Bank of Marin Bancorp (BMRC) 2016 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 first quarter ended March 31, 2016. My name is Jarrod Gerhardt, I'm Senior Vice President, Director of Marketing for Bank of Marin.

(Operator Instructions)

As a reminder, this conference is being recorded on April 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 5am Pacific Time this morning, and is posted on the 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, April 25, 2016, and may contain forward-looking statements that involve risks and uncertainties. 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. Welcome to the call. We are pleased to review our results with you for the first quarter of 2016. Let's start with some of the highlights.

Thanks in large part to strong loan originations in the fourth quarter of 2015, and gains on acquired loan payoffs and security sales, our earnings for the first quarter were a record $5.6 million. This is an increase from $4.9 million in the fourth quarter of 2015, and $4.5 million in the first quarter of 2015.

Diluted earnings per share were $0.93 in the quarter, compared to $0.81 in the prior quarter, and $0.74 in the same quarter a year ago. Return on equity reached 10.38%, up from 9.12% last quarter, and 8.92% in the first quarter of 2015. Return on assets was 1.15%, up from 0.98% the prior quarter, and 1% a year ago. Loan originations of $29 million were approximately the same as the first quarter in 2015, but payoffs of $37 million were approximately $4 million lower than the same quarter last year.

In the quarter, we filled some important commercial banking positions across our footprint. Deposit balances declined $46.9 million due to the normal seasonal factors in several deposit customers' businesses. The bank's deposit mix is healthy and continues to reflect the strength of our relationship banking focus.

Non-interest bearing deposits make up 45.1% of total deposits, resulting in a total cost of deposits of 0.08%. Credit quality remains exceptional. Non-accrual loans represent only 0.18% of total loans as of March 31, 2016, with the Texas ratio at 1.36%. There was no provision for loan losses recorded in the quarter, and we had net recoveries of $29,000.

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

Thank you, Russ, and good morning, everyone.

The first quarter was encouraging and built on our success from the prior quarter. Net interest income totaled $18.6 million in the first quarter of 2016, compared to $17.2 million in the prior quarter, and $16.6 million in the first quarter last year. Higher average loan balances from the substantial loan growth in the fourth quarter of 2015 contributed to the increase, and acquired loan payoffs also had a significant impact on net interest income.

First quarter tax equivalent net interest margin was 4.04%, compared to 3.7% last quarter, and 4% in the first quarter of 2015. The increase from last quarter includes 10 basis points related to a shift in the mix of interest earning assets from lower yielding interest bearing cash and investment securities to higher yielding loans. Another 21 basis points came from purchased credit impaired loan payoffs, and market value adjustments on interest rate swaps.

The investment portfolio totaled $400 million at March 31, a decline of $88 million from year end. In addition to paydowns and maturities in the portfolio, $55 million in securities were sold at gains totalling $110,000. At the same time, overnight borrowings were reduced by $47 million.

Non-interest expense of $12 million was higher than in the prior quarter and the year-ago quarter, due to reductions in the reserve for unused commitments that took place in both the first and fourth quarters of 2015. Additionally, expenses exceeded last quarter due to incentive accrual reversals in the fourth quarter, and 401(k) matching and lower deferred loan origination costs this quarter.

Our loan-to-deposit ratio has increased to 85.8%, and we continue to have ample liquidity and capital to support growth in coming years. All capital ratios are well above regulatory requirements for a well capitalized institution, and tangible common equity to tangible assets increased from 10.1% at year end to 11%.

The Board of Directors declared a cash dividend of $0.25 per share on April 22. This represents the company's 44th consecutive quarterly dividend. It is payable on May 13, 2016 to shareholders of record at the close of business on May 6.

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

Thank you, Tani. The first quarter of 2016 was another good quarter for the bank and a great way to begin the year. Our results are strong because of our consistent disciplined approach, which delivers positive results.

Our focus in 2016 will not vary from past years. We have built this organization based on relationships with our clients, our vendors, and our employees. We are committed to our approach and the communities we serve. Many organizations say same thing, but our results confirm that we stay true to these fundamentals.

The M&A market in the Bay area has picked up recently, and we expect to be active player in the future. We continue to look for opportunities that will benefit the bank and our shareholders. As always, expense control remains a key priority. Careful evaluation of new expenditures is integral to how we run our business.

In summary, 2016 is starting off well. We remain focused on organic growth. Our bankers have built significant loan and deposit pipelines, and we are very encouraged about future opportunities. One last note, on May 17, we will hold our annual shareholders meeting in San Rafael, California. If any of you would like to attend, please see our website for more information.

Thank you for your time this morning, and we will now open it up to answer any of your questions.

(Operator Instructions)

Jeff Rulis, D.A. Davidson.

Thanks, good morning. Russ, just wanted to follow up on, you mentioned the pipelines in your last comments there, but I think in the Q4 call, you mentioned, given the strength of loan growth, that maybe Q1 could be a bit of a rebuilding of the pipeline type quarter? I guess how could you compare the pipeline going into the quarter, versus how you exit Q1?

Well, if you compare it going into the quarter and the end of the quarter, it's substantially higher now than it was at the end of the year because we executed on so many of those opportunities right at the end of 2015.

So we're very encouraged with the pipeline. And when I talk about pipeline, I talk about, -- when I talk about both deposit and loan pipelines. For example, on the loan side, our pipeline has increased every single quarter, every single month since the end of the year. So by the end of March, it was at its highest level since it was, prior to all the bookings, prior to the end of the year.

Got it. Okay. And then I guess, is it, as it relates to the margin, obviously some moving pieces with the payoffs. But on a core margin basis, Tani, do you have any expectations for considering the December hike and how things are playing out on a core basis?

Yes, I think we attributed in the, both in the prepared remarks, as well as in the numbers that are in the release, if you subtract what came out through the gains on the payoffs to the PCI loans, we attribute about 10 basis points to the increase in average loans.

So going forward, is there any kind of pull-through into Q2, or are your expectations for core margins going ahead? I mean, you had that one-time kind of mix improvement. I guess your expectations on the core going forward?

Yes, I think, you know, that 10 basis points should stick with us and the other, the only other thing that's going to impact it, of course, is you've got the market value adjustments on the swaps. That was a key part as well.

But other than that, we try to keep our cash balances close to zero, and to the extent our cash is fully deployed, that's going to make sure that our margin is maximized. To the extent that we aren't able to keep up with the cash coming in, in terms of loans or securities deployment, then that might put some pressure on the margin a little bit.

Got it, okay. And one last one on the PCI loan balances, as those work their way down, I guess I figured as that gets smaller, the impact to margin would get smaller. But as that winds all the way to zero, is there a pickup in remarketing or anything that would make that more noisy on the way out as it goes to zero?

I'm not quite sure I understand about remarking, other than we reassess the expected cash flows every, every time we value them. Is that what you're talking about?

Maybe not the, necessarily a mark, but I guess the gains -- the absolute balance, as you say, I guess is [$]2.8 million as it is, I guess the expectations for additional volatility within that should -- I guess is it true that as that gets smaller, should have less and less impact on the margin?

Yes, it definitely should have less impact. But it's unusual, I mean, occasionally you have unexpected payoffs of loans that were PCI loans. So we had that in that first quarter. But if you look historically quarter to quarter, you can see that the impact of the accretion from PCI loans has been dropping. This quarter it just happened to be a little bit more than normal, but I fully expect that there continued to be a smaller part of, a smaller impact on total earnings.

And I mean, obviously we want, as we did in the fourth quarter, we want to continue to build the loan portfolio, the loan pipeline, which builds a portfolio. And, you know, as we bring on more loans, obviously they are much better yield than we can get from cash, so that has a significant impact on the net interest margin.

Got it. Okay. Thank you.

Jacque Chimera, KBW.

Hi, good morning, Russ. Good morning, Tani. The payoff activity that you had in the quarter, Russ, is that still pretty much the same thing that we've seen in past quarters, just people selling their businesses and just good payoff activity because of the strength of the local economy?

It was a kind of combination of that. We look at our portfolio and we have a $1.5 billion portfolio. And you have to assume you're going to get about 10% a year. And that falls in that number. We did have one large payoff, about $13 million that was paid off during the quarter. And it was one we chose. It wasn't a problem credit, but we chose to not compete on pricing. So we walked away from that. So that was a little unusual.

But, you know, it's not unusual to have a certain volume of loans get paid off just because of, just because of the portfolio. And it does churn at some point. So I would expect that to continue. Every quarter's different, but we really have to, if we get $150 million in payoffs, which is about 10% in a year, obviously we have to generate $225 million, $250 million of loan volume just to achieve, achieve some growth out of the portfolio.

No, definitely understood. So would you say that, I know there were a few quarters last year where payoff activity was very elevated because of sales. Did that actually, sounds like it [phased] off in the quarter and you didn't see quite as much of that?

Yes, we had a couple of large customers that got sold, sold their business here in Marin actually. And so when they get sold, they get paid off. And we haven't had that this year. This is mainly, more of the payoff activity typically was commercial real estate. And because there is some churn on that, people are selling property. We did have some properties that sold last year to a couple of businesses, but a number of properties. So there will be some more of that.

And I think that generally speaking, I think particularly around the Bay area, people are a little nervous about the economy and our real estate value's at a peak. If they are at a peak, then you may see more payoff activity in commercial real estate.

Okay. Are there areas in the economy that are making you nervous?

You mean other than technology? (Laughter) You know, I'm nervous about technology in the Bay area particularly because it drives so much. We don't lend to the business, but it drives so much of the activity. Certainly in San Francisco, and there's this spillover to Oakland and even into Marin of commercial real estate values, residential prices. We're not a residential lender, but it does affect what we do.

So it's, I get nervous when I, you know, there's an interesting article about the FinTech sector, and there's -- I think that sector is seeing more, higher elevated losses than they had anticipated. And you're starting to see some layoffs with those companies, and they are big employers in San Francisco. So I'm getting, if I had to pinpoint one area that makes me the most nervous, it's the FinTech sector of technology. To me, it's, and they reference their inability to properly underwrite their credits. And I'm not sure I have that exactly right, but that was referenced in the last article I read.

And so that makes me nervous, because there's a lot of [depth] that's out there for that. And so I'm particularly uncomfortable with that. We're not involved in that, but once again, there's a spillover with everything in, that has technology, that is related to technology on everything else in the Bay area.

So what, if anything, are you doing differently then, to manage these, I don't want to say fears, but these thoughts that you're having about the economy?

Well we're, first of all, we've always had pretty consistent underwriting standards. And we haven't ever changed that, in either an up or a down market. We've been very consistent. That being said, we're very cognizant of elevated real estate values. We're being very careful about loan to values on our properties that we finance. And we're being very, very careful about guarantors having liquidity to support projects based on really high values. So I think that's the, that's the important thing.

I think those that got hurt in the recession, in commercial real estate, primarily were properties that were not, did not have guarantors that were non-recourse-type financing, where there was nowhere to go. And for us, one of the main reasons we were successful through it all is that we look for guarantors that bring additional strength to their properties, so that in the event of a downturn, we can look to them to support the project. And, you know, that's on the commercial real estate side.

So we're being very careful, but you know I think one of the things we always say is that we're consistent and we're disciplined in our underwriting. And we maintain that discipline throughout both the up and down times. And again, I would say that, the thing we always say around here, bad loans remain in good times, so be careful. So we're very careful about the way we underwrite.

Okay. Thank you. That's excellent background on everything. I'll step back now.

Tim Coffey, FIG Partners.

Thank you. Good morning, Russ and Tani. Russ, can you provide a little color on the gains in the construction portfolio, not just this quarter, but last quarter as well? Kind of what you're doing there?

Sure. We're, our construction portfolio has grown. I will mention this, that if you go back to about 2008, 2009, our construction portfolio is $120 million. And then it dropped during the recession to a little over $20 million. And on the actual construction side, we didn't, we really had good success and we financed good projects. The only problems we had during that time were primarily land loans. We really don't do a lot of that anymore.

That being said, our project that we financed, we have a fair amount of single-family spec home financings that we finance the construction of. And it's primarily in San Francisco and the peninsula and in southern Marin. And we do have a number of projects we're in the middle of on those. And, you know, they are going very well. And again, the loan to value versus the existing anticipated sales price is very low. So we're very comfortable with those.

And frankly, when we've had a larger project, we have brought in a couple of, in a couple of the projects, we've brought in participants to take part of the debt, because we try to be conservative about the amount of money we advance on any single project.

Okay, and how much is, say, the construction growth this quarter was kind of that single-family spec construction versus commercial construction?

Pretty much all of it.

Okay.

And again, it's in southern Marin, San Francisco and, like I -- we have two projects down in the peninsula.

Okay. So not terrible markets, then.

No, they're all pretty good markets.

Right. Okay. And then if we look at kind of the non-interest expenses going forward, do you think you can kind of hold this level, or, I know there's going to be some moving parts with new hires and some of the non-recurring seasonal expenses for 1Q. But what would kind of be the right way to look at it?

Well, I think that the fourth quarter's always a little odd because we do have, we have true-ups in terms of bonus accruals that we had during the year, and depending upon where we think it's going to be, we may make adjustments. In fourth quarter, it has a tendency to drop, actually, relative to the rest of the year. First quarter is pretty consistent with the year.

Now, that being said, we do have, we've made some new hires, which we'll add to that. We're still trying, we're looking for more people, because we're trying to really build all of our commercial loan offices, the staffing. We've made a couple of really significant hires, one in the East Bay, one up in Santa Rosa, one here, a third one here in Marin, in our business banking area. So we're staffing up accordingly and our portfolio continues to grow, and so it's important to get good quality lenders. And so I'd expect a few more hires this year. But it's not going to be a significant increase in numbers.

Okay. That actually does lead into my next question on the new hires. So most of these are the commercial realm. Is it both C&I and CRE, or is there a specialty?

Primarily C&I type of lenders in the commercial banking offices. And as you know, we have commercial banking offices here in Novato and in San Francisco, Oakland, Napa, and Santa Rosa. And we're supplementing a couple of those offices, one in East Bay, one up in Santa Rosa, and I think you will see more hires in a couple of our offices.

All right, well thank you very much. Those are my questions.

Tim O'Brien, Sandler O'Neill and Partners.

Good morning, everybody. It's actually Alex Morris on for Tim. So most of my questions have been answered at this point, but just was curious about the deposit balances. You mentioned just some normal seasonal flows among some of your customers. Have you seen any of that return in the second quarter so far?

We continue to have some volatility. We have a number of customers who have, who basically it's other people's money. And the way I describe that is, we do have a number of big contractors that we do business with, and they do a lot of municipal projects. So when they receive a project, then they get funded, so a lot of money comes in the bank. And then as the project is built out, the money goes out.

We also have, you know, an ad agency that we pay. Lot of money comes in for projects that they're working on, and then the money goes out. And we have a number of those types of customers. Great customers. But they have seasonal flows. And it's not, I shouldn't say it's seasonal. It's kind of project-based. And so you, it's hard to predict when they're going to come and when they're going to go.

But we had a good run-up at the end of the year. We had some run down at the end of the year, I mean at the end of the first quarter. But we fully expect that'll all come back. It's just the nature of their businesses. And so, it's part of what they do every day. And so it's not, the big concern is if we had lost customers, and we have not lost any clients. And in fact, we have a couple of new clients which I don't event want to talk about, I won't mention the details until they are on the books, that we are bringing in to the bank, which will be funding their deposit accounts in July.

But our market managers on the retail side are, they stayed in all the different markets and they are working really hard bringing in deposit-based relationships and it's working exceptionally well.

That's great. So the color that you provided on healthy deposit pipelines coming in the second quarter, that sounds like it reflects probably some projects amongst contractors, ad agencies as you mentioned, but also new client acquisitions, a good healthy mix of those?

Yes, it's primarily, what I'm talking about there when I talk about the pipeline is really new client acquisitions, not the existing. That's already there. This is going out and finding new clients and bringing them in.

And they have, they manage those pipelines really closely and, you know, work with the head of our retail bank very closely, weekly, and go through the names. And they bring, they get me involved or they get him involved, people involved, to try and solidify these accounts. So it's been a good process and it's really working well right now.

That's great. Thanks for all the color on that. Just I guess one last one on the credit. Nice improvement in loans 30 to 89 days outstanding. Is that kind of just normal churn, or was there a relationship for sizable kind of credit in there? Any color you can provide?

I'm not sure which one you're talking about. We had one, are you talking about an increase in the 60 to 89 days?

I was looking at the decline in recurring loans, 30 to 89 days past due.

Went down. We had one client that we were working through a renewal and it hadn't been renewed prior to the end of the year, and now it has. It's a big relationship, so that's the primary, that's the primary culprit in that one. So there's nothing wrong.

Great. Well, that answers all of my questions. Thank you very much.

(Operator Instructions)

We have no further questions on the phone lines.

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

Thank you.