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, 2022. I'm 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 July 25th, 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 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 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, July 22nd, 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 Tawny 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. As we reported in April, Q1 2022 originations were the strongest since 2017. Through disciplined client outreach and enhanced business development efforts, robust loan production continued in the second quarter. During the first six months of 2022, our loan originations totaled $152 million, more than double the same period a year earlier. With the legacy American River Bank core system conversion behind us, we are laser focused on loan growth as our seasoned teams, complemented by talented new additions, actively develop business across Northern California. Given our focus on relationship banking and the caliber of our branch and commercial banking teams, we are able to prioritize and maintain a low cost of deposits. Non-interest bearing deposits continue to make up more than half of total deposits at June 30th, representing one of the strongest deposit franchises in the industry. Notably, our net interest margin increased nine basis points in the quarter as we saw the early impacts of the rising rate environment. This increase was driven by deployment of cash into securities and higher interest rates on our loans while the cost of deposits held steady. We expect further improvement across the portfolio in the current quarter as we experience the full impact of the Federal Reserve's 75 basis point rate increase in June and anticipate additional Fed increases in the second half of 2022. While our production was strong, total loans decreased modestly in the quarter due to expected construction project completions and borrower sales of underlying commercial real estate and business assets, PPP loan payoffs, and third-party refinancing of acquired loans outside the bank's credit risk appetite. We remain prudent and consistent in our underwriting and will not sacrifice our credit standards as we grow. Our non-accrual loans remain extremely low and our overall credit quality continues to be excellent. Now I'll turn to our second quarter results. We delivered record net income of $11.1 million compared to $10.5 million in the first quarter. Diluted earnings per share of 69 cents compared to 66 cents in the first quarter. Total loans decreased modestly to $2.2 billion driven by payoffs within the portfolio. Record second quarter originations of $102 million were offset by non-PPP loan payoffs of $109.8 million that included $35 million in expected construction project completions and $29 million whereby borrowers sold underlying assets and businesses. With non-interest-bearing deposits at 53% of total deposits, the average cost of deposits was just six basis points unchanged from the prior quarter. and better by one basis point on a year-to-date basis. Credit quality remains strong, as I noted, with non-accrual loans representing 0.37% of total loans. There was no significant change in classified loans. We were not immune to the effects of post-pandemic employee migration, however. We have recently made some outstanding strategic hires. I am excited about what these investments in talent will bring to the bank in the months to come. Thanks to the strength and durability of our financial performance, our Board of Directors declared an increase in the quarterly cash dividend to 25 cents per share on July 22nd, 2022. This represents the 69th consecutive quarterly dividend paid by Bank of Marin Bancorp. Now, I'll turn the call over to Tani to discuss our financial results in more detail.

Thank you, Tim. Good morning. Return on assets of 1.03%, and return on equity of 10.74% for the three months ended June 30, 2022 would have been 1.05% and 10.95% respectively without one-time and conversion costs related to the 2021 merger with American River Bank. That compares to 0.98% and 9.61% gap and 1.01% and 9.96% non-GAAP respectively for the three months ended March 31st. As can be seen in the reconciliation of GAAP and non-GAAP financial measures in our earnings release, merger related costs reduced second quarter net income by $219,000 or two cents per share. Net interest income totaled $31.2 million in the second quarter compared to $29.9 million in the first quarter. The $1.3 million increase was driven by higher average balances and yields on investment securities that added $1.6 million in interest income while the cost of deposits remained flat. Tim covered the major changes in the loan portfolio and I will just add that we held 112 PPP loans totaling $17 million net of $420,000 in unrecognized fees and costs at the end of the quarter. We recognized $573,000 in PPP fees net of costs during the quarter. Digging a little deeper into the nine basis point increase in tax equivalent net interest margin over the first quarter, Average and best balances grew $181 million with an 18 basis point improvement in average yield. At the same time, average cash balances fell $136 million with a 57 basis point improvement in average yield. The average rate on gross loans increased 10 basis points, but lower interest and fee income from PPP loans created a 7 basis point drag on margin improvements. The six basis point total cost of deposits was unchanged from the first quarter and improved by one basis point year to date versus 2021. The $96 million decrease in money market accounts included a large customer's transfer to a non-interest bearing account prior to an early July disbursement consistent with the customer's normal business activity. Deposits held off balance sheet with deposit networks decreased as we allowed some excess liquidity to run off. There was no adjustment to the allowance for credit losses on loans and off-balance sheet commitments in the second quarter. Improvements in the California unemployment rate forecast that decreased the quantitative calculation were offset by changes in qualitative factors associated with supply chain issues, inflation, and recession risk. The decrease in non-interest income to 2.7 million in the second quarter was related to payments on bank-owned life insurance in the first quarter. Year-to-date non-interest income was up by 1.7 million due to increased activity and fees in all categories, mostly attributable to the acquisition. Non-interest expense of 18.9 million in the second quarter of 2022 was down half a million from the first quarter. The decrease was primarily due to a $1.2 million reduction in salaries and benefits after the completion of the acquisition-related conversion in March 2022. Decreases were partially offset by a $466,000 increase in charitable contributions due to the annual distribution of grant funding related to the bank's corporate giving program in the second quarter. As Tim mentioned earlier, we have been successful in hiring to fill immediate needs and support our long term strategic priorities. Continued focus on talent acquisition and development in this competitive environment could put upward pressure on our expense run rate. As we continue to integrate and build on our most recent acquisition, the efficiency ratio illustrates its positive impact on operating leverage. The efficiency ratios of 55.7% and 57.4% in the second quarter and year-to-date respectively, both improved from 59.1% in the prior quarter and 61.4% last year. The same improvement is evident in the ratios excluding one-time acquisition and conversion costs. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 14.7% at June 30, compared to 14.4% at March 31 and 14.6% at December 31, 2021. The bank's total risk-based capital ratio was 14.2 at June 30 compared to 14.3 at March 31 and 14.4 at December 31, 2021. June 30, 2022 tangible common equity of 7.8% for Bancorp and 7.5% for Bank of Marin were down 24 and 53 basis points respectively due to an increase in after-tax unrealized losses on available for sale securities associated with rising interest rates during the second quarter. The reduction in other comprehensive losses relative to the preceding quarter was due to greater increases in interest rates at certain points on the yield curve and a larger available for sale portfolio in the first quarter. In March, we took the opportunity to transfer 357.5 million in securities from the available for sale to held to maturity given our substantial liquidity position. That transfer helped to reduce the impact of lower valuations on our capital ratios. Bank of Marin's strong balance sheet, liquidity, and capital continue to generate profitability across interest rate and economic cycles and serve as resources and support for the success of our exciting initiatives going forward. With that, I'll turn it back to Tim to share some final comments.