Bank Of Marin Bancorp (BMRC) Q2 2019 Earnings Call Transcript

BMRC earnings call for the period ending June 30, 2019.

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Bank Of Marin Bancorp (NASDAQ:BMRC)
Q2 2019 Earnings Call
Jul 22, 2019, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Andrea Henderson -- Director of Marketing

Good morning, and thank you for joining Bank of Marin Bancorp's Earnings Call for the Second Quarter Ended June 30, 2019. I'm Andrea Henderson, Director of Marketing for Bank of Marin. [Operator Instructions] As a reminder, this conference is being recorded on July 22, 2019.

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, July 22, 2019, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statement. 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.

Russell A. Colombo -- President and Chief Executive Officer

Thank you, Andrea. Good morning, and welcome to the call. Our strong results this quarter, once again, demonstrates the power of combining consistent credit and expense management with a focus on relationship banking. The Bay Area economy remains solid with robust levels of new business investment, hiring and overall activity. This is fueling steady loan demand throughout our market. Bank of Marin's commitment to disciplined underwriting enables us to meet that demand by maintaining on frisky [Phonetic] credit quality.

Now, let me walk you through some of the financial highlights for the second quarter. We reported net income of $8.2 million, up from $7.5 million in the first quarter and $7.9 million in the second quarter of 2018. Diluted earnings per share was $0.60 in the second quarter of 2019, compared to $0.54 last quarter and $0.56 in the same quarter a year ago.

Loans increased to $1.76 billion at June 30, 2019, from $1.72 billion at June 30, 2018. While balances decreased slightly from $1.77 billion as of March 31, 2019, we are seeing a lot of loan activity across our market and the timing of new loans is hard to predict. Additionally, balances were impacted by the successful completion of a large construction project. We remain disciplined in our deposit strategy, serving our customers needs and providing them a fair return.

Non-interest-bearing deposits totaled 50% of total deposits at June 30th, representing one of the strongest deposit franchises among our peers.

The cost of deposits increased to 20 basis points in the second quarter of 2019 compared to 18 basis points in the first quarter. Total deposits were down $76.6 million in the second quarter to $2.1 billion, primarily due to normal cash fluctuations of our large business customers. Additionally, we sold $16.1 million through deposit network, which enables the bank to provide our customers with higher yielding deposit offering.

Strong credit quality remains one of the cornerstones of our consistent performance. Non-accrual loans represented only 0.03% of the bank's loan portfolio at June 30, 2019, and there are no provisions for loan losses in the quarter.

Recognizing the bank's continued solid performance, our Board of Directors declared a $0.02 increase in the cash dividend to $0.21 per share, payable on August 9, 2019. This represents a 10% increase and a 35% payout ratio.

In addition, the Board approved the extension of our $25 million share repurchase program to February 2020.

The bank is also executing on two significant initiatives to align with technology trends impacting the financial services industry. First, on June 17th, we began the transition to a new digital banking platform that offers an enhanced features and functionality. Our local teams are working closely with our customers to make this transition as soon as possible.

Second, after evaluating customer needs, market size and reduced foot traffic, we have decided to close our Petaluma Downtown Branch in August. The majority of Downtown customers have already moved much of their business for our remaining -- two remaining Petaluma branches.

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

Tani Girton -- Executive Vice President and Chief Financial Officer

Thank you, Russ. Good morning. As Russ said, we delivered another quarter of strong performance with earnings of $8.2 million. Earnings increased $756,000 over the first quarter, which included the typical seasonality of higher personnel costs, as well as the underwriting costs of new bank-owned life insurance policy or BOLI.

Second quarter and year-to-date earnings reflect steady growth over 2018 as a result of loan growth, higher interest rates and expense control. Net interest income of $23.8 million was virtually flat versus the first quarter, and the tax equivalent net interest margin increased 2 basis points to 4.04%, thanks to our higher percentage of loans in the earning asset mix.

Comparing to 2018, net interest income increased $947,000 over the second quarter and $2.9 million over the first half as earning asset balances and yields increase with smaller increases in the cost of funding.

The 2019 tax equivalent net interest margin increased 12 and 14 basis points from the respective quarterly and semi-annual periods in 2018 for the same reasons.

Non-interest income of $2.3 million in the second quarter of 2019 compared to $1.8 million in the prior quarter and $2.2 million in the same quarter a year ago. The increase of $503,000 from the prior quarter was primarily due to $283,000 in BOLI underwriting costs expensed in the first quarter and gains from the sale of investment securities in the second quarter. The BOLI costs and lower deposit network income in 2019 drove $435,000 decline in year-to-date non-interest income versus 2018.

Non-interest expense of $14.9 million in the second quarter decreased $612,000 from the first quarter as salary and benefit costs fell from higher levels typical in the first part of the year. Additionally, the first quarter included a $129,000 provision for losses on off-balance sheet commitments. The increase in non-interest expense from the second quarter of 2018 was primarily related to annual merit increases and additional personnel, partially offset by $268,000 less in professional fees, mostly attributable to our core processing contract renegotiation in 2018. Year-to-date, total non-interest expense was down slightly from 2018 as higher salaries and benefits were more than offset by the absence of conversion costs from the Bank of Napa acquisition and core processor contract renegotiation fees.

In the second quarter, the bank delivered an efficiency ratio of 57.23%, a return on assets of 1.32%, and return on equity of 10.26%.

Our investment in the future starts with our people. The bank's consistent performance is a testament to their ability to serve our customers and execute on strategic priorities, while delivering solid results for shareholders.

Now, Russ would like to share some closing comments.

Russell A. Colombo -- President and Chief Executive Officer

Thank you, Tani. We have successfully executed on our organic growth strategy as reflected by our performance in the second quarter. Our strong results led the Board to declare a $0.02 increase in the cash dividend, our 57th consecutive quarterly dividend, to deliver additional value to our shareholders.

With non-interest bearing at or near -- deposit at or near 50% for the sixth straight quarter, the bank is a leader in the industry. Looking ahead, with our focus on investing in the key -- in talent in key markets like San Francisco, Santa Rosa, and Walnut Creek, and our ongoing work to develop future leaders through our commercial banking academy, we're confident we have the right people in place to respond to the steady loan demand we're seeing and meet our customers' needs.

Overall, we remain optimistic about operating condition. Our experience in multiple credit cycles reminds us that it is always prudent to be prepared for potential shifts in the economy that could affect our clients, but we do not see any notable signs of weakness in our market and we believe that the bank is well positioned for a strong second half of 2019.

Thank you 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:

Operator

Thank you. [Operator Instructions] Our first question comes from Luke Wooten of KBW. Please go ahead.

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Good morning.

Russell A. Colombo -- President and Chief Executive Officer

Good morning.

Tani Girton -- Executive Vice President and Chief Financial Officer

Good morning.

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

I just wanted to start on loan growth. I saw that you guys had the construction payoff this quarter. How do you guys feel about that market going forward for the rest of 2019?

Russell A. Colombo -- President and Chief Executive Officer

Just the construction market?

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah, just the construction loan. Do you feel a softening in construction loan market or do you feel that that was kind of one-time in nature types or portfolios?

Russell A. Colombo -- President and Chief Executive Officer

That was paid off because they completed the project and they got long-term insurance company financing.

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay.

Russell A. Colombo -- President and Chief Executive Officer

So we continue to see a lot of activity in the construction market, and we have some real good projects that we're looking at. But it's kind of the problem. But construction activity, you have a build up imbalances over time and then 18 to 24 months after they typically get refinanced down into some kind of longer term financing and get paid off. And so that was just one project, a pretty large project for us that completed and it's completed and refinanced out and so we got paid off, but -- which is fine, that's actually the way it's supposed to work.

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. It's a good problem to have. And just kind of switching over to the expense side for a second. Just on the new digital platform, just kind of wanted to see how that's kind of trending and how we should look at expenses for that going forward for the rest of the year?

Tani Girton -- Executive Vice President and Chief Financial Officer

Yes. So we expect a reduction of approximately $295,000 per quarter, beginning in Q3, as we're no longer running the two digital platforms in parallel. The new platform replaces six different solutions with a single solution, supporting both consumers and businesses, and that's providing more intuitive interface for the customers and also, in the future, will allow us quicker time to market on new functionality in the future. So, hopefully, you'll see a decline starting this quarter and we're moving forward on the digital platform and I guess -- does that answer your question?

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. No, that's perfect. Thank you. That's super helpful. And then just kind of offsetting that. Well, actually, just on the Petaluma Branch closing, wish to see the full benefit of that in 4Q correct, that's closing in August?

Russell A. Colombo -- President and Chief Executive Officer

Well, we'll see the benefit of reduced staffing needs. However, the BOLI's [Phonetic] isn't good enough until early next year, February. So we still have lease payments that we make during that time.

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That's perfect. I'll step back. Thank you for your answers.

Operator

Thank you. Our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning.

Russell A. Colombo -- President and Chief Executive Officer

Good morning, Jeff.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Russ, you talked about the outlook for the second half of the year and the payoffs occur -- I guess, as you assess your growth potential and sometimes you can't really control the payoff portion, but kind of looking at loan growth for the year, you're flat year-to-date on balances. How do you think that shapes up in terms of a net growth perspective or maybe offer some insight if maybe not specific to that, but just kind of the puts and takes of the back half of the year?

Russell A. Colombo -- President and Chief Executive Officer

Yeah. The interesting answer for the pipeline right now is more than twice what it was at this time last year. We've seen really good opportunities in a number of markets, including East Bay, as in Santa Rosa, and San Francisco. So, -- in Napa -- and we completed our -- for the most part, we've completed our -- for the most part, we've completed most of the hiring for those offices, including we've got a couple of people on the role [Indecipherable] luxury hospital [Phonetic] of North America. So the benefit of that, it definitely takes time as new value [Phonetic] people, but we're definitely seeing a much more robust pipeline than we had a year ago. So how does that translate into numbers? I can't tell you that because sometimes these things take longer to get booked than others. But I'm feeling pretty good about the loan -- the loan portfolio and the opportunities for growth for the next six months.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Great. So pipeline is 2x year-over-year and you feel like the staffing is in place to capture any additional growth, so sounds like a probably good message, I suppose.

Russell A. Colombo -- President and Chief Executive Officer

It's definitely positive. I feel very good about our commercial banking off to zero [Phonetic]. They're all really -- the addition of some new people as well as the ones that have been here, we're starting to see -- we're seeing a lot of great activity.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

And then, maybe, one for Tani. Just on the margin, I think the bank's still asset-sensitive. And I looked at this quarter and if you strip out kind of the non-PCI accretion, actually suggested a stronger core margin, how do you see that kind of trending, particularly if we were to see a rate cut or two -- the balance of the year?

Tani Girton -- Executive Vice President and Chief Financial Officer

So, about half of our loan portfolio is fixed and half adjustable, but only about 13% is floating based on the prime rate. So what -- if rates change roughly about 20% of the portfolio, we'll reprice within a 12-month period. But one thing that I think will serve us well in light of the expectations that the fed might lower rates at the end of this month is that over the past year we've extended the durations on both the loan and investment portfolios moderately, and that should help our margin to holding well in a falling rate environment.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Got you. So it sounds like protecting that margin, despite the, I guess, the GAAP sensitivity, you think it's a pretty stable outlook all things being equal?

Tani Girton -- Executive Vice President and Chief Financial Officer

Well, of course, it's really tough to know, there's some debate as to whether the fed's going to go 25 or 50 basis points. And depending on how fast they move, there is a little bit of room on the deposit side, but the key to all of this is what happens to the longer end of the yield curve and whether -- if the yield curve steepens when the fed cuts rate, then that could have a positive impact on new loans coming onto the balance sheet. As of right now, the new loans that are coming onto the balance sheet continue to come down on average rates higher than the existing portfolio rates.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Great. Thank you. And then the -- just one last question on the branch closure, we talked about potential cost savings, but is there any exit disposals, kind of upfront costs on the closure of that, that you can [Speech Overlap]

Tani Girton -- Executive Vice President and Chief Financial Officer

There are some small numbers in terms of the accelerated depreciation and lease expense that we booked in the second quarter and little more in the third quarter, but they're really not material.

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Tim O'Brien, Sandler O'Neill + Partners. Please go ahead.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

Good morning.

Tani Girton -- Executive Vice President and Chief Financial Officer

Good morning.

Russell A. Colombo -- President and Chief Executive Officer

Good morning, Tim.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

All right. Tani, I'm going to ask you this again, because I didn't catch the numbers. You said the percentage of loans that repriced 12-month window was -- the floating rate that reprice, what was that percentage you gave?

Tani Girton -- Executive Vice President and Chief Financial Officer

The floating rate is 13%.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

Got that.

Tani Girton -- Executive Vice President and Chief Financial Officer

[Speech Overlap] adjustable rate. So when you add the overall [Phonetic] of maturities, adjustable rates and floaters, it's about 20% within 12 months.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

20% in 12 months. Great. And then you also gave a deposit number for deposits that moved off-balance sheet to like SEDARs [Phonetic] and other networks. What was the dollar amount that you gave?

Tani Girton -- Executive Vice President and Chief Financial Officer

$16 million increase from last quarter.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

$16 million increase. Okay, great. And then regarding the sizable payoff on a construction loan, was that a take [Phonetic] loan construction project?

Russell A. Colombo -- President and Chief Executive Officer

No. That was actually over the East Bay and it was a multi-family project on the East Bay.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

Got it. [Speech Overlap]

Russell A. Colombo -- President and Chief Executive Officer

[Speech Overlap]

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

So, what's sizable for you? What was the payoff on that, Russ?

I don't have any, at the moment.

Do you have any other projects that are pending completion here in the second half that are on-track and on-schedule to complete that [Speech Overlap] payoffs, that should hit payoffs?

Russell A. Colombo -- President and Chief Executive Officer

Well, we have projects coming through all the time. Nothing is that big. So while things may payoff, they're not -- that was kind of a largely on that -- relatively from the portfolio perspective, there's a large loan that's paid off had an impact. But I don't see anything -- I mean, that might kind of an effect on the payoffs and effect of that.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

And then last question, CECL PODs plans in light of the FASB ruling this week for you guys?

Tani Girton -- Executive Vice President and Chief Financial Officer

Yeah. Well, that ruling won't impact us. We're in great shape on our CECL preparation. So, our system is in place. We've been collecting data for several years now and we're running parallel now and we'll be through the end of the year.

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

Great. Thanks for answering my questions.

Russell A. Colombo -- President and Chief Executive Officer

Thanks, Tim.

Operator

[Operator Instructions] Our next question comes from Matthew Clark, Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray Companies -- Analyst

Hi. Good morning.

Russell A. Colombo -- President and Chief Executive Officer

Good morning.

Tani Girton -- Executive Vice President and Chief Financial Officer

Good morning.

Matthew Clark -- Piper Jaffray Companies -- Analyst

On expenses, Tani, you quantified the lease you expected on these systems from running dual systems. Can you help us also with the savings you expect from the branch closure when that lease is up next year?

Tani Girton -- Executive Vice President and Chief Financial Officer

I don't have those numbers exactly and I can come back to all of you after the call with that.

Matthew Clark -- Piper Jaffray Companies -- Analyst

Okay. And then just thinking through what rates have done here in short order, can you give us a sense for the asset side of things and what you're seeing in terms of new securities? What you might be buying and the rates at which you're getting? And then same thing on new business within the loan portfolio. I know you said it was above the current portfolio, but just wanted to get a better sense for the rate.

Tani Girton -- Executive Vice President and Chief Financial Officer

So we've actually been selling securities out of the securities portfolio to bolster our cash position as some of our deposits went off-balance sheet to the deposit networks and also just to accommodate the large fluctuations in cash balances that come from some of our large customers on cash flows. So, we haven't been purchasing a lot recently, we've been more selling. But earlier in the year and when rates were higher, we were actually -- as I said, we did some lengthening and we purchased some agency securities that had a little bit longer duration tie to commercial projects. And so those have yield maintenance provisions that help to keep the rates high on the investment portfolio for a longer period of time.

Matthew Clark -- Piper Jaffray Companies -- Analyst

Okay. And then just on the lending side of things. You're slightly above the portfolio, is that the sense there or...

Tani Girton -- Executive Vice President and Chief Financial Officer

So, yeah. There's no real change in our loan pricing trends. But as I said before, the new loans that we're actually seeing coming into the portfolio on average are at a higher rate than the existing portfolio rate.

Matthew Clark -- Piper Jaffray Companies -- Analyst

Okay. And then just on capital, Russ, you guys have been pretty proactive with the dividend and share repurchase. Can you update us on M&A prospects these days and what you're seeing, if anything?

Russell A. Colombo -- President and Chief Executive Officer

In the Bay Area, we've been pretty clear about our desires to be around the Bay Area. There's some activity that you see and you all know that the Heritage is buying Presidio and other than that, it's been pretty quiet in the market and we're still very interested in acquiring Bay. But if that doesn't happen, we remain focused on growing organically. You can't every time plan for an acquisition, it just -- they happen when they happen and banks are sold, they're not bought. So, we continue to keep our theories out there. But, right now, there's nothing going on for us. We're focused on the -- filling out our office, going through organic growth like last week and looking at the potential situations and ultimately in terms of organic growth.

Matthew Clark -- Piper Jaffray Companies -- Analyst

Great. Thank you.

Operator

We have no further questions via the phone lines. I'll turn the call back over to our speakers.

Russell A. Colombo -- President and Chief Executive Officer

Okay. I want to thank you all for attending -- for being on the call this morning. And then we all look forward to talking to you again next quarter. If you have any questions, however, you can certainly call either Tani or myself. Thank you so much.

Tani Girton -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Andrea Henderson -- Director of Marketing

Russell A. Colombo -- President and Chief Executive Officer

Tani Girton -- Executive Vice President and Chief Financial Officer

Luke Wooten -- Keefe, Bruyette & Woods, Inc. -- Analyst

Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst

Timothy O'Brien -- Sandler O'Neill + Partners -- Analyst

Matthew Clark -- Piper Jaffray Companies -- Analyst

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