Bank of Marin Bancorp

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the fourth quarter and year ended December 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 conference call you need to reach an operator, please press star zero. This conference call is being recorded on January 24, 2022. Joining us on the call today are Tim Myers, 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 bankofmarine.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 three of our earnings press release for both GAAP and non-GAAP measures. Additionally, the discussion on this call is based on information we know as of Friday, January 21, 2022, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a 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, Tim and Tani will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Thank you, Andrea. Good morning, and welcome to the call. I'd like to begin my first earnings call as CEO of Bank of Marin by affirming that we remain laser-focused on serving our customers and communities while consistently driving long-term value for our shareholders. We generated solid results for the fourth quarter and full year of 2021, while maintaining capital, liquidity, and overall credit quality. These are the hallmarks of our consistent performance. Our acquisition of American River Bank shares in 2021 expanded our footprint into Greater Sacramento, one of the fastest growing regions in California. Importantly, It provided us with better scale to maximize efficiencies and drive growth into the future. The integration of American River is on track as we approach core systems conversion in late March. We also continue to make strategic hires and develop our teams to support growth. Several of our key hires have been in the greater Sacramento region, and I'd like to take a moment to highlight one of them. In late 2021, we hired Deepak Baku as Senior Vice President, Commercial Banking Sales Manager. In this newly created position, he will oversee the bank's commercial banking growth initiatives across our entire footprint. Deepak is a great example of the talent we continue to attract as we grow. With nearly 20 years of commercial banking expertise, including deep lending experience in the greater Sacramento area, he has a strong track record of building successful teams. This will serve us well as he expands our new client acquisition efforts and helps guide our growth initiatives. For the full year, we generated strong loan production in Napa, Marin, Oakland, and Walnut Creek. Late in the year, our commercial banking teams in these and other key markets, including Sacramento, were successful in bringing new clients to the bank and expanding existing relationships. These efforts helped generate a notable lift in loan production in the fourth quarter and and we expect that drive to continue. The pandemic is still with us, but we continue to adapt as necessary and manage the business for ongoing growth. We, along with our customers, have learned a great deal over the past two years. I am confident we will continue to accelerate momentum gained through the past year to deliver value for our shareholders in 2022 and beyond. Now for some key highlights. Net income for the full year was $33.2 million, or $2.30 per share, representing a return on assets of 0.94% and return on equity of 8.4%. Excluding one-time merger-related and conversion costs, net income would have been $38.1 million, or $2.64 per share, representing a return on average assets of 1.08%, and return on average equity of 9.67%. Loans increased 8% to $2.3 billion at year-end 2021, up from $2.1 billion at December 31, 2020. Year-over-year growth was driven by the American River acquisition and non-PPP commercial loan origination, the majority of which were investor commercial real estate loans. $181.7 million in non-PPP loan originations were distributed across our footprint. Loan growth was offset by PPP forgiveness, commercial real estate asset sales, and commercial payoffs due to ongoing borrower deleveraging. As of December 31, there were 368 SBA PPP loans outstanding, totaling $111 million, net of $2.5 million in unrecognized fees and costs. Deposits grew $1.3 billion, or 52%, in 2021 to $3.8 billion, including $790 million acquired from the American River Bank on August 6th. Non-interest-bearing deposits increased $556 million in 2021 and made up 50% of total deposits at year end. Our already low cost of deposits decreased further to seven basis points for the full year of 2021, down from 11 basis points in 2020. We reported a net increase in substandard loans in the fourth quarter, primarily due to one borrower with two secured investor commercial real estate loans that were negatively affected by the pandemic. However, non-accrual loans represented only 0.37% of the bank's loan portfolio as of December 31st. The $8.4 million in non-accrual loans at year end included two secured owner-occupied commercial real estate loans totaling $7.1 million, which were placed on non-accrual status in the fourth quarter of 2020. Bank of Marin Bancorp continued its share repurchase program, repurchasing 149,983 shares, totaling $5.6 million in the fourth quarter of 2021. Given our continued strong capital position and solid 2021 results, our Board of Directors declared a cash dividend of $0.24 per share on January 21, 2022. This represents the 67th consecutive quarterly dividend paid by Bankum Rim Bancorp. Now, I'll hand the call over to Tami to discuss our financial results.

TAMI CURTIS- Thank you, Tim. Good morning, everyone. Fourth quarter 2021 represented the first full quarter with the combined assets of Bank of Marin and American River Bank. Net income of $9.7 million increased from $5.3 million in the third quarter and $8.1 million in the fourth quarter of 2020. As shown in the earnings release reconciliation of GAAP and non-GAAP measures, Fourth quarter net income would have been 10.5 million and earnings per share 66 cents without the merger-related one-time and conversion costs. Return on average assets of 0.9% for the fourth quarter would have been 0.97% without those costs, and the 8.5% return on equity would have been 9.19%. While non-PPP loan originations exceeded payoffs by 7 million in the fourth quarter, Total loans decreased by $61 million due to $54 million in PPP loan payoff and changes related to scheduled amortization and utilization. $80 million in non-PPP loan originations for the quarter was up significantly from $43 million in the fourth quarter of 2020. Quarter over quarter, average loan balances increased to $80 million, and the yield increased 10 basis points to 4.43%, mostly due to lower rate PPP loans paying off. While average yields on investment securities decreased 36 basis points, higher balances significantly contributed to an increase in quarterly net interest income. Fourth quarter 2021 net interest income of $30.6 million increased $2.9 million over the third quarter. Net interest income increased $7 million over the same quarter last year due to higher loan balances and a 52 basis point higher average loan yield resulting from accelerated fee recognition on PPP loan payoff. Incremental balances in the investment portfolio added $2.4 million to net interest income despite the lower average yield. Overall, average interest earning assets increased $1.3 billion. The tax equivalent net interest margin was 3.03% for the fourth quarter of 2021, compared to 3.15% in the prior quarter and 3.4% in the fourth quarter of 2020. The 12 basis point decrease from the prior quarter and the 37 basis point decrease from the same quarter a year ago were primarily due to a higher proportion of investment securities in the growing balance sheet. The balance sheet continues to be asset sensitive and well positioned to benefit from rising interest rates. Non-interest income totaled $2.7 million in the fourth quarter compared to $3.6 million in the prior quarter and $1.8 million in the fourth quarter of 2020. The decline from the third quarter was largely due to $1.1 million in bank-owned life insurance benefits collected in the third quarter. The increase over the fourth quarter of 2020 was spread across most categories and largely resulted from increased activity related to our expanded deposit base. Non-interest expense of $19 million in the fourth quarter of 2021 declined $3.7 million from third quarter, mostly due to lower merger-related one-time and conversion costs. Higher loan originations in the fourth quarter led to more deferred costs, which reduced salaries and benefits. while year-end true-ups to incentives and benefits had the opposite effect. Full-year non-interest expense of $72.6 million increased $14 million over 2020. $6.5 million of that increase came from acquisition-related one-time and conversion costs. Additional personnel from the merger, annual merit increases, lower deferred loan origination costs, and year-end true-ups to incentives also increased salaries and benefits. Other increases included consulting expenses related to PPP forgiveness and higher data processing expense associated with increased transaction activity. Several other categories increased due to the bank's larger size, and charitable contributions decreased due to supplemental contributions in 2020 related to the pandemic. The efficiency ratio for the quarter, excluding merger-related one-time and conversion costs, was 53.6%. and improved from 56% third quarter and 55.9% in the fourth quarter of 2020. The effective tax rate increased 50 basis points to 26% in 2021, primarily as a result of non-deductible merger-related expenses. In closing, 2021 presented both challenges and opportunities. and we effectively navigated the environment while staying committed to the principles underlying our long-term success. We are pleased with these results and are ready to take on the new year. And now Tim would like to share some final comments.