Bank of Marin Bancorp

Good morning and thank you for joining the Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2020. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. At that time, if you have questions, please press 1 followed by 4 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 April 20, 2020. Joining us on the call today are Russ Colombo, President and CEO, and Tawny Gerton, 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 Friday, April 17, 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 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 Tawny, along with Chief Credit Officer Beth Reisman and Tim Myers, Head of Commercial Banking, will be available to answer your questions. And now, I'd like to turn the call over to Russ Colombo.

Thank you, Andrea. Good morning, and welcome to the call. Before we begin, I hope everyone is healthy and safe. I especially want to express my gratitude to essential workers who continue to provide much needed resources to local communities in Northern California and across the nation. As you know, the world has changed dramatically and the situation remains very challenging. Fortunately, Bank of Marin is well capitalized and we have ample liquidity and resources to help our clients manage through these trying times. We have participated in the Small Business Administration Paycheck Protection Program, which provides low-interest loans to small businesses to cover payroll expenses and other overhead costs. To date, we have received approximately 1,300 applications for an estimated total of $350 million. We were able to submit and receive SBA approval for a meaningful portion of those applications prior to the SBA suspension of the program. We continue to process customer applications internally and remain poised to submit them for approval as soon as the program is restarted. In an effort to ease the financial burden on our customers, we are waiving all ATM and overdraft fees and canceling early withdrawal penalties for CDs when allowed by law. We are also providing 120 days of payment relief to borrowers with hardship requests and have reduced interest rate floors on prime-based business loans. As of April 14th, we have received approximately $322 million in loan release requests for conversion to interest-only or payment deferral. 93% are secured by real estate with loan-to-value ratios averaging less than 45%. and 129 million are linked to industries most impacted by California's shelter-in-place order. Our loan portfolio exposure to the most affected industries includes 10.4% retail properties and businesses, 4.6% wine-related and 2.7% hospitality. Transportation, dental, recreation and entertainment combined represent less than 1.5% of the total portfolio. The health of our employees and customers is also a top priority. Bank of Marin has deployed safety protocols such as enhanced branch cleaning and strict social distancing policies. While we have modified branch hours, we have retained all of our employees at full pay with no layoffs or furloughs. Although many employees are currently working from home, we have seasoned banking teams in all of our markets, and they are dedicated to helping our clients weather this storm. Additionally, We're encouraging our customers to use ATM, digital banking, and telephone banking services, all of which are available 24-7. Now I'll turn to our first quarter results. We maintained strong lending levels and generated net income of $7.2 million, with diluted earnings per share of 53 cents. Total loans of $1.8 billion were up slightly from our record fourth quarter 2019. Deposits held steady at $2.3 billion, and our cost of deposits remained very low at 21 basis points. Non-interest-bearing deposits comprised 49% of total deposits. We posted a total risk-based capital ratio of 15.3%, well in excess of regulatory requirements. While we are very well capitalized, our board of directors decided on March 20th to suspend our share repurchase program. indefinitely in a precautionary response to the pandemic. The Board plans to monitor the situation closely and reinstate the program when appropriate. Mostly unrelated to the effects of the coronavirus, non-accrual loans increased by $1.4 million in the first quarter to $1.6 million, or 0.09% of total loans. Classified loans increased by $2.1 million from the prior quarter to 12.1 million, but we're still down relative to the first quarter of 2019. The credit impacts from the COVID-19 crisis will take time to materialize. Our bank is not immune to the significant economic pressures associated with the pandemic, but we are confident in our conservative lending philosophy and strong historic asset quality performance. Finally, because of our continued profitability, our board of directors declared a cash dividend of 23 cents per share on April 17, 2020. This represents the 60th consecutive quarterly dividend paid by Bank of Marin Bancorp. With that, I will turn it over to Tani for additional insight on our financial results.

Thank you, Russ, and good morning, everyone. As Russ noted, we generated $7.2 million in net income and diluted earnings per share of 53 cents in the first quarter of 2020, compared to 9.1 million and 66 cents, respectively, in the prior quarter. Net interest income totaled 24.1 million in the first quarter, compared to 23.9 million in the prior quarter. And one less day in the quarter, Net interest income exceeded that of the fourth quarter 2019 due to a larger earning asset base, accelerated accretion on a called investment security, and money market deposit rate reduction. The tax equivalent net interest margin was 3.88% in the first quarter compared to 3.82% in the prior quarter. Accelerated accretion on the called investment security added seven basis points to the first quarter margin. We have postponed the adoption of the current expected credit loss accounting standard, or CECL, in accordance with the accounting relief provision in the CARES Act that allows banks to delay implementation until the end of the national emergency or December 31, whichever occurs first. We recorded a $2.2 million loan loss provision in the first quarter under the incurred loss model. This was unusual for Bank of Marin and up from $500,000 the previous quarter, reflecting adjustments to qualitative factors for the economic uncertainties raised by the COVID-19 pandemic. Non-interest income was $3.1 million in the first quarter of 2020, an increase from $2.3 million in the prior quarter, primarily due to $800,000 in gains on the sale of investment security. The first quarter typically includes some seasonal expenses, and this year was no exception. Non-interest expense totaled $15.5 million compared to $13.3 million in the prior quarter. The increase was primarily due to $1.7 million higher salary and benefit expenses related to January resets of 401 matching and payroll taxes, 2019 bonus accrual true-ups, 401 matching on bonus payments, and stock-based compensation, which included $388,000 for participants meeting retirement eligibility criteria. Other increases included four additional full-time equivalent staff and a $102,000 provision for off-balance sheet commitments. The bank delivered a return on assets of 1.09% and a return on equity of 8.54% in the first quarter of 2020. We are pleased with our continued profitability and prepared to leverage our operating strength in support of our customers during the COVID-19 crisis. Now Russ would like to share some closing comments with you.