Bank of Marin Bancorp (BMRC) 2016 Q2 法說會逐字稿

Good morning, and thank you for joining us for Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2016. My name is Jarrod Gerhardt. I'm the Senior Vice President, Director of Marketing for Bank of Marin.

(Operator Instructions)

As a reminder, this conference is being recorded on July 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 a.m. Pacific Time this morning, and on our website at BankofMarin.com, where this call is also being webcast.

Before I get started, I want to emphasize that the discussion you hear on this call is based on information we know as of today, July 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 Bank of Marin Bancorp's SEC filings.

Following the prepared remarks, our team will be available for questions. 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 discuss the results for the second quarter of 2016. Let's start with some highlights.

Our earnings for the second quarter of 2016 were $4.8 million, compared to $5.6 million in the first quarter of 2016, and $4.3 million in the second quarter of 2015. As I mentioned in our earnings call last quarter, there were a number of one-time factors, including gains on acquired pay-offs and security sales, which contributed to last quarter's outstanding results. The second quarter numbers are more normalized.

Second-quarter loan originations were approximately $44.5 million, an increase of $15.5 million, or 53%, compared to the first quarter of 2016. Loan payoffs of $40.2 million were down $14.7 million from the same quarter last year. Year-over-year loan pay-offs declined by more than $18 million through the second quarter.

Diluted earnings per share were $0.79 in the quarter, compared to $0.93 in the prior quarter, and $0.73 in the same quarter a year ago. This was due to gains last quarter and a pre-payment penalty associated with early re-payments of federal home loan bank advance this quarter, which Tani will discuss in a minute.

Year-to-date earnings totaled $10.5 million, compared to $8.7 million for the same six-month period a year ago. Diluted earnings per share were $1.72 in the first quarter -- in the first six months of 2016, an increase from $1.44 for the same period in 2015.

Credit quality remains exceptional. Non-accrual loans represent 0.19% of total loans as of June 30, 2016, with the Texas ratio at 1.35%. We remain committed to discipline in our underwriting process during a time when others may be tempted to compromise credit quality or pricing. We are closely watching loan to values on properties that may be over-valued in the very hot commercial real estate market.

Non-interest bearing deposits comprised 47.2% of total deposits, an increase from 45.1% in the first quarter, and 45.5% in the same quarter of 2015, and resulted in a total cost of deposit of 8 basis points. Our success in attracting relationship non-interest bearing deposits is a distinct competitive advantage, and a clear value of our franchise.

We have established a strong pipeline, and we are pleased to welcome a number of new clients to the bank. This success can be attributed to our compelling customer value proposition, which is built on strong relationships, outstanding service, and a deep local knowledge. We are showing continued success in attracting marquis names in our markets, a clear sign that our relationship bankers are connecting with those organizations.

Now let me turn the call over to Tani for additional insights on our financial results.

Thank you, Russ. Good morning, everyone. It's easiest to see the bank's healthy growth trajectory by looking at our year-over-year earnings, so I will begin there. Net interest income improved to $17.2 million in the second quarter, from $16.5 million second quarter 2015, and to $35.8 million year to date, from $33.1 million in 2015.

At the same time, non-interest expenses of $12 million in the second quarter and $24 million year to date are down slightly, from $12.3 million and $24.2 million for the same period in 2015. As a result, 2016 year to date return on assets of 1.07% is up 11 basis points, and return on equity of 9.52% is also up 90 basis points from 2015.

Comparing to the first quarter of 2016, net interest income was lower in the second quarter due to $740,000 in gains on pay-offs of purchase credit impaired loans in Q1, and a $312,000 pre-payment fee to retire $15 million in federal home loan bank debt in Q2. The impact of these events was to increase the first quarter's net interest margin by 16 basis points, and suppress the second quarter's by 7 basis points. Adjusting for both, the net interest margin declined 4 basis points in the second quarter.

We also sold $13.4 million of investment securities in the second quarter, resulting in a gain on sale of $284,000. While the gain substantially offset the pre-payment penalty in earnings, it is reflected in non-interest income, rather than net interest income. However, going forward, the combination of the federal home loan bank advance pre-payment and sale of securities should provide a 4-basis-point lift to the net interest margin.

The declines in return on assets from 1.15% to 99 basis points, and return on equity from 10.38% to 8.68%, between the first and second quarters of 2016 are attributable to the changes in net interest income just discussed.

All capital ratios are well above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio for Bancorp was 14.1% at June 30, compared to 13.9% at March 31. Tangible common equity to tangible assets increased to 11.2%, from 11% at March 31. There was no provision for loan losses recorded in the second quarter of 2016, as the quality of our loan portfolio does not warrant it. This is consistent with the same quarter a year ago.

Our loan-to-deposit ratio is 84.9%, and we continue to have ample liquidity and capital to support growth in the coming years.

The Board of Directors declared our 45th consecutive quarterly dividend of $0.25 per share on July 22. The cash dividend is payable on August 12 to shareholders of record at the close of business on August 5, 2016.

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. Our organic growth opportunities remain strong. We continue to expand geographically into high-growth areas such as the East Bay, San Francisco, and Santa Rosa. Our industry-specific expertise has paid off very well in the wine business focus market. Finally, we're having success using additional products and services to expand client relationships.

We also continue to apply a disciplined approach to evaluating acquisition opportunities. It's all about the right deal at the right price. Our strong capital base gives us options to offer combinations of cash and stock without raising additional capital. We are specifically focused on acquiring banks in the Bay area that have a strong deposit base and loan portfolio, and also create value for our shareholders.

We are excited about the opportunities ahead for Bank of Marin. In the second half of this year, we will continue to focus on organic growth, strategic acquisitions, and returning capital to shareholders through our consistently rising dividend.

Thank you for your time this morning, and now I'd like to open it up to answer any of your questions.

Thank you, ladies and gentlemen.

(Operator Instructions)

One moment, please, for the first question. Our first question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks, good morning.

Good morning, Jeff.

Russ, you mentioned -- you talked about organic growth being a focus. Last year net loan growth really picked up in the second half of the year. I was interested in is there any seasonality in your pay-offs that would suggest a similar experience this year?

I'm not sure there's seasonality in pay-offs. I think the -- we continue to build -- we build our pipeline. Last year we had a terrific fourth quarter. We had a lot of closings in the fourth quarter.

Of course, when you have a lot of closings, the pipeline tends to shrink a bit. The good news is for us is that our pipelines continue to be very strong. That's both from the loan origination side, but also on the deposit gathering side in terms of bringing in new deposit-only relationships. I don't really think that there's seasonality. It just happens that maybe at the end of the year, loan officers are interested in hitting their numbers. (laughter)

Sure, yes. On that deposit side, you mentioned a few marquis customers. Was there any special program to attract those customers, and then maybe the second question to that, is there potential to cross-sell on the lending side?

The answer is yes, there is potential to cross sell. There's no real special programs. We've been calling on -- I think it goes back to that pipeline question. We've been doing a really good job of building pipeline. Our commercial lenders are really focused on building the pipeline and following through, and taking them to conclusion.

In addition to that, our marketing managers on the retail side are very focused on the same thing. The result is you build great pipelines, and great pipelines mean you're ultimately going to have a lot coming through the funnel at the bottom. We are fortunate we brought in some very big relationships, a couple of big ones on the depositary side that do have opportunities to cross-sell on the lending side, too.

All this all works together. What I'm very happy with and pleased with is that our market people on the retail side, our commercial lenders, are working really closely together to make sure that everyone is successful.

Great. Then maybe one last one. Just on expenses, I forget, have you guys put any targets out there on the expense run rate or efficiency goals?

Well, not specific dollar targets. But we do like to keep our efficiency ratio below 60% if we can do that, but at the very least in the low 60s. That's where we try to maintain it. But you can -- if you look at the various line items on the expenses, you can see we're not doing that at the expense of investment. We do continue to invest in technology when it's warranted. We try to focus on every single line item to maintain our expense control.

What I would add, too, is that the most expensive item on the expense line is our salaries and benefits. While we're focused on bringing in the right people, we're also very -- we monitor employee expenses very closely, and make sure when we add someone, any addition to staff comes to my desk. We have to make sure that we're being really smart about how we hire and when we hire. That's where you really maintain and hold the line on your non-interest expenses.

Yes, and I'd say the final piece of that is that we've done a really good job with our real estate in terms of as leases have come up or we've had opportunities to relocate branches, to down-size the footprint a little bit or right-size the footprint, get into the right locations for us. That continues to be a successful strategy.

Yes, we just moved as of last week our Oakland commercial banking office from its original location. Actually, we moved in the space across the street. Smaller location, but great spot, and we're saving a fair amount of money on the difference in the lease rate.

Got it. Thanks, Russ and Tani.

Sure.

Our next question comes from the line of Tim Coffey with FIG Partners. Please go ahead the.

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

Good morning.

Good morning, Tim.

Russ, do you have any concerns about pay-downs in your CRE book if rates stay as low as they have been?

Concerns. We get a fair amount of pay-downs as it is.

Well, relative to -- speaking more relative to the first half of last year.

The numbers this year are lower, which is good news. We look at the portfolio, and if you look at our pay-offs over time, somewhere in the 10% range is what we really even plan on each year, only about 10% a year. Really, when you grow -- if you want to grow the portfolio 6% to 7%, you really have to generate about 16%, 17% of new volume.

The good news in our pay-offs is that in the last -- the last two pay-offs in the quarters -- the last two quarters, only about $3 million was because we lost business to a competitor. The rest of it was for situations where they sold the property, paid us off with cash. But it wasn't a situation where we were actually losing business.

Obviously you're concerned when you see high levels of pay-offs, but it's part of the business. We plan for it now. We anticipate that there's going to be 10% pay-offs in the portfolio every year. You really have to plan for generating loan volume of 16% to get to that 6% or 7% number that we've achieved.

Okay, but you don't see anything in the cards right now? As far as you can see, the pay-offs would exceed that 10% annualized number?

It always can go a little above, it might be a little below. We plan on that number as being the target of where we think pay-offs will be in any single year, approximately 10%.

Okay, great. That makes sense. Then your comments on CRE concerns I think are completely reasonable. Do you feel that your reserves reflect those concerns?

Our loan loss -- I mean our ALLL number?

Yes.

Yes, it's pretty low. We're at 1.04% our reserves. But if you look at our loss experience over 26 years, our total losses -- total net losses in commercial real estate are $2.5 million. The problem we have in creating ALLL reserves for commercial real estate is we really don't have history of losses there. It's a difficult process to create the right number.

It comes back to the way we underwrite, the way that we look for strong guarantors with liquidity that can step in, in the event of problems. Clearly, during the recession we had a couple of those situations, and we had guarantors that stepped in and put money in to bring the loan totals down, to bring them back into conformity.

You always have -- you have to have heightened concerns when real estate values increase as much as they have over the last few years, particularly in and around San Francisco, the peninsula, even the East Bay. You've seen values that are substantially higher than they were three, four, five years ago.

Yes, clearly. Okay, thanks. Then what's your outlook for NIM? If you back out some of the accretion and you back out the pre-payment penalty this past quarter, it's been surprisingly consistent in the first half of the year, given what we've seen in market rates. Do you think you can hold that 3.83%, 3.79% range?

We think that's a pretty good level that, as you say, the decline has been decelerating. There's less of an impact of higher-rate loans maturing, and being replenished with lower-rate loans. That's declined quite a bit. It could still continue to happen, maybe at a slower pace. But as we said, the activities on the securities and advanced side should help support the margin a little bit next quarter. I think we're looking at more stability going forward.

Okay, great.

If you want to answer that?

I just would say that the focus of our business continues to be relationship banking. While it was not going to give us a 4-plus NIM, we are able to maintain margins in many cases because of the customer relationships that we've built. That shows up in the numbers. We really try to build good relationships, and we try and start conversations with clients in advance if we think there's a potential for a re-finance, and we don't -- we're very proactive about managing our relationships.

If we do -- if we need to adjust rates, we do. But if you maintain that -- if you have that conversation early, and you're constantly talking to customers -- everybody knows what rates are doing. There's no secrets out there. You have to be very proactive with your clients to make sure that they don't think that you're not doing the job for them. That's our relationship, our officers' job, and they're doing a good job at doing that.

Okay. Those are all of my questions. Thank you very much.

Thanks, Tim.

Thanks, Tim.

Our next question comes from the line of Tim O'Brien with Sandler O'Neill. Please go ahead.

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

Hi, Alex.

Hi, Alex.

Good morning. Just two quick questions for you guys. With regard to in the last quarter you guys discussed that you're looking to do some new hires and you're filling out some of your commercial lending offices. Any notable hires this past quarter in the second quarter, or any anticipated hirings coming up in the third quarter?

Yes, we've hired -- we hired a new market manager, regional manager in the East Bay, a woman who came over to us from Union Bank. We hired a number -- we made three hires in Santa Rosa to fill out that commercial banking office. We're still looking -- we're still looking for people in different markets, East Bay -- I think a little in San Francisco. In Marin here we have a really strong team, so it's really on those locations. We're having some great success, and we're seeing really good people, and we're very happy with the results of the hires we've gotten in the last couple quarters.

That's great to hear. Then on following up on the margin and loan outlook, would you say have loans been -- new pricing been under any more incremental pressure relative to three months ago and maybe a year ago, or have they been -- has new production been at a fairly constant rate or level?

It's been pretty constant. It has come down a little bit, so that would indicate there is some pressure. At some point how far, how low can you go?

Right.

But you are -- there's always -- there are banks -- banks want to see volume now, because they're not getting that margin. There's always pressure from a variety of organizations, and a lot of the bigger banks too have come in with longer-term, low-rates financings. It's -- I don't want to say it's completely stabilized, but it certainly is not the kind of pressure that we saw a year ago or so.

Okay, that's great. Then actually just one housekeeping question. On the income statement, the fee income, it looks like wealth management services has been flat to down over the last couple of quarters. Any directionality with there, or any color you can provide?

Yes, I can provide a little color. The business that they have, there's a lot of trust business there. When a trust that they're managing, if an individual passes away, they deal with the trust and they liquidate -- they disperse funds. Frankly, that -- we've had a couple of those situations where you see an up-tick, because there's fees related to taking care of the trust, but then you see a decline in the management fees because the monies are -- have been dispersed out to the heirs. That's the main reason for the decline this year.

Okay, that's great. Thanks for answering my questions.

Sure.

(Operator Instructions)

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

Good morning.

Good morning, Don.

Good morning, Don.

A couple things. One, you mentioned, Russ, that the line usage was down some. What's the percentage on that?

I don't know the answer to that. Line -- I didn't mention line usage was down.

Well, the reason that we took an off balance sheet addition --

The off-balance provision, right.

Was because commitments are up, combined with a little bit of a decline in the utilization and --

Don, I don't know the answer off the top of our head, but we can get back to you.

Okay, that's fine.

We're flipping through the pages now. Here we go.

Okay. Then while you're doing that --

It went about 1% down. It was 43% utilization, down to about 42%, in rough numbers.

Okay, great. Then on the FHLB advance that was pre-paid, what was the remaining term on that, and the rate?

It was a 2.07% rate, and the maturity was in 2018.

Okay.

Then what would you expect the tax rate to be for the second half -- continue at the current run rate in the quarter?

Well, we have a little bit of an adjustment usually in the first quarter; but I'd say if you use the run rate from the second quarter, that's probably reasonable.

Okay, great. All right, thank you.

Thanks, Don.

Our next question comes from the line of Charlize Vancoor with KBW. Please go ahead.

Hi, guys. (inaudible - audio difficulty) for Jackie.

Hi.

I have a follow-up question. Russ touched on M&A a bit in his prepared remarks. I'm just curious how the pace of conversations have changed in this past quarter, if at all?

Yes, I don't think they've changed at all. We keep in conversation with many banks throughout the Bay area. But right now there's no -- you think -- there's no real urgency -- not from our side, I'm talking about from others. Banks aren't bought, they're sold. When a board comes to the determination they would like to do -- to sell, then that's when something happens.

We just keep in front of everyone, and hope that something -- one of the ones that we're interested in makes that decision. But we don't try and force things. We certainly are not ever hostile in that respect. We just like to keep good communication with all our friendly competitors. If there's an opportunity, we'll be in front of them.

Okay, great. Thanks. All of my other questions were asked, so I'll step back now.

Okay, thank you.

Thank you.

(Operator Instructions)

There are no further questions on the phone lines at this time.

Great. I would like to thank everyone for attending this morning the call. I look forward to speaking with all of you again next quarter. Thanks very much.

Thank you.