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, 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 October 24, 2022. Joining us on the call today are Tim Myers, President and CEO, and Tawny Gurdon, 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, October 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 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, everyone, and welcome to our call. Our record third quarter results highlighted our unwavering commitment to discipline fundamentals. Our balanced and measured approach supported solid loan originations, excellent credit quality, and improved efficiency. We also continued to benefit from ongoing earnings accretion from our 2021 acquisition of American River Bank. We remain focused on building long-term customer relationships based on great service and local market expertise. As such, with rates rising, our funding costs have remained low as our customers continue to value our high-touch approach. We have an exceptionally strong base of core non-interest bearing deposits that allows us to grow methodically and efficiently while delivering consistent performance in all rate environments. More than half of total deposits were non-interest bearing at September 30th. While our cost of deposits was flat, rising rates positively impacted our earning asset portfolio, increasing our net interest margin by 11 basis points in the third quarter. Positive loan origination trends persisted in the quarter on a year-over-year basis. We grew our core loan portfolio, boosted net interest income, and expanded our margins. Excluding PPP, our loans were up $5.1 million in the quarter, offset primarily by payoffs related to construction project completions. We generated $52 million in originations in the quarter, up 60% from the year earlier quarter. Our year-to-date originations of $204 million doubled what we produced in the first nine months of 2021. That noted, we are seeing some easing in demand in certain segments of our business as rising rates impact borrowing costs and borrower sentiment. We are mindful of recessionary concerns, both from where we sit today We are cautiously optimistic about the economic health of our markets through the remainder of the year. Additionally, our excellent asset quality and strong credit culture position us well to weather any slowdown. In fact, our credit quality continues to improve, with classified loans down almost 10% and non-accrual loans representing just half a percent of total loans. Subsequent to quarter end, $7.1 million in longstanding substandard loans paid off. and this will lead to further improvement in our credit metrics. As a result, there are no longer any pandemic related payment relief loans on our books. Now I'll turn to some final highlights from the third quarter. We delivered record net income of $12.2 million compared to 11.1 million in the second quarter. Diluted earnings per share of 76 cents compared to 69 cents in the second quarter. who are realizing the expected earnings accretion from the American River Bank acquisition and remain on track to meet the targets announced when the merger became public. With 53% of total deposits being non-interest-bearing, 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. With rates rising, we anticipate that deposit costs will increase in the coming quarters but we expect a gradual shift and we will carefully manage this on a customer-specific basis. Given the enduring strength of our financial performance, our Board of Directors declared a quarterly cash dividend of 25 cents per share payable on November 14, 2022. This represents the 70th consecutive quarterly dividend paid by Bank of Marin Bancorp. Now I'll turn the call over to Tani to discuss our financial results in greater detail.

Thank you, Tim. Good morning. Our third quarter earnings translated into a return on assets of 1.11% and return on equity of 11.65%, up from 1.03% and 10.74% in the second quarter. Net interest income totaled $33 million in the third quarter compared to $31.2 million in the second quarter. The increase was primarily driven by higher average balances and yields on investment securities that added $1.4 million in interest income, while our cost of deposits remained flat. Year-to-date, net interest income of $94 million was more than 25% higher than the first three quarters of 2021. This demonstrates the value added by our acquisition, other deposit growth, and higher interest rates. which overwhelmed the $6 million decline in PPP income year over year. Other changes during the third quarter included increases in cash and deposit balances as network deposits were returned to the balance sheet to replenish expected deposit outflows. Also, stockholders' equity decreased due to market value adjustments to the available for sale investment portfolio partially offset by earnings. As Tim highlighted, our third quarter tax equivalent net interest margin improved 11 basis points, driven by higher average balances and yields on interest earning assets and a stable cost of funds. We recognized 260,000 in PPP fees during the quarter, down from 573,000 in the second quarter. At the end of the third quarter, our loan portfolio had only 7.6 million remaining in PPP loans, net of $161,000 in unrecognized fees and costs. There was a provision for credit losses on loans of $422,000 in the third quarter compared to no provision in the second quarter. The provision this quarter was primarily due to an increase in qualitative factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance. There was no provision for credit losses on unfunded commitments in either the third or second quarter. Third quarter non-interest income was consistent with the second quarter at $2.7 million, with some line items increasing and others showing modest decline. Of note, we took the opportunity to replace some short-term, lower-yielding securities in the investment portfolio with higher-yielding investments, which generated the $63,000 and many more. We also want to make sure that you have a plan in place to make sure that you have a plan in place to make sure that you have There was a $345,000 valuation adjustment to other real estate owned based on a recent appraisal. Finally, a favorable resolution on a vendor contract termination fee in the third quarter resulted in a partial reversal of amounts accrued in the second quarter, reducing expenses by $200,000 quarter over quarter. As we continue to integrate and build on our most recent acquisition, The efficiency ratio illustrates the... integrate and build on our most recent acquisition. The efficiency ratio illustrates the... quarter and year-to-date, respectively, both improved from 55.7% in the prior quarter and 65.7% in the first nine months of 2021. As there were substantially more acquisition-related expenses in the comparable periods, The improvements on a non-GAAP basis were 257 basis points quarter over quarter and 433 basis points year over year. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.1% at September 30 compared to 14.7% at June 30. and the bank's total risk-based capital ratio was 14.7% at September 30 compared to 14.2% at June 30. September 30 tangible common equity of 7.5% for Bancorp and 7.3% for Bank of Marin were down 24 and 53 basis points respectively due to a $22 million increase and after-tax unrealized losses on available-for-sale securities associated with rising interest rates during the third quarter, partially offset by earnings. Overall, Bank of Marin's strong balance sheet, liquidity and capital continue to generate profitability across interest rate and economic cycles and enable us to execute on strategic initiatives going forward. With that, I'll turn it back to Tim to share some final comments.