Bank of Marin Bancorp (BMRC) 2018 Q1 法說會逐字稿

Good morning, and thank you for joining Bank of Marin Bancorp's Earnings Call for the First Quarter ended March 31, 2018. I am Nancy Boatright, Senior Vice President and Corporate Secretary. (Operator Instructions) As a reminder, this conference is being recorded.

Joining us on the call today are Russ Colombo, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast. Before we get started, I want to emphasize that the discussion on this call is based on information we know as of today, April 23, 2018, 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 our earnings press release as well as our SEC filings.

Following our prepared remarks, Russ and Tani will be available to answer your questions. And now I'd like to turn the call over to Russ Colombo.

Thank you, Nancy. Good morning, and welcome to our call. We are pleased to review our results for the first quarter of 2018 with you. Let's start with the highlights. We had a strong start to the year with net income of $6.4 million and diluted earnings per share of $0.91, an 11 basis point increase in the net interest margin and the full quarter including Bank of Napa results contributed $1.5 million or 23% increase in our pretax income over last quarter.

Loan originations were $37.4 million, up from $13.5 million over the first quarter 2017. Activity was well distributed among our East Bay, San Francisco, Napa and Marin markets. As mentioned on last quarter's call, several loans that were originally expected to close in the fourth quarter rolled into the first quarter's originations. The success of our relationship banking model is reflected in noninterest-bearing deposits, which grew $51 million, an increase from 47% to 49% of our total deposits.

Our ability to attract and retain low-cost deposits continues to be a significant competitive advantage and positions us well for our net interest margin expansion as interest rates rise. The cost -- the total cost of -- cost of total deposits was 8 basis points, up only 1 basis point from a year ago. Our credit quality continues to be excellent with no provision for loan losses or off-balance sheet commitments required during the quarter. Nonaccrual loans represented only 0.2% of the portfolio at quarter-end, reflecting our highly disciplined approach to underwriting. The Board of Directors has declared a $0.02 increase in our quarterly cash dividend to $0.31 per share. This represents the 52nd consecutive quarterly dividend paid to our shareholders.

I am pleased to announce that we will be commencing a $25 million share repurchase program as part of our capital management strategy. This represents 5% of shares outstanding, based on the quarter-end closing stock price. As part of this program, Bank of Marin Bancorp is entering into a 10b5-1 trading plan, which would permit common stock to be repurchased during the insider trading blackout periods.

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

Thank you, Russ, and good morning. First quarter net income of $6.4 million is a strong indicator of where Bank of Marin is headed in the future. As Russ mentioned, assets and liability required from Bank of Napa are now fully reflected in our financial results. Our asset sensitivity is manifested in the net interest margin growth and the new tax law has taken effect. 2018 first quarter net interest income was $21.9 million compared to $20.1 million in the fourth quarter and $17.6 million in the first quarter last year. The increase in net interest income from both earlier quarters reflects higher-earning assets from organic growth and the acquisition. In addition, yields on loans, cash and securities were higher in the first quarter than in both prior periods.

There was a $7.3 million decline in outstanding loan balances between December 31 and March 31. Payoffs of $32 million were slightly lower than Q1 2017, and $6 million lower than Q1 2016. The largest portion of payoffs came from the successful completion of construction projects and customer sales of assets. Amortization and changes in lines of credit utilization accounted for the remainder.

Reported net interest margins of 3.79% was up 11 basis points from 3.68% in the fourth quarter of 2017, and the tax equivalent margin was up 5 basis points to 3.85%. Our efficiency ratio is 66.6%, was down from 68.3% last quarter, and up from 65.9% a year ago.

Those ratios reflect noninterest expenses of $16.1 million, $15.1 million and $13 million for those respective quarters. Primary factors accounting for the increase in noninterest expense from both earlier quarters were: higher salaries and benefits related to the addition of Bank of Napa employees; increased stock-based compensation expense related to certain employees meeting retirement eligibility requirements; and $750,000 of expenses related to renegotiating our core processing contracts which we expect to result in future cost savings.

We incurred $615,000 in Bank of Napa acquisition-related expenses in the first quarter of 2018 compared to $1.7 million in the fourth quarter of 2017.

We anticipate an additional $325,000 of acquisition-related expenses for the remainder of this year.

The effective tax rate for first quarter of 2018 was 20.7%, and a reduction in federal corporate income tax rate to 21%, positively impacted earnings per share by $0.09. As a reminder, there was a $3 million write-down of deferred tax assets included in the tax provision for the fourth quarter 2017.

We are very pleased with first quarter results. Our 1.05% return on assets and 8.7% return on equity reflect continued growth and balance sheet strength. The loan-to-deposit ratio was 76.5%, our total risk-based capital ratio was 15.1% at quarter-end and tangible common equity to tangible assets was 10.6%. We have plenty of liquidity and capital to support growth in the coming years.

And now I will turn the call back over to Russ for some closing comments.

Thank you, Tani. Let me discuss the stock repurchase plan in a little more detail. Creating value for our shareholders has always been our top priority. Our Board of Directors has determined that the repurchase of our common stock is an attractive investment, given its belief in the long -- positive long-term outlook for the growth of our franchise. Also, due to the potential for higher returns with Bank of Marin, most M&A targets would prefer to receive our stock over cash as part of any deal. Organic growth plays a principal role in delivering strong returns. And it continues to be a key part of our strategy. The investments we made in 2017 are showing positive results. The team that has grown out of our acquisition of Bank of Napa is already making strong impact in that market, and our East Bay commercial banking office continues to exceed expectations.

As we turn our focus to Sonoma County, we have a blueprint, we need to increase our pace of growth in that strategic region. The acquisition of Bank of Napa gives us another platform for an organic growth. With our increased presence in Napa County, we can provide our new customers expanded product offerings, lending limits and commercial banking capabilities. The combined team there has already identified a number of new business opportunities with borrowers who are excited to access our greater credit capacity and enhanced expertise.

Finally, I am pleased to report that as of this morning, the conversion of Bank of Napa systems to Bank of Marin is complete. With this successful integration, we can now fully serve our new customers.

Along with the growth across our footprint, we also continue to gain market share. Thanks to our successful relationship banking model. By providing a stable, low-cost deposit base, we have been able to expand our net interest margin. That strong deposit base, especially in a rising interest rate environment distinguishes Bank of Marin from many other banks.

As we look ahead to further success in 2018, we will achieve it as we always have, through disciplined relationship banking that delivers growth and success for our customers and attractive long-term returns for our shareholders.

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

(Operator Instructions) Our first question on the phone is from the line of Jeff Rulis with D.A. Davidson.

A question for Tani on the -- just on the expenses. I guess you had about $1.4 million and if you combine the core processing and acquisition costs. If you anticipate the -- you said the $325,000 to come still, but I guess I get close to $1 million goes away, is that's how we read the core processing and acquisition cost?

So on the core processing, there's probably -- there's still some more to go, we're still on negotiations on that one. So the $615,000 that's associated with the acquisition is -- that's different than the core processing contract negotiation. And on the $615,000, we've got for the Napa acquisition, onetime cost about $325,000 left to go.

Okay. And as the core process...

Jeff, this is Russ, can I just add one thing? In addition -- we do have this charge for the renegotiation but there's going to be, over the life of the new contract, substantial savings. So in fact we had this cost, which is up front, which is a percentage of the savings that we're going to be getting over the next -- over the -- terms of the contract was 5 years. And so -- and that's not completed yet, and -- but that's the first charge that we took on that. There will be some more charges not that level but you could -- we can count over the next 5 years, our core processing costs are going to come down substantially because of that negotiation.

Okay, that's maybe just bigger picture then, I'm looking for a quarterly run rate on noninterest expense. It would seem like with some savings and some of these going away that you're at a $15 million or sub-$15 million a quarter operating expense, is that correct?

Yes. I think that's roughly in the ballpark because if you think about some of our salaries and related expenses, also have included some of our conversion employees and yes, I think that's...

Yes, I think that's pretty close. When you take out those costs that we had first quarter, you're going to be right around $15 million. And in fact there may be -- that may drop because of the savings we achieved from our core processing contract. Once we sign the contract, that will kick in, which is very close.

Just to clarify, that conversion was this weekend?

The Bank of Napa conversion was this weekend. That was completed over the week and actually over this Saturday, last 2 days. The core processing contract is completely different, that's in negotiations right now and that -- once we sign that, then we'll be able to start incurring lower costs on our -- on the processing costs.

Got it. And then the tax rate, was this a little lower in Q1 than you had assumed. What is that maybe -- better yet, what sort of balance of the year do you expect it to hold near this rate?

Yes. Usually what we do -- the tax provision is reflective of what our expectation is for the tax rate going forward. So yes.

Okay, and maybe one last one. Russ, just to follow-up on the buyback. Is this more of a tool in the capital chest if you will, and not necessarily less interest in M&A. This was just a move by the board that -- should we view it as an option versus not a negative view of other M&A options out there that you're having discussions with?

That's a really separate discussion. This is capital management. We've got excessive capital at this time, and it's important for us to bring that down, to bring proper returns to our shareholders. So that's one thing. But as we said, we've had -- we've done 3 deals. Napa was 100% stock, we've had lots of discussions with other banks and all the discussions are, either all stock or mostly stock. So the need for cash and capital or an acquisition really isn't there, and frankly, when we -- as we do this, it should have a positive impact from the standpoint, our EPS will grow as we do this buyback.

Our next question is from the line of Tim O'Brien with Sandler O'Neill.

This is [Thomas] on for Tim today. So just drilling down a little bit further into the expenses. The $325,000 related to acquisition expenses. Is that planned for 2Q '18 or is that going to be spread out through the year?

Most of that will happen in the second quarter. We should be pretty much -- by the end of the second quarter.

Okay. And then is there going to be any increase in compensation related to merit-based increases in 2Q '18?

Those are already embedded in Q1 cost, partially. You'll get a full quarter of that in second quarter, yes. Just the merit increases. Bonuses were already in the first quarter.

(Operator Instructions) We have a question from the line of Matthew Clark with Piper Jaffray.

I apologize if I missed this, I'm just straddling a couple of calls here. But on the loan pipeline, I guess, coming into the second quarter, I guess how does that compare year-over-year in the linked quarter?

The second quarter's pipeline is actually substantially better than the second quarter of this -- the last year. We're getting really good volume on loan side. That being said, there's always -- we have construction activity, and the good news on construction activity is it gets completed and paid off. So we do have a lot of that. We've had some asset sales but we're probably 30% higher with our pipeline for this -- at this time, this year versus last year.

Okay, great. And then loan pricing, looked like your core loan yields were up about 4 basis points to $455,000 if we are calculating it correctly. Wondered what pricing look like on new production, and whether or not you're feeling competitive pressures out there that might mitigate some of the upward repricing?

Yes, the -- we're able to maintain our margins. The interesting thing is, in short term, rates obviously are up, but this yield curve is flattening and so you still get really competitive, it's really competitive when you're looking at 5, 7 year fixed transactions or higher some or [you're higher] than that. So you -- it's kind of an odd situation, so it's very competitive. And we're already looking for volume, and we haven't seen much movement in longer rates. It's mostly short.

Okay, and then just on capital management, I think I caught you talking a little bit about it when I switched over, with the new share repurchase. Just updated thoughts on kind of your organic growth outlook, and potential dividend increases, given the step up in earnings here and the buyback and thoughts on M&A?

So we've got $0.02 per share dividend that we announced for this quarter, an increase as part of the overall capital management program. And as Jeff mentioned earlier, the share repurchase is one arrow in our quiver of capital management along with organic growth using capital for M&A as needed but as Russ mentioned, it's not always desired, people would rather have stock, and we will also maintain some dry powder on our capital position, we're not going to take it all the way down [to].

Yes, we do a $25 million share repurchase. It's certainly taking long to reiterate -- to earn that back given our run rate currently. We're paying out about 30% of our earning -- 35% of our earnings so.

Our next question is from the line of Jacquelynne Bohlen with KBW.

I know you touched on a little bit on the technology cost savings and everything expected. Do you have any way to quantify what you think that might be even just very generally speaking?

I think we can't really quantify because we are in the middle of our negotiations right now, and we're just -- we're not at liberty to talk about it very much.

Okay, that's understandable. And then just moving over -- just between the -- and I apologize if I missed this, I had some problems getting into queue. The differential on loan generation between where the portfolio was at and where you're pricing new generation now. Is -- where are you seeing that and then what kind of update do you expect after the March rate increase?

Well as I was saying the -- we see lift on the short-term financings but the competition on longer-term financings continues to be pretty aggressive, pretty intense and pricing is pretty aggressive. I don't, frankly, I haven't seen that much lift on longer, like I said 5 to 7 or even 10-year financings. You're not seeing -- because the yield curve is so flat, and we're not seeing the lift in that -- in those as much as we are in the short term. But we are seeing some lift and you're obviously seeing some margin expansion here was just to...

And I'll just add, we did see lift in our -- in most of our loan categories, although as Russ said, it's not as fast as the said moving rates, of course, because the long end of the curve is not responding as much but the only categories really that we're seeing any declines or more pressure on, are some of the consumer loan categories, residential and home equity, in terms of the rates on those.

And can you -- Tani, do you think there are -- are there any specific nuances that are driving that in terms of customer behavior? Or is it just kind of how things are shaking out?

Yes, I think we can -- I think we need a little bit more time to understand that. But we can -- we've got some theories out there about how equity loan balances and rates in general are responding to the new tax law, and I think, you might know more about that in another quarter.

Okay, and obviously there's been, essentially, no movement in your deposit costs. When you think about what could happen as rates continue to increase, just on that same log, between consumer and businesses, do you see any behavioral pattern differentiation between the 2?

Well, I'll tell you this, and I'm not sure I completely understand your question but as rates rise, there will, I'm sure, with all banks, there will be some movement on out-of-demand deposits into money market accounts and maybe CDs and things of that nature. We are so well funded though, we had such a huge percentage in demand deposits. And frankly, the thing about our demand deposit is, those are primarily operating accounts, and so those are going to be used. Those are going to stay and for the most part will stay in demand, and we should continue to have a very high percentage of demand deposits. But again, this is a reflection of the relationship-based model that we have. We might see some movement in prices. It certainly is in the money market accounts. We're not a big CD bank, we don't chase rates ever, and we don't need to, because we've got a strong deposit base but as money market rates move, then you'll see some rise in our cost of deposits but -- and there may be some movement of -- some of the demand deposits over the money market accounts, so you might see a little bit lower on the demand side, a little bit higher money market and costs going up slightly as rates rise, but I think we were probably better positioned than just about any bank that I looked at recently, relative to our deposit base and our cost of funds going forward -- [plus] the deposits going forward.

And I'll add to that, Jackie. We model our net interest income going forward on different rate scenarios with much higher betas obviously, than we're actually experienced -- experiencing right now. And even when we utilize those higher -- those higher betas, we are still asset sensitive. And the other thing about our customer base, as Russ said, they are -- they have large operating account balances, and that's why sometimes we see big movements quarter-to-quarter in our deposit -- in our total deposit numbers because they have -- they can have large cash inflows and large cash outflows at any given point in time, whether they're construction companies or something related to elections and so going back to Russ' point, because of that, they have to maintain a certain level of liquidity in those accounts in order to cover those cash flows in and out. So that limits how much can ultimately move from demand deposits over to money market.

Okay. So in the essence, their liquidity needs help to keep your deposits sticky, basically? And obviously, in addition to strong relationships that you have with your customers and everything?

Yes.

Yes.

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

Okay. Well I'd like to thank everyone for joining us this morning, and we'll look forward to talking with you again after the second quarter. Thank you.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.