Bank of Marin Bancorp (NASDAQ:BMRC)
Q2 2016 Earnings Conference Call
July 25, 2016 11:30 AM ET
Jarrod Gerhardt - SVP and Director of Marketing
Russ Colombo - President and CEO
Tani Girton - CFO
Jeff Rulis - D.A. Davidson
Tim Coffey - FIG Partners
Alex Morris - Sandler O’Neill
Don Worthington - Raymond James
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.
During the presentation, all participants will be in listen-only mode. After the call, we will conduct a question-and-answer session. [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 5:00 AM Pacific Time this morning and is posted 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 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 discuss the results for the second quarter of 2016. Let’s start with some highlights; our earnings for the second quarter of 2016 was $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 are a number of one-time factors including gains on acquired loans payoffs and securities sales which contributed to last quarters outstanding results. The second quarter numbers are more normalized. Second quarter loan origination 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 payoffs 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 against last quarter and the prepayment penalty associated with earlier repayments of the 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 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 disciplining our underwriting process; sharing time with others may be tempted to compromise credit quality of pricing. We are closely watching loan to values on properties that may be overvalued in a very hard 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 to deposit of 8 basis points. Our success in attracting relationship in non-interest bearing deposits is a distinct competitive advantage in the 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 to 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 marketing 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 insight on our financial results.
Thank you Russ. Good morning everyone. It’s easy to see the banks 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 payoffs to purchase credit impaired loans in Q1 and a 312,000 prepayment fee to retire 15 million in federal home loan bank debt in Q2.
The intent was to increase the first quarter’s net interest margin by 16 basis points and suppress the second quarters’ 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 prepayment 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 prepayment and sale of securities should provide a 4 basis points 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 a 45th consecutive quarterly dividend of $0.25 per share on July 22. A 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 remained strong. We continue to expand geographically in the high growth areas such as East Bay, San Francisco and Santa Rosa. Our industry specific expertise is paying off very well in the line business focused market. And finally, we are having success in additional products and services to expand client relationships.
We also continue to apply 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 in 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 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.
[Operator Instructions] our first question comes from the line of Jeff Rulis with D.A. Davidson. Please go ahead.
Russ you mentioned and you talked about organic been a focus. Last year net loan growth really picked up in the second half of the year, and I guess what I was interest in, is there any seasonality in your payoffs that would suggest a similar experience this year.
I’m not sure of the seasonality in payoffs, but I think that we continue to build from our pipeline. Last year we had a terrific fourth quarter, we had a lot of closings in the fourth quarter. So of course when you have a lot of closings the pipeline tends to shrink a bit. The good news for us is that our pipelines continue to be very strong and that’s both from a loan origination side but also on the deposit gathering side in terms of bringing in new deposit only relationships. So I don’t really think that there is seasonality, it just happens maybe at the end of the year and loan officers are interesting in hitting their numbers.
Sure. Yeah. On that deposit side, you’ve mentioned a few marquee customers, was there any special program to attract those customers and then maybe the second question is that, is there a potential to cross-sell on the lending side?
The answer is yes, there is potential to cross-sell. There is no real special programs, we’ve been calling on and it kind of 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 through conclusion.
In addition to that our market managers on the retail side are very focused on the same thing, and the result is you built great pipelines and great pipelines being you’re ultimately going to have a lot coming through the funnel at the bottom. And you’re fortunate that we brought is some very big relationship, couple of a big ones on the depository side that do have opportunities to cross-sell on the lending side too.
So all this works together and what I’m very happy with and pleased with is that our market people on the retail side and our commercial lenders are working really closely together to make sure that everyone is successful.
And then may be one last one, just on expenses have you guys put any targets out there on the expense run rate or efficiency goals?
No, not specific dollar targets, but we do like to keep our efficiency ratio below 60% if we can do that, but it’s a very least in the low 60s that’s where we try to maintain it. But 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 investment in technology when it’s warranted. We just try to focus on every single line item to maintain our expense control.
And what I’d add too is that the most expensive item on the expense lines are (inaudible) expenses and while we are focused on bringing in the right people, we are also very - we monitor employee expenses very closely and make sure when we add some one, any addition to staff comes to my desk, we have to make sure that we’re being really smart about how we hire, when we hire. And so that’s where you really maintain and you uphold the line on your non-interest expenses.
Yeah, and I’d say the final piece of that is that we’ve done a really good job with our real estate in terms if leases has come up or we’ve had opportunities to relocate branches to downsize the footprint a little bit or right-size the footprint getting in to the right locations for us. And that continues to be a successful strategy.
We just moved as of last week our Oakland commercial banking office from its original location actually we moved in a space across the street. Smaller location, that’s great spot and we’re saving fair amount of money on the difference in the leases.
Our next question comes from the line of Tim Coffey with FIG Partners. Please go ahead.
Russ, do you have any concerns about pay-downs in your CRE book, if rates stays as low as they have been?
We get a fair amount of pay-downs as it is. We’re --.
I figured more relative to the first half of last year.
The numbers this year are lower which is good news. If we look at the portfolio and if you look at our payoffs overtime, we’re somewhere in the 10% range is what we really even plan on each year. We’re about 10% a year. So really if you want to grow the portfolio 6% or 7%, you will have to generate about 16%, 17% of new volume. The good news in our payoffs is that the last two payoffs in the quarters don’t - in the last few 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, just paid us off with cash, but it wasn’t a situation where we were actually losing business. So obviously our concern with the key high levels of payoffs is part of the business we plan for it now. We anticipate that there is going to be 10% payoffs in the portfolio every year and so you really have to plan for generating loan volume of 16% just to get to that 6% or 7% number that we’ve achieved.
Okay, but you don’t see anything on the cards right now, and plus you’d say that payoffs would have exceeded that 10% annualized number.
You know if you go a little above, it might be a little below, but we plan on that number as being the target of where we think payoffs would be in any single year approximately.
Okay, great. That makes sense. And then your comments on CRE concerns I think are clearly reasonable. Do you feel that your reserves kind of reflect those concerns?
Our loan loss, our ALLL number?
It’s pretty low because, we’re at 1.04% our reserves. But if you look at our loss experience over 26 years, our total net losses in commercial real estate are $2.5 million. So the problem we have in creating ALLL reserves for commercial real estate is zero in on how history of losses there is. So it’s a difficult process to create the right number. But it comes back to the way we underwrite, to the way that we look for strong guarantors with liquidity that can step in the event of problems.
And clearly during the recession we had couple of situations and we had guarantors that stepped in and put money in to bring the loan total down to bring it back to conformity. So you always have to have heightened concerns when real estate values increase as much as they have over the last few years. That’s particularly in and around San Francisco peninsula even East Bay you see values that are substantially higher than they were three, four, five years ago.
And then what’s your outlook for NIM? If you kind of back out some of the equation and if you back out the prepayment I don’t know if this does for the quarter, it has been surprisingly consistent in the first half of the year, given what we’ve seen in the market rates. Do you think you can kind of hold that pre 83, 79 ranges?
We think that that’s a pretty good level. 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, so 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 advance side should help support the margin a little bit next quarter. But I think we’re looking at more stability going forward. Do you want to answer that?
Well, I just would say that the focus of our business continues to be relationship banking. While it’s 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 built, and that shows up as a number. 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 refinance and we don’t - we were very, very proactive about managing our relationship and 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 and so there is no secrets out there and so you have to be very proactive with your client to make sure that they don’t think that you’re not doing their job for them. So that’s our relationship officer’s job and they are doing a good job at doing that.
Our next question comes from the line of Tim O’Brien with Sandler O’Neill. Please go ahead.
It’s actually Alex Morris on for Tim. Just two quick questions for you guys, with regard to 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 can any anticipated hirings' coming up in the third quarter?
Yes, we’ve 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 up that commercial banking office, and we’re still looking for people in different markets these days I think a little in San Francisco, but in Marin here we have a really strong team so its’ really on those locations. But we’re getting - we’re having some great success and we’re seeing really good people and we’re very happy with the results of the hires that we’ve gotten in the last couple of quarters.
That’s great to hear. And then on just kind of following-up on the margin and kind of 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 has new production been at a fairly constant rate level?
It’s been pretty constant; I mean the NIM has come down a little bit. So that would initiate that there is some pressure, but at some point out far how low can you go. People who’ve in our banks - the banks want to see volume now because they’re not getting much [larger]. So there is always pressure from a variety of organizations and a lot of the bigger banks too have come in with longer term, low rate financing. But 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.
That’s great. And one housekeeping question on the income statement it looks like wealth management services has been kind of flat to down just a little bit over the last couple of quarters. Any sort of directionality with there or any kind of 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 are managing, if an individual passes away they deal with the trust and they liquidate, they disperse funds, and frankly we’ve had a couple of those situations where you see an uptick because there are fees related to taking care of the trust, but then you see a decline in the management fees because the money have been dispersed out to the heir. So that’s the main reason for the decline this year.
[Operator Instructions] Your next question comes from the line of Don Worthington with Raymond James. Please go ahead.
A couple of things, one, you mentioned I think 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.
The reason that we took an off balance sheet provision was because commitments are up combined with a little bit of a decline in the utilization and --.
I don’t know the answer off the top of our head, but I think we can get back to you.
We’re flipping through the pages now.
It was 1% down; it was 43% utilization down about 42%.
And then on the FHLB advance that was prepaid, what was the remaining term on that and the rate?
It was 2.07% rate and the maturity was in 2018.
Okay. And then what would you expect the tax rate to be for the second half, kind of continuing with 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.
Our next question comes from the line of [Shalese Vancora] with KBW. Please go ahead.
Shalese on for Jacky. I have a follow-up question a rough touch on M&A a bit in your prepared remarks. And so I’m just curious how is the [case] conversation have changed in this past quarter if at all?
Yes, I don’t think it’s changed at all. We keep in conversation with many banks throughout the Bay area, but right now there is no real urgency not from our side, I’m talking about from others. So banks aren’t about their soul, so when a Board comes to a determination that they would like to do to sell then that’s when something happens, and we just keep in front of everyone and hope that something and the one’s 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. So we just like to keep good communication with all our friendly competitors and if there is an opportunity we’ll be in front of them.
[Operator Instructions] There are no further questions in the phone lines at this time.
Great, I would like to thank everyone for attending this morning’s call, and I look forward to speaking with all of you again next quarter. Thanks very much.
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