Bank of Marin Bancorp

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2021. 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 call you need to reach an operator, please press star zero. This conference call is being recorded on April 19, 2021. Joining us on the call today are Russ Colombo, President and CEO, Tawny Gertens, Executive Vice President, Chief Financial Officer, Tim Meyer, Executive Vice President, Chief Operating Officer, and Beth Reisman, Executive Vice President, Chief Credit Officer. Our earnings press release, along with the merger announcement press release and investor presentation, which we issued this morning, can be found on our investor relations page 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, Monday, April 19, 2021, 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 disclosures in our earnings press release and merger announcement presentation, as well as our SEC filings. Following our prepared remarks, Russ, Connie, Tim, and Beth will be available to answer your questions. And now, I'd like to turn the call over to Russ Colombo.

Thanks, Andrea. Good morning. I'd like to begin the call by addressing the exciting news we announced in a press release this morning that Bank of Marin is acquiring American River Bank. This combination will be a great fit for us in many ways. It brings together two exceptional institutions that share complementary values and disciplined fundamentals, which allows us to expand our franchise by delivering the same legendary service on a regional scale. After I discuss first quarter results Tim, Tony, and I will walk through the details of the deal for you. Bank of Marin opened 2021 on solid footing, generating first quarter results that included strong credit quality and net income that exceeded results from the prior quarter and the first quarter of 2020. Net income was $8.9 million, with diluted earnings per share of $0.66. Given improved economic forecasts, our model indicated that we were over-reserved. So during the quarter, we made the decision to reverse provisions for credit losses on loans and unfunded loan commitments. We reversed $2.9 million from the allowance for credit losses on loans and $590,000 of allowance for credit losses on unfunded loan commitments. As I noted, our credit quality remains strong. Non-accrual loans totaled $9.2 million, or 0.43% of the loan portfolio. and classified loans increased slightly from the previous quarter to $26.4 million. While we continue to accommodate payment relief requests, the portion of the loan portfolio requiring assistance has declined to 11 relationships comprised of 17 loans totaling $59 million as of April 15th. We grew our loan portfolio modestly from the prior quarter and 15% from a year ago to a total of $2.1 billion at March 31st. This growth reflected our ongoing focus on new loan origination as well as our continued participation in the SBA's Paycheck Protection Program. During the quarter, we funded $25 million in non-PPP loans, primarily in the Marin and Napa markets. In addition, we have accepted over 1,200 applications for new PPP loans, totaling $139 million, with $127 million funded as of April 15th. The forgiveness portion of the program is accelerating. Of the $177 million in loan forgiveness requests by our original TPP borrowers, 81% of those applications, totaling $130 million, have been submitted to the SBA, with $91 million forgiven and no applications denied. Total deposits grew $152 million to $2.7 billion, with non-interest-bearing deposits comprising 54% of total deposits and the average cost of deposits at just seven basis points. Our total risk-based capital ratio of 15.7% at March 31st was well above well-capitalized regulatory requirements. Our balance sheet is strong and stands to benefit from any increases in interest rates. During the quarter, we took advantage of market opportunity to invest excess cash and reduce high-cost debt. As advised on our last earnings call, we redeemed a $2.8 million subordinated to venture on March 15, 2021, which resulted in accelerated discount accretion of $1.3 million. This redemption reduced tactic equivalent net interest margin by 18 basis points for the quarter. It was also the primary driver of our increased efficiency ratio, which would have otherwise been 58.92%. Finally, due to our continued profitability, our board of directors declared a cash dividend of 23 cents per share on April 16, 2021. This represents the 64th consecutive quarterly dividends paid by Bank of Marin Bancorp. You will find more detail on our first quarter performance in our earnings press release. In summary, our strong credit quality, the strength of our relationship banking business model, and the resiliency of our customer base position the bank for success as the economic outlook improves for the market we serve. Now, let's talk about the deals. With this merger, Bank of Marin becomes a $4 billion bank well positioned to emerge as the preeminent business bank serving Northern California. The combined company will be one of the largest Northern California-based community banks by market capitalization. Growing in size and scale across the Greater Bay Area and Sacramento region will allow us to increase efficiency, manage costs, and help offset the challenges brought on by a low interest rate environment across two highly attractive markets. Bank of Marin and American River Bank have very similar disciplined credit and risk management cultures, as well as loan and deposit strategies, which allow for a seamless integration of business models. These two organizations share a commitment to exceptional customer service and dedication to our local communities that can be amplified on a regional scale In the merger, each share of American River Bank shares will be exchanged for 0.575 of one share of Vancouver and Bancorp. The deal generates 14% accretion to 2022 earnings on a fully phased-in basis and over 15% internal rate of return. The year-and-back period on 4% tangible book value dilution is 3.5 years. Tangible common equity at closing is projected to be 10.8%. All regulatory capital ratios, including total risk-based capital, 17.3%, will be well above well-capitalized levels. Bank of Marin Bancorp will invite two American River directors to join both its bank and holding company boards. Now let me turn it over to Tim to give you a snapshot of American River Bank and the Greater Sacramento Market. Thank you, Russ.

Slide four gives an overview of American River Bank. Founded in 1983 and headquartered in Rancho Cordova, California, they have 10 full-service branches providing business banking services in Sacramento, Amador, Sonoma, and Placer Counties. Like Bank of Marin, American River is focused on building relationships and maintaining strong credit discipline. In addition to deep expertise in commercial real estate, They also lend to small businesses, wholesalers and manufacturers, professionals, and property managers. Their loan portfolio is an excellent complement to our own. Importantly, also like Bank of America, American River's credit quality and capital ratios are strong. Their like-minded focus on discipline management, relationship banking, and community commitment looks very appealing to us. Slide five gives you some regional highlights. Projected population and household income growth expectations by 2026 are exceeding national estimates, providing long-term economic benefits to the greater Sacramento region. In the last year, the region has been ranked the top migration destination for people looking to relocate, driven in part by newly remote workers seeking a more affordable lifestyle while still accessible to everything Northern California has to offer. There is ample existing office space throughout the region as well as new development activity in Sacramento's downtown and midtown areas. There has been more than $6 billion invested in new projects since the opening of the Golden One Center, the home of the Sacramento Kings, in 2016. Finally, with universities such as UC Davis, Sacramento State, and Universities of the Pacific nearby, the region is an increasingly attractive market for companies seeking educated young professionals. Slide 6 profiles the combined bank's branch network, markets of operation, and most recent financial highlights. I will now turn the call over to Connie to share the financial aspects of the transaction in greater detail.