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, 2022. 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 April 25, 2022. Joining us on the call today are Tim Myers, President and CEO, and Tawny Girton, 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 note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on page 3 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, April 22, 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 discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release as well as our SEC filing. Following our prepared remarks, Tim and Connie 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, everyone, and welcome to our call. We completed the final step in our 2021 acquisition of American River Bank shares in March 2022 with the core system conversions. This collaborative process brought together people from across the company to ensure a smooth transition for our customers. With this milestone behind us, our combined team throughout Northern California can leverage our substantially larger balance sheet to drive long-term growth. We have already seen traction on this front in the first quarter of 2022. With our expanded footprint and talent pool, we generated robust loan production in the quarter, marking our strongest first quarter in six years and continuing the momentum from Q4 in 2021. Our pipelines reflect steady loan demand, healthy economic activity across our markets and our bankers re-energized business development efforts. Loan origination, excluding PPP, totaled $50 million for the first quarter, nearly double the year earlier level. And commercial line utilization increased to 38% of total commitment from 34% at year end. Even as we pursue growth, we remain vigilant and committed to our foundation of sound underwriting. While provision reversals were due to improvements in economic forecasts underlying credit loss calculations, we also saw improvement in our already strong portfolio credit quality. This was evidenced by a 10% improvement in special mention loans, the majority of which was due to payoffs and upgrades to past risk ratings. Loan payoffs remain elevated in this competitive environment. While we continue to win new business and deepen relationships with existing clients, we may choose not to retain loans that fall outside of the bank's lending appetite. In the long run, this commitment to our disciplined lending principles has served us well as our loan portfolio continues to perform through all credit cycles. Importantly, we have also begun to see the early benefits of a rising rate environment. Yields on new loans, including real estate, are increasing. as well as yields on existing variable rate commercial loans in our portfolio. We expect improvement across the portfolio following additional rate increases as forecasted by Fed officials. This should provide support for our net interest margin and earnings as we progress through 2022. Now I'll turn to first quarter results. We generated net income of $10.5 million and diluted earnings per share of 66 cents. Both were up 8% from the prior quarter. Loan balances of $2.2 billion reflect an increase of $17 million in non-PPP loans and $71 million in PPP loans forgiven and paid off. At quarter end, only $40.6 million in net PPP loan balances remain. Deposits grew by $53 million to $3.9 billion, with most of the growth coming from non-interest-bearing balances related to normal fluctuations in our customers' operations. Non-interest-bearing deposits made up 51% of total deposits, with a cost of average deposits at just six basis points, flat for the prior period. As I noted, credit quality remains strong, with non-accrual loans representing only 0.35% of total loans and classified loans unchanged from year-end. We reversed $485,000 in loan loss provisions and $318,000 in provisions for losses on unfunded loan commitments. Our Board of Directors declared a cash dividend of 24 cents per share on April 22, 2022. This represents the 68th consecutive quarterly dividend paid by Bank of Marin Bancorp. Finally, as we previously announced, the Bancorp and Bank of Marin Boards have appointed current Vice Chairman, Rolly McDevitt, for the role of Chairman effective May 10, 2022. The Director since 2007, Vice Chair since 2015, and a valued Bank of Marin customer since 1993, Willie brings with him more than 40 years of experience investing in and managing commercial real estate and other businesses in Marin and Sonoma Counties. Current Chairman Brian Sobel will remain on both boards. We thank Brian for the seven years of tireless service, the longest tenure of any chairman in the bank's history. Now I'll hand the call over to Tommy to discuss our financial results.

Thank you, Tim. Good morning, everyone. We are pleased with our first quarter results. We generated solid earnings by deploying excess liquidity into investment securities and new loan production and by managing expenses. We have a strong balance sheet, and we expect to benefit from rising interest rates. As Tim noted, we reported net income of $10.5 million and 66 cents per share in the first quarter of 22, up from 9.7 million and 61 cents per share in the fourth quarter of 21. Net income also compared favorably to 8.9 million and 66 cents per share in the first quarter of 21, despite much larger provision reversals last year. The 3.5 million provision reversal in the first quarter of 2021 and the 803,000 in 22 both derived from improving economic forecasts underlying credit loss calculations. Net interest income totaled $29.9 million in the first quarter, compared to $30.6 million in the prior quarter and $22 million a year ago. The decrease from the fourth quarter was primarily due to changes in acquired loan amortization and depreciation, lower loan prepayment fees, Lower PPPT recognition and fewer days in the quarter. Partially offsetting the combined effect of those changes was higher interest income from the larger investment portfolio as cash was deployed into securities during the rising interest rate environment. The $7.9 million increase in net interest income over first quarter 21 was reflective of the ARB merger, a larger allocation of the loan portfolio to higher rate loans, a deployment of cash into investment securities, and the cost associated with the early redemption of subordinated debt in 2021. Those increases were partially offset by a lower average yield on the investment portfolio. The tax equivalent net interest margin was 2.96% this quarter compared to 3.03% last quarter and 3.19% in the first quarter of 21. Average yields on the loan and investment portfolios are beginning to reflect recent increases in interest rates at the same time the PPP portfolio is winding down. Non-interest income totaled $2.9 million in the first quarter compared to $2.7 million in the prior quarter and $1.8 million in the first quarter last year. The improvement from the fourth quarter was primarily related to payments on bank-owned life insurance policies. The improvement over first quarter 21 was mostly attributable to increased activity associated with the acquisition. First quarter non-interest expense increased $400,000 from fourth quarter to $19.4 million, primarily due to seasonal increases related to annual incentives, stock-based compensation, and 401 contributions in salaries and related benefits. Professional services also increased due to financial statement and acquisition related audit work performed in the first quarter. Increases were partially offset by a decrease in acquisition related one-time data processing expenses. First quarter 22 relative to Q1 21 reflect the higher expense base from the acquisition. Most notably, salaries and related benefits rose $2.3 million due to increased numbers of employees, regularly scheduled annual merit increases, and lower deferred loan origination costs. The improving operating leverage of Bank of Marin is evident in our 57.5% efficiency ratio, excluding merger-related one-time and conversion costs, compared to 64.6% in the first quarter of 2021. The increase over 53.6% in the fourth quarter of 21 is largely related to the seasonal first quarter increase in salary and benefit expenses. During the first quarter, our strong liquidity position enabled us to transfer 358 million in available for sale securities to our health maturity portfolio to partially insulate other comprehensive income and equity from future changes in interest rates. The transfer had no impact on net income. The rapid increase in interest rates during the quarter led to a $37.3 million after-tax other comprehensive loss associated with transfers and other available-for-sale securities. That led to an 80 basis point decline in tangible common equity to 8%. In closing, we are in excellent financial shape with a strong balance sheet and ample liquidity to efficiently fund long growth. Return on assets would have been 1.01% without one-time and conversion-related costs compared to 0.97% in the fourth quarter. Likewise, return on equity would have been 9.96% versus 9.19% in the fourth quarter. The increases in investment portfolio balances and yields over the first quarter are expected to provide a list of roughly $8 million per year in net interest income. The bank is well positioned to continue delivering strong returns for our shareholders. With that, I'll turn it back to Tim to share some final comments.