Q3 2019 Earnings Call

At that time, if you have questions. Please press one followed by four on your telephone.

If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded on October 21 2019.

Joining us on the call today, our rest Colombo, President and CEO , and Tony Girton, Executive Vice President and Chief Financial Officer.

Our earnings press release, which we issued this morning can be found on our website at bank of Marine Dot Com, where this call is also being webcast.

Before we get started I want to emphasize the discussion on this call is based on information. We know as of today October 21, 2019 and may contain forward looking statements that involve risks and uncertainties actual results may differ materially from those set forth in such statements for discussion of fees.

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 breast and Tony will be available to answer your questions and now I'd like to turn the call over to rest Columbus.

Thank you Andrea.

Good morning, welcome to the goal.

By any measure our third quarter performance was once again excellent.

We produced strong deposit and loan growth, while maintaining exceptional credit quality.

These results demonstrate the success of our organic growth initiatives.

Our discipline in the way we operate.

The investments we've made in banking held our driving consistent loan growth in the key enhancing our reputation across the footprint.

Our business development activity is strong across our bay area markets Rins Sonova Napa, the East Bay in San Francisco.

And we have a strong pipeline of new opportunities to fuel continued growth.

Now I'll walk you through some of the highlights of the third quarter.

Net income was 9.4 million up from $8.2 million in the second quarter and 8.7 million in the third quarter of 2018.

Diluted earnings per share was 69 cents in the third quarter 2019, compared to 60 cents last quarter and 62 cents in the year ago quarter. After adjusting for the two for one stock split last November .

Loan originations increased to $77 million in the quarter from $53 million a year ago.

This drove $33 million $33.8 million, a loan growth for the quarter, resulting in total loans of $1.8 billion on September thirtyth.

The positive increase due increased $122.5 million in third quarter, primarily due to normal cash fluctuations in some of our large business accounts and total deposits were 2.22 billion at quarter end.

At September 30.

Not noninterest bearing deposits accounted for 50% of total deposits and our cost of deposits remained very low at only 21 basis points for the quarter.

We have been at or near these levels since the beginning of 2018.

Making our deposit franchise, one of the strongest among our peers.

Our credit quality remains excellent non accrual loans declined to only point euro 2% of the total loan portfolio at September Thirtyth, which was down one basis point from the prior quarter.

We recorded a 400000 dollar provision for loan losses in the quarter, which is in line with our loan growth.

Recognizing the banks continued solid performance our board of directors declared a cash dividend.

Of 21 cents per share payable on November eight 2019.

This represents a 30% payout ratio in a 2% dividend yield based on our September thirtyth.

2019 share price.

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

Thank you Wes.

Good morning.

As Ross mentioned bank and marine delivered another quarter and strong performance with earnings of $9.4 million.

Earnings increased 1.2 million or 15% over the second quarter of 2019, and 768000 over the third quarter of last year.

Year to date earnings of $25.2 million translate into a return on assets of 1.33% and return on equity of 10.4%.

In addition to solid loan and deposit growth there were two items that benefited net income in the third quarter.

One of 562000 bank owned life insurance or Beauly benefit.

And to a $327000 tax adjustment related to the true up of our deferred tax liability.

Taken together these items accounted for six cents per share of net income and without them return on assets and return on equity for the quarter would've been 1.35% and 10.28% respectively.

Net interest income of $24.2 million was up 362000 from last quarter and up 612000 from third quarter 2018.

The increase from last quarter was largely due to interest recovery on a land development loan.

This recovery combined with higher average loan balances and higher yields across interest, earning categories accounted for the year over year increase in net interest income and was only partially offset by higher rates on deposits.

The tax equivalent net interest margin of 4.04% was unchanged from the second quarter and up seven basis points from the euro those quarter.

The seven basis point increase over third quarter of last year as well as the 12 basis point year to date increase over 2018 were both due to higher interest rates and loan growth.

Noninterest income was $2.7 million, an increase of more than 400000 from both the second quarter 2019, and the third quarter 2018, the increase was due to the bully benefit I mentioned earlier.

Year to date noninterest income was up by a smaller amount due to the underwriting cost on new volley policies purchased earlier this year and lower deposit network income in 2019.

Non interest expense in the third quarter decreased by 716000 to 14.2 million from the second quarter, primarily due to severance paid in the second quarter and increased deferred costs associated with higher loan originations in the third quarter.

Importantly, we completed our transition to an enhanced digital platform in the third quarter. As a result, we're no longer absorbing the added cost that come from running to digital banking platforms in parallel.

In addition, last quarter's FDIC assessment was reversed in the third quarter since the insurance fund was above its required reserve ratio.

For the first nine months of the year noninterest expense was up less than $100000 from last year.

The modest increase coupled with revenue growth resulted in an efficiency ratio of 56.8%, which is a testament to our ongoing focus on expense control.

In conclusion, our strong operating fundamentals excellent credit quality steady balance sheet growth and prudent expense management should continue to position bank of marine for long term success.

Now rest, we'd like to share some closing comments.

Thank you Johnny.

We are optimistic about the bell to the year based on our strong performance in the third quarter would you direct reflection of our consistent business practices.

We are gaining traction in all of our key markets and are sick and our team has successfully winning new business.

We have an exceptionally strong base of low cost non interest bearing deposits that should allow us to deliver consistent performance in any interest rate environments.

We are disciplined in our underwriting and our focus will always be on building long term customer relationships based on service and market expertise.

Before I open up the call to questions I want to comment on my plans to retire.

As you May have seen we recently announced that our board of directors has engaged Korn ferry to conduct a search for my successor.

No date has been set for my retirement and I plan to continue to serve as CEO until my successor is appointed and in place.

It has been a privilege to lead bank of rent for more than 13 years, and I'm committed to making sure that we have a smooth and successful transition.

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

Thanks.

Thank you for like the rest of your question. Please press the one Paul maybe four on your telephone you will hear three contract not to request. A question has been answered about to retry registration. Please press the warm fall by the three what's going to Russia question on the phone. It's one for questions can also be submitted for you to webcast page by clicking the ask question Pat tightening.

Your question into the box that appears below the path.

Our first question comes the line of Jeff Rulis with D.A. Davidson. Please proceed.

Thanks, Good morning.

Turning Jeff question on the just the expense line seems like you've got some moving pieces in there I guess the first question would be can we expect anticipate any further.

Synergies or or.

From the systems transition.

I would assume also the FDIC reversals normalizes and the next quarter, but any thoughts on expense levels and ability to achieve any further synergies there.

So I think we've pretty much now gotten to steady state in terms of our conversion on the.

Technology front end, our core processing and digital platforms.

And so.

The third quarter expenses are indicative of the future on that line.

Of course are a lot of other expenses included in that data processing line, but besides the core processor and digital platform, but in general those synergies have all been recognized with regards to the FDIC assessment as long as the fund remains above that threshold.

We will not.

I have to pay those assessments, but we have to wait for them to measure each quarter.

Okay, Okay, so a manageable level and modest growth from here is.

Okay.

Estimates.

I think I heard what I think you said that grow just sort of normal growth from this point is that what you said.

Right yes.

Yes, I think that makes sense I mean, we don't we don't typically have a spike in the fourth quarter in expenses for any particular reason.

There's no projects or otherwise that would would indicate any increase.

<unk> expense levels no new teams that were hiring right now that will bump that so area the fourth quarter.

We expect it to be relatively normal from that resets.

Okay. Thanks, and then on the margin.

Hi.

Interest recovery.

I was trying to get maybe to our core number if you had.

What four four reported but what are the recovery added that I see the accretion tables have gone and maybe those have just been minimize that was just a basis point or two maybe a material, but was there any significant change sequentially on due to accretion.

No accretion actually we took the accretion table out of the release because both historically and currently.

There are not.

Persons are not meaningful and you side I'm guessing that the amount of the interest recovery was 388000 in the press release.

Right.

Basis points, I guess, we could calculate that but I just wanted to get good for a number.

Let me get back to you offline on that one Jeff I have that but.

Okay.

I'll step back thank you.

Thanks, Jeff.

The next question comes online Jackie Bohlen with KBW. Please proceed.

Hi, good morning, everyone.

Good morning Maggie.

Just looking to the deposit fluctuate then that fluctuations on I know that these can be volatile given the customers that you have at the bank, but whether any temporary balances and there is at all just normal seasonal fluctuations.

Are there any what ancillary balances.

I guess operating accounts are always temporaries right.

Because we have we have a number of large client large deposit or deposit clients, who you know their normal business that they have inflows of cash in outflows of cash and.

I'll give an example of the type of business.

We have a number of large.

Contractors to do a lot of music municipal state kind of work building roads, and so they'll bid on busy they'll bid on project.

If they win the project they get funded the money comes in to it there and as a as they can do the construction it kind of filters out until you have kind of money coming in and out at the same time from new projects that you really can't project or predict.

The reliability of those deposits when they come in that's just one example, and we have a lot of the like that so.

Sometimes you have these big upswing, sometimes you guys.

Downswings, but if you look over history, the deposit levels continue to grow.

Pretty consistently over time.

Okay. So nothing it's all very usual course of business nothing that you Ed.

Anticipate a specific outflow going forward just.

The business as it goes up.

Nothing unusual there will be outflows, but they're also will be inflows as we go.

Yes, yes under said.

And in terms of pricing and now that we've had.

Some of the rate types Ari.

I know that your deposit prices have been stable and have obviously performed very very well as rates have increased.

Just wondering if you if you've seen any sort of a change with the rate cuts than what you would anticipate going forward in terms of pricing on those.

Are you on the deposit side.

Mhm I'm talking about the deposit side or the those on the side the deposit side.

Okay, I assume the deposit side.

Actually we still see.

Certain banks, who maybe don't has as.

Strong of a deposit bases us offering pretty high interest rates kind of counter too.

The drop in rates because.

There is still have infinite portfolio. So.

We haven't seen that much of kind of backing off it's just kind of the usual suspects sewer, we're providing the high interest rates we.

We are pretty flush, though so we don't we don't have to compete we try to we like we always say, we try to be fair or good clients and we will pay.

Competitive interest rates too good clients, but we don't chase deposits with rates.

On the on the other side of the leisure.

If you were going to follow through to that on the on the loan side. There is incredible pressure from all from all sides on interest rates on particularly in longer term financings, you're seeing rates under 4% for 10 years.

Pretty consistently across the board from for many many banks. So it's hard you have to.

Pick and choose your new battlefield so to speak.

Okay and that yes, I was asking about the deposits and what's going to follow up unless I apologize if I had flat with having some issues.

So low.

Can you hear me.

The vehicles anyone seeking we can't hear anyone on the call linear thank.

Yes, Miss or are you able to hear this will be operator, Jackie bohlen here, meaning are you.

Yes, I'd Jackie I hear you now.

Okay.

Sorry, I'm not I might be having technical difficulty with all of the Bakken figure that out thank you Rob.

Thanks Jackie.

Okay.

Your next question comes on it Tim Obrien with Sandler O'neill and partners. Please proceed.

Good morning, Ross and Tony can you hear me.

Good area, if I will tell thank you how that's great.

Glad.

Just a follow up a little bit more on the color you provided on.

Loan pricing.

Did you guys.

Make accommodations on the pricing front in order to help support loan growth this quarter and if so could you give a little bit of color on what you might have done there and.

That'd be great.

No we havent, if you're asking did we do very low interest rates to try and drive loan growth. The answer is no and do we compete with on good customers.

From time to time on.

More aggressive rate sure from time to time, but we didn't do anything.

Anything new nothing nothing different than we've done historically Tim.

You're not going to see these great swing of the of the net interest margin downwards because of its of.

It's pretty competitive out there, but we pick and choose what we're going to do when we're in good.

Yes, and then in the first in your opening remarks, Rusty you can you just mentioned that you're.

Its pipeline remains strong so you're.

And that kind of.

Bleeds into your optimism for the full year, so you're feeling pretty good about production opportunities in the fourth quarter I guess this data and other way to translate that.

Yes, we have a very strong pipeline.

I would say that we are significantly higher pipeline today than we were this time last year.

Hi, Bob.

How about at the end of how about the.

Discarded the third quarter, how does the pipeline compare sequentially.

It is definitely up we had you know the interesting thing about this quarter was that when I look out the where the fundings game. It was across the board ill throw a couple of names out there Francisco Napa.

We're in.

Commercial banking office here in the motto.

Our.

Office in Oakland.

All of them did.

We had really good quarters and they all have.

Very good strong pipeline.

We feel good one thing I would say I feel really good about the staffing while we have across our commercial banking offices. We we have leadership in all the offices we have.

So as any bank does we have a couple of openings for commercial bankers, but.

When you have good people in place and you haven't staff properly you will see loan growth because it either we have really good James I'm a.

Very optimistic for the future because of the people we have in place.

And then I would imagine last question.

Your we're coming into the planning season for banks for.

And our updated strategic planning and such can you give some general thoughts about.

I guess kind of how your initially.

Looking at 2020 relative to 2019 to you.

More optimistic do you think you feel like it.

At this time.

Time, this year relative to a year ago or you know what are you more of your thoughts there.

Hi, I'm still very optimistic license.

Yes.

We are pretty disciplined about the way we operate and.

We don't.

As I've said many times before we don't we don't stretch to do deals on structure.

We we maintain our discipline in how we view do transactions in that shows up in our credit quality and that also shows up in auto loan volume because because of the disciplined approach we haven't really.

Building our pipelines in executing on that we've we've done really well from the economy standpoint, I feel I feel okay about it it's.

It's always hard to judge what's going to happen, but in the bay area areas very strong economy as you know and.

I haven't seen.

Big signs that we're going to have a big turned down in the next year, So I'm I'm very.

I guess I am cautiously optimistic about the year go ahead kind of in place I was a year ago.

Okay, great well, thanks for answering my questions and.

Congratulations on the quarter.

Thank you Jim.

The next question comes on line of Matthew Clark with Piper Jaffray. Please proceed.

Hi, good morning.

According to that.

Yes, I have the amount of interest recoveries.

And to Q.

As well.

Just trying to hone in on the core NIM, Tom ex purchase accounting accretion and recoveries.

Yes recovery on loan recover on.

Interest I don't know that we had any interest recoveries in the second quarter.

Hi, guys, yes, maybe out of the I think the number zero funny this area.

If at all very small yep yep, Okay. That's fine.

And then can you speak to your plans for the excess cash liquidity, how should we think about the timing and.

Redeploying those proceeds.

So.

We take.

Liquidity into account as well as where the market is and since we've had we've had a little bit of a backup in the yield curve.

We're at a good point for purchasing right now but.

It's really we have to our primary objective in the investment portfolios and make sure that we've got appropriate liquidity to account for the fluctuations in the deposit portfolio and to make sure that we have.

Good.

Buying opportunities so we continue to purchase investments.

Again, the same types of investments that we've always been purchasing.

But we want to make sure that we do it at the right time, given liquidity constraints in where the markets are.

Okay.

And then.

Shifting gears to new business on the long front in terms of given what rates have gone can you give us a sense. Furthermore, the weighted average rate is on new production, just wondering if philip off the portfolio yield or not.

I don't think we share the typically.

With the new volume will get you know as I mentioned, there's a lot of price pressure coming in on longer term transactions, but a good good.

We're still we're still getting decent returns on our on our portfolio, but as you can imagine when you have.

You have the environment, we have the interest rate environment that we have longer term financings are are being driven rates are being driven down.

And so we are some longer deals we are seeing rates.

As I said, you've seen rates in the three the high threes.

Lets them.

As a little under serving because [laughter].

So I forget if were present them if you're if your lending money, we certainly five.

So.

We're we're we're holding aligned we do this for we will make exceptions for really good clients, but.

No. It's it's every every transaction is different and we reevaluate not only the rate, but what else that customer has because the customer comes in and they are asking for rates in the 375 range, let's just say, but they have a lot of deposits and they have other business that we then we then we make those adjustments, but if its a.

Kind of a one shot deal.

It's pretty hard to do that at that price.

Just to add to that risk I.

I think the margin shows that where we are holding our own in terms of the new originations when we look at the rates if they came in over the last quarter.

They were coming in on average pretty much at the portfolio rate.

Okay, and then just last one from me on.

Reserving and provisioning the $400000.

Provisioning for growth in on 34 million of net loan growth.

And then implies converts no no ramble.

Over 115, well puts your reserve a 90 basis points.

Should we assume that your reserve.

Reserve coverage ratios have largely bottom.

From here I know it depends on mix for any given quarter, but.

Hi.

Well I guess, you're probably revenues it depends on mix again, I can't say that has bottomed I mean, our credit quality has been so good.

And 90 basis points of total portfolio. We do have we do have we've made acquisition. So obviously if you took the number.

Having a number but.

Against that portfolio that has actually reserving for that number is higher.

Because we have we have them.

Acquired portfolios, we're closer to 1% if you just supplies and the reserve.

Our our age of oil against the portfolio that its reserve again and excluded the acquired portfolios from the acquisitions. So.

It's.

Those numbers I always I always question the calculation is actually against a different portion of the portfolio than the entire portfolio. So.

So I can make a comment that it's the bottom because.

You know.

Yes, because of the way that the calculation stuff.

Understood. Thanks.

Thanks.

Okay.

Other mines to register question, it's one for on your telephone keypad.

Third a good really no further questions on the telephone lines.

Okay well.

Well I want to thank everyone again for joining us this morning, and we look forward to speaking with all of you again next quarter. Thank you for calling them. Thank you. Thank you site.

Okay.

No.