Bank of Marin Bancorp

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30, 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 conference call you need to reach an operator, please press star zero. This conference call is being recorded on October 25, 2021. Participating on today's call are Russ Colombo, CEO, Tim Myers, President and Chief Operating Officer, and Tawny Gertens, Executive Vice President, Chief Financial Officer. We have also invited Misako Stewart, Executive Vice President and Chief Credit Officer, to join us. Our earnings press release which will be 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 note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on page 3 of the press release for both GAAP and non-GAAP measures. Additionally, the discussion on this call is based on information we know as of Friday, October 22, 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 disclosure in our earnings press release as well as our SEC filings. Following our prepared remarks, Russ Tim, Connie, and Misako will be available to answer your questions. And now I'd like to turn the call over to Russ Kostel.

Good morning, everyone. Thank you for joining us today on our first earnings call since the completion of our acquisition of American River Bank shares on August 6th. Bank of Marin is now an organization with over $4 billion in assets, along with 31 branches and 8 commercial banking offices across 10 northern California counties. The integration is progressing smoothly. With the American River team on board, we are positioning the bank for long-term growth across a much larger and more diverse footprint. It is important to note that the third quarter marked the early stages of the integration process, and we did take on a substantial portion of the one-time merger cost in the quarter, impacting earnings and returns. We reported net income of $5.3 million and return on average assets of 0.56%. The decreases from 9.3 million net income and 1.2% ROA in the second quarter largely reflected the absorption of American River operations. Merger-related costs reduced third quarter net income by 3.9 million. In addition, a 1.8 million provision was primarily related to purchase ARB loans and others. In addition to the factors above, return on average equity of 4.99% for the third quarter was impacted by approximately $124 million for shares issued in conjunction with the merger. We have provided a reconciliation of GAAP to non-GAAP financial measures in the earnings release that illustrates the impact of the merger related one-time and conversion period costs on various performance ratios. Excluding those expenses, year-to-date ROA and ROE would have been 1.13% and 9.87%, respectively, compared to 1.03% and 8.47% for the same period in 2020. Despite headwinds associated with the merger and a low interest rate environment, these adjusted results demonstrate the earnings power They also reflect our expanded ability to generate attractive returns for our shareholders. We continue to maintain one of the best deposit bases in the country. Now, with an expanded team to deliver on our longstanding commitment to prudent underwriting and exceptional customer service, we are confident we will continue driving strong returns. Here are additional key highlights. Total loans increased to $2.3 billion, including just over $410 million in loans acquired in the third quarter. Credit quality remained solid. Non-accrual loans in the third quarter were just $8.4 million, or just .36% of total loans. Total deposits grew by $1 billion during the quarter to $3.7 billion. The increase included nearly $808 million of acquired deposits. Non-interest-bearing deposits increased by $378 million in the third quarter and comprised 49% of total deposits. The average cost of deposits was just six basis points in the third quarter, reflecting the low rate environment and the enduring strength of our relationship banking model. Thanks to our consistent profitability, the Board of Directors declared a cash dividend of $0.24 per share. This is the 66th consecutive quarterly dividend paid by Bank of Marin Bancorp. On October 22, the Board of Directors also approved an amendment to the $25 million share repurchase program approved on July 16 to increase its size by $32 million to a total of $57 million. Finally, as announced on September 24th, I will retire as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp on October 31st. I couldn't be more delighted that the Board has appointed Tim Myers to succeed me. I'm confident that Tim is more than ready to take the helm and deliver continued growth and positive results. Bank of Marin is in excellent strategic position and on solid ground financially. Our core results for the third quarter affirm this. I'm very proud of the bank we have built over the past two decades and the talented team that drives our success. Now let me hand it over to Tim to give an update of our expanded loan portfolio and the Paycheck Protection Program. Thank you, Russ.

I want to thank Russ for his leadership and support over the years. We have worked very closely in recent months to ensure leadership continuity and a seamless transition. I wish you all the best in retirement. Now taking a look at our loan portfolio. Excluding PPP loan payoffs and loans acquired from American River, Legacy Bank and Marin's loan portfolio was relatively stable in the third quarter. We continue to identify attractive opportunities and actively engage customers throughout our expanded footprint from the Bay Area to Greater Sacramento. New loan originations in the third quarter totaled nearly $33 million. We are confident our combined resources will enable us to drive further growth across two of the most attractive metropolitan markets in the state of California. Elevated competition and loan payoffs continue to impact portfolio growth. Not including PPP, payoffs total $50 million in the third quarter, compared to $41 million in the year earlier. These payoffs consisted largely of commercial borrower cash paydowns, real estate asset sales, and third-party refinancing at prices and structures outside of Bank of Marin's lending appetite. We are taking a disciplined approach, meeting our existing clients' needs and developing new relationships. Over time, we fully expect the power of our larger platform, new markets and added scale to drive increased origination. Our merger with American River brought together two institutions that share complementary values and discipline fundamentals. I look forward to leading the combined team as we roll up our sleeves and work hard to ensure a seamless integration. By committing significant resources to this process, we are building a strong foundation to grow our franchise on a regional scale. On the PPP front, Bank of Marin and American River originated a combined total of over 3,500 loans, amounting to more than $550 million in two rounds of financing. As of September 30, We had 871 loans outstanding, totaling almost $165 million, net of $4.2 million in unrecognized fees and costs. Of the 2,876 PPP loans funded by Bank of Marin, the SBA has forgiven and paid off 2,036 loans for a total of almost $285 million. The bank's PPP activity is winding down, and we expect to enter 2022 with this program essentially completed. Our pandemic-related payment program is also winding down. As of September 30th, we had two borrowing relationships with a total of five loans totaling approximately $24 million remaining. We monitor the financial situation of these clients closely and expect them to resume payments as the economy continues to gain momentum. With that, I'd like to welcome to the call Misako Stewart, who was promoted to Chief Credit Officer on September 30th. She will discuss our key credit metrics.