, this conference is being recorded on January 25, 2016. 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 the discussion you hear on this call is based on information we know as of today, January 25, 2016, 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 on Bank of Marin Bancorp's SEC filings.

Following the prepared remarks, the 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 review our results with you for the fourth quarter and the year.

Let's start with some highlights. The Bank generated record loan originations of $252 million for 2015. The fourth quarter was particularly strong, with loan volume of $114 million. Gross loans totaled $1.45 billion at 12/31/2015, an $88 million increase from the prior year.

We are especially pleased with our performance, given some of the strong economic and competitive forces we faced in 2015. It's worth noting that loan pay-off, a natural part of the business, totaled $169 million for the year, but we still grew the portfolio substantially.

Total deposits grew 11.4% year-over-year to $1.73 billion from $1.55 billion. The Bank generated a number of new relationships on both sides of the balance sheet, which is a testament to our commitment to relationship banking.

We talk about our credit quality quarterly, because it's a great measure of the type of growth we've been able to generate through solid, disciplined, relationship-oriented loans. Thanks in large part to our credit culture, non-accrual loans continued to trend downward, representing 0.15% of total loans as of 12/31/2015, down significantly from 0.69% a year ago. Diluted earnings per share totaled $0.81 per share in the fourth quarter of 2015, compared to $0.79 in the prior quarter and $0.78 in the same quarter a year ago.

With 2015 annual earnings totaling $18.4 million, our long-term strategic focus and ongoing day-to-day diligence have paid off. Our Board of Directors has declared a quarterly cash dividend of $0.25 per share. The $0.01 increase represents 14% growth in our dividend over the past year and is evidence of our confidence in the ongoing performance of the Bank.

As for detailed results from the quarter, earnings were $4.9 million, compared to $4.8 million last quarter and $4.7 million in the fourth quarter of 2014. Return on assets is 0.98% and return on equity is 9.12%. Capital levels remain well above regulatory requirements. At year end, the Texas ratio stood at 1.18%, a substantial improvement from 4.79% a year ago.

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

Thank you, Russ, and good morning, everyone. Our fourth quarter results are the culmination of persistent work throughout the last 12 months to bring in new lending and deposit relationships which will benefit the Bank for a full year in 2016. The growth in our balance sheet, combined with strong credit quality and expense discipline, support high performance, despite the challenges of the prolonged low interest rate environment and the decline in accretion income related to acquisitions.

Earnings per share were $0.81 for the quarter and $3.04 for the full year 2015. Net interest income grew to $17.2 million in the fourth quarter of 2015, compared to $16.9 million in the third quarter and $17.1 million in the fourth quarter of 2014, primarily due to balance sheet growth.

The third quarter tax equivalent net interest margin of 3.7% continues to be under pressure from the low interest rate environment. The margin declined 9 and 29 basis points, respectively, from last quarter and the fourth quarter of 2014, largely because lower yielding securities made up a greater percentage of the balance sheet. Additionally, accretion income related to acquired loans continues to decline over time.

The Bank recorded a $500,000 provision for loan losses as the result of significant loan growth. Improvements in credit quality reduced the amount of provision required. Consequentially, the loan loss reserve fell slightly, to 1.03% of total loans, which is deemed appropriate, given our excellent credit metrics.

Non-interest income has been fairly stable. $2.1 million for the quarter reflects the decline in merchant interchange fees and the absence of gains on sale of securities. For the year, higher dividends and a special dividend on FHLB stock more than offset reduced merchant interchange income.

Non interest expense of $11.1 million in the quarter was down $500,000 from the third quarter, primarily due to a refinement of the methodology used to calculate our off-balance sheet reserve. The change resulted in a $277,000 reversal of provision, and going forward, we expect to see less fluctuation in the off-balance sheet reserve than experienced over the last 12 months.

Non interest expense in 2015 declined $314,000 from the prior year, due to the change in the off-balance sheet reserve and the absence of acquisition-related expenses. On the other hand, increased salary and benefit expenses and nonrecurring accounting adjustments in the second quarter partially offset the decline.

All in all, our efficiency ratio is trending downward. While the ratio for all of 2015 was 61.47%, it declined to 60.67% in the third quarter and 57.57% for the fourth quarter.

Key metrics, such as our efficiency ratio, return on assets and return on equity, are at very healthy levels, notwithstanding the challenging interest rate, competitive and regulatory environments. Our loan to deposit ratio has increased to 84%, and we have ample liquidity and capital to support continued growth in coming years.

With that, I'd like to turn it back over to Russ for some additional comments about the outlook for the coming year.

Thank you, Tani. As you can see by our results, 2015 was another excellent year for Bank of Marin. As we say here at the Bank, a consistent, disciplined approach delivers consistent results. Our results are due to carefully executing our strategic plan.

We are consistent about many things. First, we are dedicated to conservative underwriting and, more importantly, diligent credit management. This has been a hallmark of the Bank since day one and continues to drive our culture today.

Second, we have built an organization built on relationships. This is a clear differentiator for our Bank and our results bear it out. We achieved organic growth in both loans and deposits while maintaining excellent credit quality. We do not purchase loans to bolster loan growth which, frankly, is a major factor in helping us maintain our excellent credit metrics.

Third, acquisitions remain an important component of our strategic plan. The Bay Area is the most attractive area in the country and we intend to expand our footprint through organic growth and strategic acquisition. We're actively looking for opportunities, but have nothing new to report. Our culture dictates that we apply the same discipline while reviewing transactions as we do throughout our business. We remain firmly committed to future acquisitions in the Bay Area as a supplement to our organic growth throughout the region.

Fourth, as we grow the Bank, our focus on commercial banking depends on strategically placed offices to support our relationships in the business communities we serve. Our retail offices, which number 20 in four counties, support increased deposit growth. With more than $1.7 billion in deposits and 45% of that in demand deposit accounts, this tremendous core deposit base is the value of our franchise, this becomes even more valuable when rates rise.

Fifth, expense control continues to be a critical component of our success. We are convinced that great efficiencies will be achieved as we grow the organization serving the Bay Area. We cannot and will not lose this focus.

In summary, 2015 was a great year, and the reason for our success was our consistent approach to the way we do business. Our discipline brought us through the recession in solid financial condition and will ensure Bank of Marin's continued success and profitable growth.

Thank you for your time this morning. And now we will open it up to answer your questions.

(Operator Instructions)

We have a question from the line of Jeff Rulis with D.A. Davidson. Please proceed.

Thanks. Good morning.

Good morning, Jeff.

Russ, you mentioned the pay-off activity for the year at $169 million. What was that in Q4?

$36 million in the fourth quarter.

Got it. So that is tailing off some?

It tailed off a little bit. You never know for sure what the payoffs are going to be. We had, in the second quarter was quite a bit higher, it's almost $55 million.

But the payoffs are kind of a function of the business. When you look at the $169 million, it's a little over 10%.

And if you look at our portfolio, you're going to have runoff that continues throughout the year, just from refinances, from sales of properties and sale of businesses, from normal amortization. So that's really kind of a function of that.

Sure. So in terms of the larger payoffs, what you do know, if you look out, is there any indication that you see some out on the horizon? Or is it, as you say, it's pretty tough to read, at this point?

I'd say the percentages are probably, as we plan for our 2016, we plan for the same level of payoffs. Because you just don't know. We had over $70 million in sale of properties and businesses and loan payoffs during this past year.

So as we go forward, we have to assume that payoffs are just part of the business. So if you want to grow 5%, let's say, on your loan portfolio, you probably have to replace 10% of it first and then add the 5%. Because really, the volume of loan transactions really needs to be 15% to 20%, just to get the kind of loan growth in the high single digits category that we've shown. So it's just part of the business.

How's the loan volume pace so far in Q1?

Since we're not even through one month -- we had a really big pipeline that our team really did an outstanding job of closing in the fourth quarter. So there's going to be a normal slowing of that activity in the first couple of months, but I don't view that as really concerning. The team is really working on building the pipeline again.

Got it. So the pipeline was -- you booked tremendous growth. It just sort of cleared that a little bit, so you're kind of starting the year at a lower pipeline, I guess.

There's no question. We're definitely starting at a lower pipeline than we started the fourth quarter at, because we've closed such a big percentage of what we had in process.

Got you. And Tani, on the margin, I guess expectations for 2016, you mentioned the lower yielding securities pulling down core margin. If you exclude the accretion drift, core margins, sounds if it's still tough to tread water in the near term and maybe modest pressure still.

If you exclude the accretion, the yield on loans -- or the impact on the margin, just from loans last year, was about 3 basis points per quarter. And if you look at what the fourth quarter margin was compared to previous quarters or the year-to-date margin, you can see that it was still falling, but primarily because the balance sheet has grown significantly.

And so while loans were catching up with our deposit growth, we deployed more of our earning assets into the securities portfolio as opposed to loans. Now with loans catching up a little bit, right now we're a little leveraged. So we will be ratcheting down that percentage, and hopefully, that will help to stabilize the margin a little bit.

Okay. I'll step back. Thanks.

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

Hello. Good morning, everyone.

Good morning.

Tani, still looking at the margins -- and I realize that I use a little bit different of a date count than your calculations do -- but from my end, it looks like the loan yield has been stabilizing over the past three quarters. Is that a fair assessment? And I mean the core loan yield, ex accretion.

Like I said, I think it's pulled down margin about 3 basis points a quarter over the year, ex accretion. But as we look at the differential between the new loans coming on and the portfolio yield just for loans, that differential is getting smaller.

Do you have the differential for the last quarter?

Let me see if I can find that and I'll come back to you on that.

Okay. And then also, I'm curious as to the yield of some of the new securities you're putting on versus that differential, as well. But in the meantime, I'll hop into another question so that I can let you look at that.

Looking to the unfunded commitments, I know that obviously had a larger impact in the quarter. Is that something where you would expect it to go back to having a positive expense in future quarters or will it be lower now under the new methodology?

Basically what we did was we adjusted the methodology so that reversal of provision is more of a one-time adjustment, and then we expect, as a result of the new methodology, for it to be more stable going forward. So less fluctuation.

If you notice, we took a provision at the end of 2014. We had to reverse it in early 2015, and then we took another one and then we reversed it again. So we think that thee new methodology will just smooth that out a little bit and not cause that kind of volatility.

Okay. So when I look from a forecasting perspective, is the provision that was taken in 3Q, is that a little bit high then for what you would expect on an ongoing basis, realizing that it will still fluctuate from quarter to quarter?

It's hard to tell what it will be going forward, because it really depends on what utilization rates are doing, along with the growth in the loan portfolio. So I'd say that I don't actually know what the number is going to be going forward. But we have a reserve established, and to the extent that we just need to add to that reserve for loan growth that is unutilized, again, I think it should just be a smaller number going forward.

Okay. And were utilization rates a big factor in either -- did they add anything in addition to the methodology in the quarter, and then how did they impact loan growth in the quarter?

I'll take that. There was some utilization in the fourth quarter of unutilized commitments, and so it had the positive impact on two things. So there was less unutilized and there was more loan growth.

But it was like $8 million, something in that range, that was utilization was higher of the unfunded than it was in the prior quarter. So wasn't a huge number in our loan totals and it did have a positive impact on the reserve for the unutilized commitments, but not huge.

Okay. So if I look at that $114 million that was booked in the quarter, roughly $106 million of that was just straight organic growth, it had nothing to do with line utilization increases.

That's right.

Okay. Great. Thank you both very much. I'll step back now.

Jackie, going back to your earlier question, when we look at the rates on the new loans versus what we have in the portfolio on our most active categories, which are C&I and commercial real estate, the spread between the new and the portfolio rates is actually pretty small.

Okay. Thank you. That's very helpful.

Our next question is from Tim Coffey with FIG Partners. Please proceed.

Thank you. Good morning, everybody.

Good morning, Tim.

Russ, what is your -- do you have any kind of expectation for deposit growth going forward? You talked about the new relationships you brought into the Bank during 2015.

Do you anticipate that to continue on the deposit side? And what would that mean for the loan to deposit ratio?

The deposit growth this year was, frankly, higher than we had anticipated. Our branches did a tremendous job in generating deposits. And let me explain some of the things we've done to enhance that growth.

As you know, our Bank is really bifurcated into commercial banking and retail banking for the majority of our business. And commercial banking, obviously, when we bring in a new relationship that we're lending money, we also take deposits.

On our retail side, in all of our markets, we have market managers whose job it is to go out and find and build deposit relationships. So we've got growth and deposits both coming from commercial banking, because of new credit relationships, but also new deposit relationships. And we had two or three substantial new deposit-only relationships that, that area of the bank built in the last year.

So my expectations are that those people continue to have their focus on building deposit relationships. We hope that our deposits continue to growth. They certainly have goals to have it grow.

But I can't give you a number in terms of what my expectations are. We just don't give that kind of guidance on deposit growth.

But the good news is we've had this growth and we're getting growth in the best kind of deposits, which is demand deposits. With the 45% demand deposits, these are relationship deposits. We're certainly not going out and buying deposits, just like we don't buy loans.

Right. Okay. Understood. Do you have any color on the loan growth from this quarter, which was obviously fantastic?

Was it sizable relationships? Was it more spread out? Obviously, there's a big pop in investor CRE. But what kind of commentary can you give on the loan growth in the quarter?

I can give you some commentary. It came across the board. We obviously did have commercial real estate growth, but we had come significant C&I opportunities that we closed.

We had a number of relationships that were closed in the quarter. And within the quarter, we had growth up in the Napa Valley, where we had a number of new winery clients that we brought in. And there were some bigger deals that we did.

But the volume was tremendous. And the biggest growth of totals came in what we call our Marin-Petaluma market, where we had significant portion of that come out of new relationships in those markets. So it was really across the board.

There's nothing that I could say, oh, it was all commercial real estate or all C&I. We had some really good growth in all of our markets. In the East Bay, too, we grew that market, new fundings of over $15 million.

So it came in all a bunch of different markets, which was really a good comment, because we're seeing the results of our approach, not just here in Marin, but also in our new markets like Napa, and the East Bay, and San Francisco. So we're pretty pleased with the level of growth, but more than that, the number of new relationships in many different markets.

Okay. And then if I could pick your brain a little bit on some of what you're seeing in terms of the leading indicators for commercial real estate in the Bay Area, have those changed at all significantly in the last six months or so?

I'd say that the thing that's the most -- I don't want to say concerning, but gives you, you have to give you pause -- is that commercial real estate is, the valuations and the lease rates and everything are going through the roof. Most of it, as you would guess, is being driven by technology.

So you're seeing in San Francisco, commercial real estate in San Francisco, the values just have gone way up, because the lease rates are -- you're getting $70 a foot for commercial real estate in San Francisco these days, and that has a trickle, and certainly in the peninsula. We don't do a lot of commercial real estate in the peninsula.

But San Francisco, and as you go in to the East Bay, there's certainly a -- as you know, Tim, living over there, there's been a big impact as technology has gone across the bridge. Downtown Oakland is seeing a renaissance because of the move of some technology companies into downtown, and so the prices are starting to lift.

All that being said, we have to be very careful in terms of our underwriting of commercial real estate and the advance rates that we apply. We're pretty disciplined about maintaining conservative advance rates and making sure that we've got borrowers who have liquidity and have guarantors. So it is concerning because the prices are so high in the Bay Area.

But the answer for that is that you have to maintain discipline and you have to make sure that you're not over advancing. Because if things went the other direction, those advance rates all of a sudden look really bad. So we're maintaining our discipline.

Okay. And just a follow-up question on that. Have you seen any of the insurance companies or pension funds or any other people, organizations that have been driving your payoffs through 2015, have you seen any of them back off?

Back off? We haven't seen -- there's nothing remarkable to report on that, one way or the other. We're seeing -- personally, and when we look at larger deals, we maintain lower advance rates.

But frankly, that hasn't hurt us, because we haven't had a big influx of insurance money or the opposite direction. Like I said, you just have to be very careful, conservative, and be disciplined about how we underwrite and manage our relationships.

Okay. Thank you. Those were all my questions.

Okay. Thanks, Tim.

We have a question from Tim O'Brien with Sandler O'Neill and Partners. Please proceed.

Good morning, everybody. It's actually Alex Morris on for Tim.

Hello, Alex.

Just a quick follow-up question on the deposit growth. Were there any, I don't want to say lumpier, but one-time either sale of a business or lumpier deposits that came in throughout the quarter, or was it all, as you mentioned, relationship, just general building of the deposit base?

There were a few large relationships that we brought in that were substantial. I can't tell you the names, just because those customers, we can't disclose that. But there were two or three pretty substantial, multi million dollar deposit relationships that we established during the quarter.

That being said, the deposit growth was well in excess of those few relationships. So we've seen deposit growth across the board. Every branch, almost every branch, I would say, has shown deposit growth during 2015.

And like I said, this is not driven by price. Our cost of deposits is 9 basis points. So this is based on relationships, bringing in operating business, not just dollars that are sitting in a CD or something like that.

Right. Absolutely. Thank you for that.

And margins have been touched on pretty well, but just a follow-up. The average deposit growth was stronger than the average loan growth throughout the quarter. Could there be any pull-through or benefit to the margin in the first quarter of 2015 as the average loan balances catch up?

Definitely, as loan balances catch up, that will be a positive. And remember that much of the loan growth that we had in the fourth quarter came in the last part, in December. So we're definitely going to get the benefit of that for the full year. Additionally, when we have that additional deposit growth, even though it pulls down the margin, of course, when we go out and invest that money, even in the securities portfolio, we're going to have a pop to net income as a result of that.

Right. Absolutely. And then just one last one touching on expenses, if I may. Any kind of notable tech investments or branching considerations or anything that you guys are thinking about or planning for 2016?

We have nothing to report in that case. We're making investments all the time in technology, and we've done some remodels of different locations. Every opportunity we have, as a lease comes due, we have tried to reduce our space and make the branch smaller to reflect the changing needs of the branch customer, because really, we obviously don't have much foot traffic as we used to, as we all know.

The ideal branch is 2,000 to 2,500 square feet. And some of them are larger than that, and we're doing that whenever we can and we're trying to be aggressive about that to bring the size down. At the same time, some of our older branches, we've done some remodels and things of that nature. But there's nothing significant about investments in facilities over the next year that we're going to do.

Sure. And just a quick follow-up to that, any notable FTE slots that you guys are planning to fill?

Not really. We've certainly got opening. We've got some needs up in the North Bay and Santa Rosa that we're trying to fill.

Our teams are pretty well staffed in the other commercial banking offices. And our branches, there's always openings, but it's the normal turnover at branch locations is typically a teller and new accounts and things of that nature.

But we don't have any gaping holes in terms of certainly a senior level at the Bank. So there's no big major hire that we have planned for the next year.

That's great. Thanks for answering all my questions.

Okay. You're welcome.

We have a question from Don Worthington with Raymond James. Please proceed.

Good morning.

Good morning, Don.

Looks like the balance of FHLB advances increased in the quarter. Was that short-term borrowings at year end? It was up about --

Yes, that's just overnight borrowings as we've funded more of the loans. It takes a while to catch up with our securities portfolio, either investing or divesting, to try to maintain our cash at the zero spot.

Okay. And then what would you expect the tax rate to be for 2016?

We don't know what the rate for 2016 is going to be. When we plan, we base it on our best knowledge, which is what we did at the end of 2015. So we're looking at about a 36.5% rate.

Okay. Great. Thank you. I guess my last one is in terms of the M&A environment, would you characterize seller expectations as higher or lower than last quarter?

Nobody ever lowers their expectation. (Laughter) You see some of the transactions that have been closed during the past year, and certainly, the multiples of book value, or tangible book value, have increased. And there are reasons why some of these are very high.

Obviously, the deal like Bridge Bank or Square One, those are unique situations. And so they obviously paid a lot for those banks, but they got a lot, too. And there's reasons that those multiples are higher.

All that being said, that doesn't change, I think there's an expectation in every board room that is considering selling, they see those numbers and so it does drive some of those expectations higher. But we don't price -- if we're looking at a transaction, we're really not pricing based on a multiple of books. We're pricing on earnings opportunities and whether that can be accretive to our shareholders and over what period of time and what kind of cost savings we can achieve and those kinds of things.

So the multiple of book is a result of the other work that we do. It kind of comes out at the other end. You don't start there.

That's the way we -- I know that everybody else does, they price a deal that way. But that still doesn't cause potential sellers to change their expectations. They see numbers and they decide that they should get a certain multiple, right or wrong.

Okay. Thank you, Russ.

Okay, Don. Thanks.

(Caller Instructions)

We have a follow-up question from Tim O'Brien with Sandler O'Neill and Partners. Please proceed.

Just one more follow-up. The salary and benefit expense trended down throughout the year, and it had a nice decline in the fourth quarter. Any color on what drove the decline in the fourth quarter, and maybe should we expect a little bit of an increase in the first quarter with some seasonal expenses?

In the fourth quarter, what we do is we end up truing up what we've accrued for bonuses and employee stock option program. So there was a little bit of that. And in the first quarter, you will see some of the early year expenses coming through for the increased tax rates, as we -- before we complete the fulfillment of the taxes on some of the federal income tax and Social Security. So I think you might see a little bit of a bump there.

Alex, when we budget each year, we anticipate bonuses being paid at the 100% level across the board on all incentive plans and everything. And then as we get close to the end of the year, we try to do a true-up, some true-up in fourth quarter, and then completing that probably in the first quarter, because you don't know.

Sometimes it might have to increase the allocation. You might have to decrease it, depending upon how the year went. The year went really well, and so we're pretty close. But there was a little true-up, as Tani mentioned, and that does happen every year.

That's great. Thank you very much.

And there are no further questions registered at this time.

Okay. I thank you all for your calling in today, and we appreciate your interest in the Bank and we look forward to talking to you again next quarter. Thank you very much.

Thank you.