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Edited Transcript of BMRC earnings conference call or presentation 24-Apr-17 3:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Bank of Marin Bancorp Earnings Call

Novato Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Bank of Marin Bancorp earnings conference call or presentation Monday, April 24, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jarrod Gerhardt

Bank of Marin Bancorp - SVP & Director, Marketing

* Russ Colombo

Bank of Marin Bancorp - President & CEO

* Tani Girton

Bank of Marin Bancorp - EVP & CFO

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Conference Call Participants

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* Alex Morris

Sandler O'Neill & Partners - Analyst

* Jeff Rulis

D.A. Davidson & Co. - Analyst

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Presentation

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Jarrod Gerhardt, Bank of Marin Bancorp - SVP & Director, Marketing [1]

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Good morning and thank you for joining us for Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2017. 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 April 24, 2017.

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 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, April 24, 2017, 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.

And now I would like to turn the call over to Russ Colombo.

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Russ Colombo, Bank of Marin Bancorp - President & CEO [2]

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Thank you, Jarrod. We are pleased to review our results with you for the first quarter of 2017. Let's start with some highlights.

First-quarter deposits grew by $6.6 million. If you include balances sold to deposit networks for short-term investment, total growth was $55 million. Non-interest-bearing deposits continue to be the strength of the bank, making up 49.4% of the on-balance-sheet deposits and 48.1% of the combined on- and off-balance-sheet deposits.

The total cost of deposits dropped 1 basis point to 0.07% from both the prior quarter and the first quarter of 2016. There are substantial commercial lending opportunities in the Bay Area and our pipeline is considerably larger than it was at this time last year. Based on these factors, we expect to see stronger levels of loan originations in the coming quarters.

Gross loans actually decreased by $9 million and totaled $1.478 billion at the end of the quarter. First-quarter loan originations were $24 million. Loan payoffs were $33 million for the quarter and continue to be primarily the result of property sales and the successful completion and sale of construction projects.

Our credit quality continues to be outstanding. We recalculate our loan-loss reserve each quarter and we believe the current 1.03% of total loans is appropriate given the quality and size of our portfolio. As a result, there was no provision for loan losses taken in the first quarter.

We monitor the portfolio carefully and acknowledge any potential borrower issues and address them proactively.

Diluted earnings per share totaled $0.74 in the first quarter of 2017 and our Board of Directors has declared a quarterly cash dividend of $0.27 per share. This is our 48th consecutive dividend paid by the bank.

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

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [3]

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Thank you, Russ, and good morning, everyone. First-quarter net income was $4.5 million, compared to $5.7 million last quarter and $5.6 million in the first quarter of 2016. In spite of the decline, there are some positive underlying trends such as margin stabilization.

Let's break down the numbers. Net interest income of $17.6 million this quarter was $355,000 lower than last quarter and $1.017 million lower than first quarter 2016, largely due to the absence of gains on payoffs of purchased credit impaired loans and fewer days in the quarter. The improving investment portfolio yield helped to offset the decline.

The tax equivalent net interest margin was 3.79% in the quarter, compared to 3.78% in the prior quarter and 4.04% in the same quarter a year ago. Removing the impact of acquired loans, the yield on the loan portfolio was unchanged from the prior quarter and the yield on investments was up over both earlier quarters.

A well-secured $1.1 million commercial real estate loan was placed on nonaccrual during the first quarter. This loan and another $9.6 million relationship were both downgraded to substandard, increasing classified loans to $30.2 million at March 31.

Noninterest income of $2.1 million was down from $2.5 million in the fourth quarter 2016, primarily due to the $347,000 special dividend paid by the Federal Home Loan Bank in Q4. Noninterest expense was $13 million for the quarter, increasing $1.3 million from the prior quarter and $1 million from Q1 2016.

Salaries and benefits increased as we filled a number of open positions related to meeting our organic growth goals. The bank increased its 401(k) match to 70% with a higher per-employee cap. At the same time, beginning of the year balances reset to zero. The combined effect of those was a $288,000 increase in expense over Q4 2016.

Deferred loan origination costs declined from the level associated with large new loan volume in the fourth quarter, resulting in a $275,000 additional expense. The bank paid $147,000 in recruiting fees over the quarter as part of building the commercial banking teams. We also recorded a $165,000 provision for off-balance-sheet commitments related to the increase in classified loans.

The increase in noninterest expense, combined with lower revenues, led to an increase in the efficiency ratio to 65.92% and our return on average equity was 7.92% for the quarter. We have a very strong capital position and a low-cost deposit base, both of which position us well for future growth.

Now back to Russ for some closing comments.

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Russ Colombo, Bank of Marin Bancorp - President & CEO [4]

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Thank you, Tani. Long-term success in this business has a lot to do with discipline, fundamentals, and strategic planning, both of which have underpinned our consistent performance over many years. As we look ahead, we will stay true to our mission and our market.

We are investing in a number of strategic initiatives to help us increase our market penetration and build the value of the franchise. This summer we will be opening our first new branch since the Bank of Alameda acquisition in 2013. This office, located in Healdsburg, California, will extend our footprint north and help us solidify our presence in vibrant and growing markets. This office will complement our team's extensive wine industry financing expertise.

We will also be expanding our geographic reach by adding a commercial banking office in the East Bay, which continues to be one of the strongest growth markets in the Bay Area. For each of these new offices we already have a strong base of clients in the area. Our commitment to opening local offices to better serve the needs will help grow our presence and broaden new relationship opportunities.

Finally, while we have had success hiring new lenders and regional management in the last year, we believe it is also important to develop our own lending team internally to build bench strength. Accordingly, we are establishing an intensive in-house training program. We will be recruiting from local universities to train new commercial loan officers, who will ensure the continuity of our lending principles and customer-centric culture.

It is important to note that all of these initiatives are long-term commitments and critical to the success of our strategic plan. We manage for the long term, which has served the bank and our shareholders well throughout our 27-year history.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Tim O'Brien, Sandler O'Neill + Partners.

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Alex Morris, Sandler O'Neill & Partners - Analyst [2]

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Good morning, it's actually Alex Morris on for Tim. Just to start off, I was wondering if you guys could give just a little bit of color on the $9.6 million criticized loan that moved to nonaccrual. In the press release it mentioned that -- sorry, just any kind of additional color you could provide on that.

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Russ Colombo, Bank of Marin Bancorp - President & CEO [3]

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We really -- for privacy of our customers, we can't give you a lot of information. The only thing I would say: it's a long-term relationship; we feel very good about working with our client and we don't anticipate any lost potential in this credit.

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Alex Morris, Sandler O'Neill & Partners - Analyst [4]

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Understood, appreciate that. Then, Tani, I apologize if I missed this in your prepared remarks. That $275,000 in the one-time expenses; was that tied to the new stock comp accounting rule or was that something else?

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [5]

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The $275,000 was the decrease in deferred loan origination costs. So we had a higher volume of loan originations in the fourth quarter than we did in the first quarter and so we deferred fewer expenses in the first quarter.

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Alex Morris, Sandler O'Neill & Partners - Analyst [6]

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Understood, okay. That's it for now. I'll hop back in the queue. Thank you.

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Operator [7]

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Jeff Rulis, D.A. Davidson & Co.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [8]

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Thanks, good morning. Maybe another follow-up, Tani, on quarterly expense. It seems like -- I'm just trying to get a handle on what's going to remain and maybe what was a little one-time issue in the quarter, particularly given the branch and office initiatives that are underway. And then you've got the off-balance-sheet commitments and some seasonal comp stuff.

So maybe just a little more detail on that operating expense level and kind of puts and takes.

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [9]

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The increase in salary and expense and the associated increases in incentives and payroll taxes and benefits, those are permanent changes, if you will, because we did fill a lot of open positions over the course of the past year. The increase in the 401(k) and the taxes related to resetting to zero for the beginning of the year as 401(k)s and payroll taxes hit their caps, of course, those will go down over the course of the year.

The deferred loan origination (multiple speakers)

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Jeff Rulis, D.A. Davidson & Co. - Analyst [10]

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Any gauge on the number on that? Any sort of number to that in terms of how much higher than normal that is in Q1 versus the balance of the year?

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [11]

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So the increase from Q4 to Q1 for the 401(k) itself, which was the effect of the increased match to 70%, plus the higher cap, plus the reset to zero was worth about $288,000. So part of that will start to decline over the course of the year. I can't say exactly how quickly it will decline.

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Russ Colombo, Bank of Marin Bancorp - President & CEO [12]

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Let me add one thing, too. As you know, when you have 401(k) and you have -- now since we've increased the match, which is significant -- I mean, increased the percentage -- significant because our employees then -- it's a real employee benefit to get their match easier. And so those that are deferring a bigger percentage of their salaries, they are going to hit their cap faster and so a lot of our 401(k) match will be frontloaded.

So while it's not all in the first quarter, from the first quarter to second to third it will decline significantly. And that $288,000 is that number from the first quarter -- from the fourth quarter.

So it's hard to actually break down the number exactly, but since we pay bonuses in the first quarter, in the bonus number we take the deferred amount that the employee defers for the 401(k). And so that is in there at an elevated level because it's a bonus and so you get a bigger number that first quarter. I don't expect that number to be even close to that $288,000 in the second quarter.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [13]

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That's very helpful, thank you. Maybe the last piece of that would just be what have you incurred from any of the branch and office initiatives that are baked in or will we see a pickup in the coming quarters related to that piece?

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Russ Colombo, Bank of Marin Bancorp - President & CEO [14]

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We actually haven't; there's nothing yet because we just signed a lease for up in Healdsburg. We have identified employees to be moving, but they are internal so there's really no costs yet. You will start seeing -- we wanted to make sure you understood that we are doing this. You will see those numbers beginning in the second quarter and then fully baked in the third is really the expectation.

And we are out there looking for people, particularly for -- not only for the branch in Healdsburg, but the commercial banking office over in the East Bay. But there's really nothing in these numbers that reflect any dollars for that.

That being said, we have had significant increases in salary because of the hirings we've done in our Oakland office. And in Santa Rosa, if you are comparing first quarter last year to first quarter this year, we completed our hiring of our team up there, three people that we brought in over the last year, in Santa Rosa. Then we've also hired people in our business banking unit which is here in Novato, which is a small business lending unit; we've filled vacancies.

So we had a fair number of vacancies and, frankly, we have been filling the pipeline with people, which is great; it's the good news. The bad news is it takes time for people to produce and so you bring these people in and it takes a while before they are bringing in and growing our loan portfolio.

So it is what it is, I suppose. You have the expense in that first quarter. You don't necessarily have the resulting revenues that will come from that, from the hiring of those people.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [15]

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Got it. And then the tenants in common, could you remind us the total size of that portfolio as it stands today and maybe how large? It sounds like some positive comments in the release, but how large could that piece be or if you have even range bound it at this point?

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Russ Colombo, Bank of Marin Bancorp - President & CEO [16]

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Sure. The TIC portfolio I think it's somewhere in the $50-million range, but let me give you the exact number on that. It's actually $61 million in TICs. We had some growth in that.

It is certainly -- the TIC is a reflection of the very difficult housing market in San Francisco. In our 12 years in the business we have never had a default and there aren't that many lenders that actually make fractional interest loans for these TICs in the city. We had some nice growth in that over this quarter, I think it was $6 million or $7 million. $9 million, I'm sorry, $9 million in the quarter of new TIC loans.

And as you can imagine in San Francisco, the price of housing that's probably not that many units, but it has been a great ad for us. And because we don't have a lot of competition for that, we have some pretty good returns out of that portfolio.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [17]

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Great, and maybe one last one for Tani. Just the tax rate; would we expect that to pop back up in the remaining three quarters of the year?

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [18]

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Obviously, the dollar amount of taxes was lower because of the lower earnings in the quarter. We also -- so there are a couple moving parts there. We also had the implementation of the new accounting rules for excess tax benefits on stock-based comp and that lowered the tax by about $133,000 for the quarter. And also, we just have a higher balance of tax advantaged loans and securities on the balance sheet, so those are going to remain in effect.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [19]

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Okay. So tax rate similar to or -- I guess in a more higher profitable quarter we could see a potential lift in that number?

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [20]

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Yes.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [21]

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And then the stock-based impact; is that oversized or outsized in Q1?

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [22]

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Yes. On that one, that's just a change of moving from booking it to the equity versus moving it to the tax provision.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [23]

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I guess some others have suggested that Q1 is maybe, in this change, has been maybe a little more sizable in Q1 relative to --

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [24]

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Because of the accumulated impact, yes. I think I will get back to you on that one, because I don't know the piece of that that's cumulative versus the quarterly impact.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [25]

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Okay, thanks. I will step back. Thanks for the commentary.

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Operator [26]

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We have no further phone questions at this time.

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [27]

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We have a question from the web from the online participants. The question is: Please discuss the interest rate sensitivity of the asset side of the balance sheet. Given 49% BDAs, I would've expected some meaningful margin expansion.

So we -- remember that there was a significant impact of acquired loan accretion decline, which impacted the margin in the quarter. So if you look at the fourth quarter or the first quarter of 2016, those two quarters had a fair amount of accretion and you can see the exact amounts in the press release.

If you take those out, we actually did have a bump in our margin. We had, in fact, a flat loan yield and an improving securities portfolio yield, which resulted in a net increase if you remove the effect of the accretion.

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Russ Colombo, Bank of Marin Bancorp - President & CEO [28]

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We also had another question that came in and the question was: What is your expectation for deposit growth in 2017 following the strong growth in Q1?

As we have the pipeline in the commercial banking side, we also have the very strong pipeline and sales process in our retail side for our deposit growth. The pipeline currently is very strong. The expectations are that we will continue to grow similar -- at a similar level.

Look, the deposit is very -- it's more difficult than the loan pipeline to predict, because when you have a financing opportunity, there is a need and it gets done because of that need. To actually move deposit balances from one bank to another sometimes takes a lot longer than we would have anticipated, but we are pretty excited about the opportunities that we have.

As you saw, our demand deposit growth continues to be very strong. Here now we are at close to 50% and that, to me, is an indication that we are building relationships as opposed to money that's just flowing in because of the rate, although it really never has with us. But it's really relationship based.

We are seeing some really outstanding deposit opportunities up in Santa Rosa and also in the East Bay. Pretty excited about that because historically our deposit growth has been fueled for a big part out of Marin, but now we are starting to see very strong opportunities in different markets. And so, as we look forward, that is a real positive side.

Okay. If there are no more questions, I would like to thank everyone again for listening this morning and we look forward to talking to you again next quarter. Thank you very much.

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Tani Girton, Bank of Marin Bancorp - EVP & CFO [29]

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Thank you.

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Operator [30]

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