Bank of Marin Bancorp (BMRC) Q4 2019 Earnings Report, Transcript and Summary

Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Fourth Quarter and Year Ended December 31, 2019. I am Andrea Henderson, Director of Marketing for Bank of Marin. [Operator Instructions] As a reminder, this conference is being recorded on January 27, 2020. 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 as we know as of today, January 27, 2020 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 would like to turn the call over to Russ Colombo.

Thank you, Andrea. Good morning. Welcome to the call. Bank of Marin’s full year 2019 results reflect a successful execution of our proven relationship banking model. We continued to deliver consistent loan growth of low-cost deposit base and exceptional credit quality. Let’s start with our 2019 highlights. Net income for the full year was a record $34.2 million which represented a return on assets of 1.34% and return on equity of 10.49%. Diluted earnings per share were $2.48 up 6.4%. We grew our loans by $79.4 million or 4.5% based on a record year of originations with contributions across our footprint. Deposits grew $161.7 million for the year to $2.3 billion. Non-interest bearing deposits increased $62.8 million in 2019 and comprise 48% percent of total deposits at year-end. For the year, our cost of deposits remained very low at 20 basis points. Non-accrual loans represented just point 0.01% of total loans at year end, reflecting our unwavering focus on credit quality. In 2019, we successfully executed on the organic growth initiatives that we discussed at the start of the year. We opened a new loan production office in Walnut Creek and strengthened our presence in San Francisco by bringing in well-established commercial banking lenders. We made significant progress in staffing across our markets that should position as well for continued loan growth and market share gains in 2020. With favorable outlook on top of our strong 2019 performance, our Board of Directors declared a cash dividend of $0.23 per share on January 24, 2020, an increase of $0.02 per share. This represents the 59th consecutive quarterly dividend paid by Bank of Marin Bank board. Our $25 million stock repurchase program expires February 28, 2020. We repurchased 42,349 shares totaling $1.9 million in the fourth quarter and 356,000 shares totaling $15 million over the year 2019. With the current share repurchase programs nearing expiration, Bancorp’s Board of Directors approved a new repurchase program on January 24th of up to $25 million of Bancorp’s common stock. The new program will expire February 28, 2022. Now let me turn it over to Tani for additional insight on our financial results.

Thank you, Russ. Good morning everyone. As Russ stated we built solid momentum through 2019 producing net income of $34.2 million for the year. This marks a 5% increase over 2018 and continued Bank of Marin’s long-term upward earnings trend. Over the past five years, we've produced an average earnings growth rate of more than 10% due to the successful execution of our two-pronged growth strategy. First and foremost, is consistent organic growth. We amplify that growth by effectively integrating and building on strategic acquisitions as we have done with the Charter Oak Bank, Bank of Alameda and Bank of Napa Acquisitions. Year-over-year net interest income grew $4.2 million or 4.5% driven by higher loan balances and yields. The impact of higher interest-bearing deposit balances and rates was mitigated by the early redemption of subordinated debt in 2018. Non-interest income declined $1 million from 2018, which included a $956,000 gain on the sale of Visa Class B shares and higher fees on deposits sold to third party networks in 2018. In 2019, a $562,000 payment on bank-owned life Insurance policies was partially offset by expenses on new policies purchased. Notably non-interest expense of $58 million was down from 2018. While salaries increased 7.5% year-over-year primarily driven by hiring for commercial banking offices, our data processing, professional services and health insurance costs, declined due to the renegotiation of contracts. There were no acquisition related expenses in 2019 and FDIC insurance premium payments were not required in the last two quarters of the year as the deposit insurance fund exceeded its billing threshold. The full year 2019 efficiency ratio of 55.3% declined from 57.3% in 2018 demonstrating our commitment to careful expense management that is balanced with strategic investments in talent and technology. Now turning to our fourth quarter results. Net income was $9.1 million in the quarter compared to $9.4 million in the third quarter. There were three events in the third quarter that led to higher net income, a $388,000 interest recovery on a land development loan, a $562,000 benefit on bank-owned life insurance and a $327,000 tax adjustment related to the true up of our deferred tax liability. Diluted earnings per share were $0.66 in the fourth quarter compared to $0.69 in both the prior quarter and the same quarter a year ago, after adjusting for the November 27, 2018 stock split. Our return on assets was 1.37% and return on equity was 10.75%. Net interest income was fairly stable quarter-over-quarter as growing loan balances mostly offset declines in yields related to Federal Reserve interest rate reductions and the third quarter interest recovery. In line with strong loan growth, we recorded a $500,000 loan loss provision in the fourth quarter compared to $400,000 in the third quarter of 2019 and no provision in the fourth quarter of 2018. Non-interest expense of $13.3 million in the fourth quarter of 2019 was down from $14.2 million in the prior quarter and $13.7 million in the same quarter a year ago. The declines from the third quarter was mostly due to an incentive bonus adjustment and higher deferred loan origination costs related to a higher volume of new loans. Most of the decline from the fourth quarter of 2018 was due to lower data processing costs and the absence of FDIC insurance premium payments. Disciplined expense control enabled the bank to reduce its efficiency ratio to 50.8% in the fourth quarter of 2019, from 52.8% in the prior quarter and 51.3% in the fourth quarter last year. I'd now like to discuss the new accounting standard related to credit losses, commonly known as CECL. This went into effect on January 1, 2020 and had no impact on our 2019 results. Our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default. Parallel testing occurred throughout 2019 and we estimate that our implementation of CECL will result in an increase of 5% to 15% of our December 31, 2019 allowance for loan losses, which will reduce retained earnings net of tax. In closing, we are very pleased with our 2019 results and all of the work accomplished during the year that positions our teams to build off this great success as we move forward in 2020. Share some closing comments.

Thank you Tani. The bank celebrated its 30th anniversary on January 23. We're very proud of the progress we've made and the success we've had over the last three decades. We have built one of the strongest and lowest cost deposit franchises in the country with close to 50% of funds in demand deposit accounts. That's a result of a true commitment to our relationship banking model. Our focus on sound underwriting and comprehensive understanding of our clients and markets produces a high-quality loan portfolio with industry leading credit metrics, rarely having to deal with problem loans allows us to focus on attracting and serving customers. Our steady and safe loan growth paired with our low-cost deposit base drives continued growth in the earnings per share. With an efficiency ratio at 55.3% for the year it's clear that we manage expenses exceptionally well. We spend wisely, when it can help us provide more services to our customers and grow our market share. This is evidenced by the recent hires I noted in Walnut Creek in San Francisco. We are always mindful of expenses. For example, we review all contracts and leases upon renewal and often find opportunities to drive efficiencies and reduce costs. Looking ahead, we believe we are well positioned for growth in 2020. We serve one of the most economically vibrant regions in the country. We have a strong technology sector as a foundation and the Bay Area is growing and economically diverse. Unemployment across our markets is very low. Here in Marin County, it's just about 2% which is basically full employment. This drive on-going economic activity and opportunities for loan growth. There is substantial momentum confusing for local businesses and for the bank. And we are confident, we can further -- we can further build on this in 2020. We also feel we are well positioned to grow our presence in our existing markets, and to consider expansion into new markets with de-novo offices or acquisitions. Our consistently strong performance coupled with our proven history give us a strong position to acquire other community banks. While acquisitions are a very important part of our long-term strategy, we take a disciplined and selective approach to evaluating opportunities. All-in-all, I am very excited about the future of this bank in 2020 and across the next 30 years. Thank you for your time this morning. And now we'll open it up to answer your questions.

Thank you. [Operator Instructions] Our first question is from the line of Jeff Rulis with D.A. Davidson. Please go ahead, your line is open.

Hi. Good morning.

Morning, Jeff.

Morning.

The first one is on expenses and I guess we had a year-over-year decline. Tani, kind of outlined a bunch of the some of the levers to pull, you had some contract negotiations. Obviously, the FDIC expense line item and a true up on the salaries in the fourth quarter, so declined year-over-year moderately. I guess expectations as you invest in the business for 20. First question is, the expectations for broader expenses in 20. And then Tani, if you could provide detail on the FDIC expense early part of the year before you expect to normalize those going forward? Thanks.

Sure. Just to clarify, I think you mentioned a true up on salaries. It wasn't really a true up on salaries, we just brought in some new hires in our commercial banking area, which is what drove our salary lines up a little bit. And in terms of going forward, I think we continue to look at any contracts that come up for renegotiation to the extent that we had vacancies in 2019. A lot of those vacancies has been filled. And so if we have a lower vacancy rate in 2019, I mean, in 2020 than we did in 2019 plus with our new hires, you could see a lift in salary expense. Again, that's consistent with the fourth quarter level. And then finally on the FDIC premium. As long as that, the insurance fund remains above its threshold, we won't have to pay those insurance premiums and it has been trending up. So our expectation is that it is likely that at least for the first quarter or two we may not have to pay that. But there is no telling, because there are lot of bank results that go into producing that number and if something happens then obviously, all bets are off. So, but we have had two quarters and we do notice that the insurance fund is increasing in value. So that -- if that trend continues then we will probably continue to get relief.

Okay. Tani, if I get this circle back then on the comp line that really does seem to be kind of -- it was pretty front-end loaded in 2019, I assume on hires and as that sort of transition lower throughout the year. So, if I read you right, I mean, you'll continue to invest in finding new folks, but is there -- I mean, we're kind of a 1.5 million range on that salaries and benefits. Is there a quarterly number that you think you have in maybe 4Q, does that seem artificially low at [7.8] [ph]? Any further color there?

No. I don't think so, because we actually -- our staffing levels were pretty good in the fourth quarter. And what happened in 2003 is that we had severance payment and that bumps salaries up in the third quarter.

Okay. And last one is just a question broader on growth, 4.5% loan growth, 7.5% roughly on deposits. Looking at pay off activity in the overall environment, Russ sounds like you're pretty positive on origination activity. Just thoughts on 2020 in general is that anything that could be changing and what you're hearing out in the market from a demand side?

No. It's pretty consistent. And the good news for us is that we have staffed up these offices and we're really pretty much full employment. I think we maybe have one opening in all of commercial banking right now, which is fantastic, and that -- when you hire there's a little bit of lag period, but you should see better -- greater production going forward. We had great production in 2019 and I'm very confident about 2020. One of the things I just wanted to mention, to the salaries in the -- you said that salaries -- you thought the salaries are front loaded. They were more back loaded frankly, because we hired a lot of those peoples kind of near the end of the year. And the fourth quarter typically we have an accrual of bonuses that goes on through the year. And if we think we're going to over accrued then we do reverse them. So there were some accrual reversal in the fourth quarter which happens very year. So, that fourth quarter is kind of weird number, probably, we got most of the salaries, but it does have an accrual reversal in them [Indiscernible]. But to tell you what, as I look forward to the next year, I feel pretty good about the opportunities for growth in commercial banking.

Okay. Thank you.

Thank you. We do have another question from the line of Matthew Clark with Piper Sandler. Please go ahead. Your line is open.

Hi. Good morning.

Good morning.

On the comp line can you maybe quantify how much the lower accrual was? And how FAS 91 impacted that $7.8 million?

FAS 91, I'll have to dig a little bit, for the bonus accrual was about $500,000 reduction.

Okay. And then on the pipeline can you speak to how that pipeline looks going into 1Q here, maybe year-over-year. Just give us a sense for how that may have changed?

There is two components to that. There's a existing staff and then there's the people we just brought in. So, we feel pretty good about it. We are -- obviously when you have a really good fourth quarter, a lot of the work that you've been doing during the year translates into business, and so then you do have a reduction in your pipeline first quarter. And so, it takes time to build that backup. So while I don't think it’s a big impact It’s probably off a little bit just because we booked everything that we're working on. So that being said, I'm very confident about the people that we have. And now with our -- we staffed up San Francisco and Santa Rosa and Walnut Greek. And so I feel pretty good about the opportunities for growth of our commercial loan portfolio.

Okay. And then on loan yield, they were down a little bit here. I know part of that was from the recovery, so difficult comparison relative to the third quarter, but still even adjusting to that there was still some pressure. Can you give us a sense for where kind of new money yields are coming on the books and what might be running of in terms of yield?

Yes. Okay. So the new -- kind of the new loans that are coming on around the average -- on these new loans is about 4.3%, whereas the existing portfolio is probably at 4.8%, 4.9%. So you're seeing definitely a lots of pressure coming down on the loan yields. That being said, I think you'll see that across the industry.

Okay. And then just any update on M&A in terms of conversations or opportunities out there for you?

We keep talking to people. The key problem is as we always say, bank are sold they are bought. There's not a lot of banks left in the Bay Area. So, as I mentioned I think in my comments, we're looking at not only necessarily M&A in the Bay Area, but we might look at contiguous markets. There's nothing new to this part at this point. My job is to talk to other banks and I continue talking, but nothing new at this point.

Okay. Thank you.

Matthew, this is Tani. I dug out the deferred loan origination cost for the fourth quarter that was roughly $900,000 and that was up about a $100,000 from the third quarter.

Great. Thanks.

Thank you. [Operator Instructions] Our next question is from the line of Jackie Bohlen with KBW. Please go ahead. Your line is open.

Hi. good morning.

Good morning, Jackie.

I would be remiss if I didn't started off with a compensation question. Just one quick one. So I have in my note that payroll taxes usual -- and other seasonal items usually increase compensation by about $1 million between 4Q and 1Q. Is that still the run rate you're expecting?

It might be a little bit higher just given the higher level of salaries in general, but I think that we do get a pretty big bump in payroll taxes as well as in 401(k) match in the first quarter. So those expenses will go up.

Okay. Thank you. And then, you've talked new contiguous markets from both the de novo and an M&A perspective. And I have kind of a two pronged question here. First off, why would you can consider to be a activity contiguous market? And secondly, if M&A doesn't happen in that way, would you look to de novo in those markets?

So, the contiguous markets, certainly we're not in the South Bay. We're not really other than --we're not any farther South in Oakland, in Alameda and the East Bay, so there is markets there we're really not -- I mean, on the Peninsula we have --and off San Francisco we have nothing from San Francisco South. So there's a number of contiguous markets for you that we would consider if something came up for either M&A or for de novo offices. If we know -- if there's not M&A then we will continue on the growth of just organic growth and we've been able to see good -- we've been able attract good people in all of our market and that would translate into business. And if we don't buy anything then we're doing just fine and we're showing nice loan growth and we're almost 5% in the loan side, 7% on deposit side. Those are good numbers. And given the market I think that -- and our margins, while they're down little bit still continue to be good. I'm pretty confident about the future regardless of whether we have M&A or not.

Okay. And given the high quality of your brand, do you get bankers or teams of bankers from some of the markets you're looking at that inquire about coming to work for you?

I'm not sure that people are just calling us to come work for us. Its more of an outreach. We have a program where we have identified in all of our markets. It's really quite of the branch managers jobs as well as regional manager and the commercial banking side's job to identify the top markets and their top bankers in their markets. And so just like having the loan portfolio we have a banker pipeline. And so we know, our job is to get to know those people and if there are opportunities then we know who to reach out to. And that's -- when you have a need, its better to be able to go to those people directly and that you've identified as good as oppose to calling up a search firm to help us. So that's a strategic initiative we have just to make sure we know all the top bankers in every market we do business.

Okay. That's helpful. Thank you. And then just one last one for me. You had really strong origination volume in the quarter and it accelerated throughout the year most notably in the second half. Is that timing driven or market driven? Is it part of -- you have the new hirers you invested in at Walnut Creek in San Francisco. How would you characterize that?

Sure. Our board will say, its bonus driven, but I won't say that. Its just all over the map. I mean, I think that there is a push certainly by lenders as you get close to the end of the year to meet their goals, to meet their targets. And as you get later in the year they -- push, gets harder and they really push hard. So that being said, I think there's a lot of activity -- since there's a lot of activity in the fourth quarter it tense to fall off a bit early in the year and then it picks up again as you get later in to the spring and to the summer and then certainly near the end of year. So, that's a -- it’s a pattern that has existed for a number of years here. This is not unusual and we keep thinking, well, it would be great if we could frontload more of that, it just doesn't happen that way and its -- I think that pattern will probably continue this year. I mean, we had slow originations early in the year. But as you say, it picked up in summer and then really picked up at the end of the year.

Okay. All right. Thank you. That's all I had.

Okay. Thanks.

Thank you. And I'm showing no further questions on the phone lines.

Okay. If there's no other question, I want to thank everyone for joining us this morning and we will look forward to talking with you again next quarter. Thank you.

Thank you.