Bank of Marin Bancorp

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30, 2021. I'm Andrea Henderson, Director of Marketing for Bank of Marin. During the presentations, 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 0. This conference call is being recorded on July 19, 2021. Joining us on the call today are Russ Colombo, CEO, Tim Myers, President, Chief Operating Officer, Tani Gerton, Executive President, Chief Financial Officer, and Beth Reisman, Executive Vice President, Chief Credit Officer. Our earnings press release, 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 Friday, July 16th, 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 as well as our SEC filings. Following our prepared remarks, Russ, Tawny, Tim, and Beth 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, everyone. Bank of Marin continued to generate momentum and strong earnings growth in the second quarter. We reported net income of $9.3 million, up from $8.9 million in the first quarter and $7.4 million in the second quarter of 2020. We continue to prioritize disciplined expense management and underwriting and consistently sound credit quality as we have across our various economic cycles over our 31 years history. Along with our proven relationship banking model, this gives us one of the strongest deposit bases in the country. Importantly, we also have a well-designed plan in place to extend our model to greater Sacramento and Amador County with our acquisition of American River Bank. The acquisition is on track to close in the third quarter as planned. As I have said before, this is a combination of two exceptional institutions that share complementary values and discipline fundamentals. Our teams have diligently worked together to bring the merger toward closing. We've been thrilled with the spirit of partnership, dedication, and talent that the American River team We are confident that we will expand our community banking franchise on a regional scale bringing new products and services to American River customers. We will also benefit greatly from local expertise and proven talent that our new teammates bring to Bank of Marin. Upon closing, Bank of Marin will be well positioned as a preeminent business bank serving Northern California. with approximately $4 billion in combined assets. Gaining scale across the greater Bay Area, the greater Sacramento region, and Amador County will allow us to develop new revenue opportunities and further increase efficiency, offsetting the challenges of a low interest rate environment. Our two organizations share a commitment to exceptional customer service and dedication to our local communities that we are all excited to magnify at the regional level. While the pandemic still poses significant risk, I am encouraged because vaccination rates are above the national average in our footprint, and we have begun to reach a new normal. This sets the stage for a stronger economic activity ahead. Our Bank of Marin team is back in the office, actively engaging with customers. Now I'll turn to the key highlights of our second quarter results. We generated diluted earnings per share of 71 cents. Total loans decreased to $2 billion from $2.1 billion in the prior quarter, primarily as a result of PPP loan forgiveness. As of June 30th, the Small Business Administration had forgiven and paid off $189 million of our total PPP loans. Our commercial bankers are working to understand and meet the needs of their customers' evolving credit needs. and they are also identifying new opportunities across our markets. We expect these efforts will help us grow our portfolio over time. Credit quality remains strong. Non-accrual loans decreased slightly in the second quarter to 9.2 million or 0.46% of total loans. Classified loans increased by 4.4 million from the prior quarter to 30.8 million. Total deposits grew $27 million to $2.7 billion, primarily driven by our customers depositing PPP funds into their accounts and new account openings. The average cost of deposits was just seven basis points in the second quarter, reflecting the low rate environment in our relationship banking model. Non-interest bearing deposits represented 54% of total deposits. Given our strong capital and liquidity, On July 16th, the Board of Directors approved a new share repurchase program under which we may repurchase up to 25 million of our outstanding common stock. Also, on July 16th, due to our continued profitability, the Board of Directors declared a cash dividend of 24 cents per share, an increase of 1 cent per share from the prior quarter. This represents a 34% payout ratio and the 65th consecutive quarterly dividend paid by Bank of Marin Bancorp. Now I'd like to recognize an important change to our leadership team. Tim Myers, Chief Operating Officer, was promoted from Executive Vice President to President in May. Tim is now responsible for the management of commercial banking, retail banking, centralized operations and technology, wealth management and trust, and marketing. As COO, he proved his ability to lead in an ever-changing environment, and this new role is a natural progression of that success. Now let me turn it over to Tim to provide more detail on our lending activity and our expansion into the greater Sacramento region.

Thank you, Russ. Excluding PPP loans, our total portfolio held steady at $1.8 billion. New loan originations in the second quarter totaled $44 million. With interest rates low and deleveraging trends continuing, however, loan payoffs of $61 million are influencing that growth. Those payoffs consisted largely of HELOC, tenant common loans, and commercial loans on which underlying assets were sold or paid off with cash. While optimistic about new opportunities, we remain disciplined and patient. We are focused on prudent, durable growth, not growth for growth's sake. We remained an active PPP lender until the program's funds were exhausted in early May of this year. And our second round of PPP funding totaled 1,063 loans for $136 million. We did this to support our customers and communities and to help ensure a strong recovery for small businesses as we all emerge from the pandemic. PPP loans outstanding were $248 million at June 30th. versus $365 million March 31st and $299 million at June 30th a year ago. We expect the remainder of the portfolio to steadily decline in the second half of this year as loans continue to be forgiven and paid off by the SBA. As of July 13th, a total of 1,395 loans amounting to $202 million have been approved for forgiveness by the SBA. Of the loans remaining, 70%, or 1,072 loans totaling $46 million or 150,000 or less and have access to streamlined SBA forgiveness processing. With respect to the bank's payment relief program, at the close of the second quarter, we had just six borrowing relationships with nine loans totaling $43 million that were benefiting from loan deferrals or similar payment reliefs tied to the pandemic. We are working with these clients closely and expect the majority to resume payments. As we look ahead, we are optimistic about new growth opportunities across our San Francisco Bay Area footprint in addition to our expansion into greater Sacramento and Amador. The Bay Area economy is among the most vibrant and prosperous in the country. Sentiment among our commercial clients is upbeat and steadily improving. The economy here is open and new opportunities are emerging. At the same time, Sacramento is growing in population, household income, and new business formations. There has been more than $6 billion invested in new projects in the region over the past five years, and more is underway. The greater scale and broader footprint positions Bank of Marin exceptionally well as the economy gains momentum and our clients make plans to expand. I will now turn the call over to Tani to dig deeper into our financial results.