Bank of Marin Bancorp

Good morning and thank you for joining the Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2020. I'm 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 call you need to reach an operator, Please press star zero. This conference call is being recorded on July 20, 2020. Joining us on the call today are Russ Colombo, President and CEO, Tim Myers, Executive Vice President and Chief Operating Officer, 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, July 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, Tim, and Tawny, along with the Chief Credit Officer, Beth Reisman, 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. I hope everyone remains healthy and safe. As COVID-19 persists in impacting our daily lives, we all find ourselves responding to a very fluid situation. In the face of so much uncertainty, Bank of Marin continues to execute on our guiding principles, relationship banking, discipline fundamentals, and community commitment, which positions us well to assist our customers in weathering the pandemic. At the outset of the public health crisis, the bank swiftly responded to customer needs, including actively participating in the PPP. Since the inception of the program, we have funded over $300 million in PPP loans, helping over 1,800 local small businesses and nearly 28,000 employees. These loans will aid many of our customers in bridging the gap to economic recovery. We also implemented a 120-day loan modification program for borrowers with hardship requests. As of July 10, The bank had approved over 260 loan modifications, exceeding $386 million. As that program moves toward maturity in August, we continue to have active discussions with our customers about loan modifications, and we'll be able to provide more detail next quarter. Although many of our employees continue to work from home, our branches are open and enhanced with safety protocols. And our banking teams across our market are dedicated to helping our customers. Now I'll turn to the second quarter results. Our performance reflects a financially sound and stable community bank with a proven ability to manage through changing market conditions. We are very well capitalized, and our loan portfolio is supported by disciplined underwriting standards, as well as conservative loan-to-value ratios and personal guarantees. As we reported last quarter, our loan portfolio exposure to the most affected industries is low, which leaves us with less vulnerability relative to the bigger banks. We'll give a more detailed breakdown later in the call. Here are some key highlights from the quarter. We generated net income of $7.4 million, with diluted earnings per share of $0.55. Total loans of $2.1 billion were up about 14%, with solid commercial and industrial growth driven by PPP loans. We will not see continued growth from PPP loans because we completed that lending program at the close of the second quarter. Our commercial bankers are working to understand and meet their customers' evolving credit needs, and they are also identifying new opportunities across our markets. We expect these efforts will help to grow our portfolio over time. Total deposits increased $473 million in the second quarter to $2.8 billion, driven by a combination of PPP loan proceeds and increased liquidity throughout the banking system as a result of higher savings rates. The average cost of deposits decreased to nine basis points in the second quarter, reflecting the low rate environment and our relationship banking model. Non-interest bearing deposits represented 52% of total deposits. Our total risk-based capital ratio was 15.8% at June 30th, well above regulatory requirements and the 15.3% we reported at March 31st. While we are very well capitalized, our share repurchase program remains suspended indefinitely as a precautionary response to the pandemic. Management and the Board of Directors continue to monitor this situation and will reinstate the program when appropriate. Non-accrual loans decreased by $45,000 in the first quarter to $1.6 million, or 0.08% of total loans. Classified loans increased by $1.5 million from the prior quarter to $13.5 million, but were still down relative to the first quarter of 2019. The full impact of COVID-19 crisis will take time to materialize. Our bank is not immune to the significant economic pressures, but we are confident in our conservative lending philosophy and long history of strong asset quality. Finally, due to our continued profitability, the Board of Directors declared a cash dividend of 23 cents per share on July 17, 2020. This represents the 61st consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August 7, 2020, to shareholders of record at the close of business on July 31, 2020. Now I'd like to recognize an important change to our leadership team. Tim Myers, most recently Executive Vice President, Commercial Banking, was named Chief Operating Officer on June 30. Tim has nearly 25 years of experience in finance and banking spanning small business, middle market, and corporate segments. After 13 years with Bank of Marin, Tim has a deep understanding of our business model and a strong connection to our customers and to our people. I am pleased that Tim was prepared to step up to the role of COO. In these challenging times, stability and consistency in management are more important than ever. Tim will now provide more detail on our PPP and loan modification programs, as well as an update on our overall loan portfolio and expansion efforts in the Peninsula and South Bay region.

Thank you, Russ. The bank's execution of PPP is a testament to our dedication to meeting our customers' needs. A small team of subject matter experts devoted a great deal of time and energy to launching the program and helping hundreds of customers get their loans. After receiving approval to become an SBA lender, we formed cross-functional teams that successfully processed and funded more than 1,800 loans totaling over $300 million. We committed to focusing on small businesses that needed funding to weather the downturn and, in time, help our local markets grow during the recovery. Notably, 73% of the PPP loans were for $150,000 or less, and almost 90% were $350,000 or less. Only 48 loans were $1 million or greater, representing approximately 30% of the total balance. Among all the businesses we were able to assist, we are proud to say there were 178 nonprofit organizations, ranging from education to health and human services, that received $57 million. which help protect payroll for over 6,000 of their employees. Bank of Marin stopped taking applications for PPP loans on June 30th to focus our efforts on helping customers through the loan forgiveness process. We have contracted with the technology provider and the CPA firm to streamline the submission of applications to help educate our bankers and borrowers on the SBA guidelines, forgiveness process, and necessary calculations. We were pleased to play a key role in this program and are excited to see it through to completion. In the first quarter of 2020, with the onset of the pandemic, we identified industries within our portfolio that could be most impacted. These included retail, transportation and energy, medical and dental, hotels and motels, entertainment, private schools and the wine industry. Not including PPP loans, exposure to these segments totaled $430 million at June 30th or 20% of the loan portfolio. 366 million of these loans were secured by real estate. The greatest exposure was related to both retail businesses and retail related commercial real estate totaling 198 million or 9% of the total portfolio. 185 million of which is secured by commercial real estate. Our average loan to value on these properties is 39% and the majority are also backed by personal guarantees. The wine industry exposure was $77 million, or 4% of the portfolio, of which $42 million is secured by real estate. Education was $67 million, or 3% of the portfolio, of which $63 million is secured by real estate. And hospitality was $48 million, of which $45 million is secured by real estate. We made $103 million in PPP loans to these industry segments as of June 30th. the largest of which were in the medical and dental sector at 33 million, hospitality at 17 million, retail which is mostly commercial real estate at 16 million, and education at 12 million. We also continued to work with customers that needed temporary assistance. Loans for which we processed payment relief requests exceeded $386 million at July 10th. 223 million were for payment deferral, and 163 million allowed for interest only payments. While our loan modification agreements largely span a 120 day timeframe, a small number of customers requested only 90 days of relief. Of the loans on payment relief, almost 50% fell into our expected pandemic impacted industries. The largest being retail related commercial real estate at 70 million, hotels and motels at 37 million and education related commercial real estate at 25 million. Over 90% of the payment relief loans are secured by real estate and have a total average loan to value of 45%. Within the largest categories, average loan to value is 43% for retail related properties, 39% for hotels and motels, and 37% for education properties. Even as we respond daily to the impacts of the pandemic, we continue to look for strategic opportunities for expansion. During the second quarter, we hired Jake Winn to establish a commercial banking office in San Mateo, focusing on the Peninsula and South Bay regions of the Bay Area. Jake is a seasoned and highly regarded banking leader in these markets. Subsequent to joining Bank of Marin, Jake hired an experienced commercial banker, David Mears, and secured an office location in San Mateo that we will occupy soon. This positions us well to serve eight of the nine Bay Area counties, and we are very excited about our prospects south of San Francisco. With that, I will turn it over to Tani for additional insight on our financial results.