Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the fourth quarter ended December 31st, 2022. I am Andrea Henderson, Director of Marketing for Bank of Marin, and thank you for your patience this morning. 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 0. This conference call is being recorded on January 23, 2023. Joining us on the call today are Tim Myers, President and CEO, and Tawny Gurtin, Executive Vice President and Chief Financial Officer. Our earnings press release, which was issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast. Before we get started, I wanted 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, January 20, 2023 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. We are pleased with our record fourth quarter and full year earnings. Both reflected the strength of our relationship banking model paired with disciplined expense control, liquidity, and credit risk management efforts. As always, we remain dedicated to disciplined underwriting and prudent lending. Originations eased in the fourth quarter, but our $240 million in full-year production represented the second best since 2019 without the need to compromise credit quality. In fact, we saw steady de-risking of our credit portfolio over the course of the year. We are, of course, mindful of recessionary concerns and associated impact on loan demand. However, we will continue to rely on our balanced approach to meeting customer needs while maintaining a strong credit culture in order to navigate any economic slowdown. We provide exceptional service and local market expertise, deepening ties with our customers without competing strictly on price or taking unnecessary risks. Although our loan balances declined modestly from the third quarter, we funded $35 million in commercial loans in early January 2023 that have been scheduled to close in the fourth quarter of 2022. $20 million of that is expected to remain on our balance sheet as we have participation commitments for $15 million of that total amount. Our asset sensitive balance sheet helped our performance in 2022, driving yields on interest earning assets and we will be diligent about protecting our net interest margin in 2023. More than half of total deposits were non-interest bearing at the close of 2022. While our cost of deposits rose just two basis points in the fourth quarter, rising rates boosted our tax equivalent net interest margin by 10 basis points in the fourth quarter and 23 basis points over the fourth quarter of the prior year. Finally, earnings and synergies generated from our 2021 acquisition of American River Bank further contributed to our improved efficiency ratio, allowing us to allocate resources towards our strategic initiatives as we head into the new year. In Q1 2023, we will deliver on our plans to further gain efficiencies from the merger by consolidating four northern Sonoma County branches into two that have overlapping customer coverage. Also in the quarter, we will close two additional branches where we will be able to serve customers effectively from nearby locations. These efforts are expected to generate savings of $470,000 in 2023 and approximately $1.4 million per year thereafter, that will be reinvested in both talent and technology. Now I'll turn to some additional highlights. We produced record net income of $12.9 million in the fourth quarter compared to 12.2 million in the third quarter. Diluted earnings per share of 81 cents compared to 76 cents in the third quarter. For full year 2022, we generated record earnings of 46.6 million up from 33.2 million in 2021. Deluded earnings per share were $2.92 for the quarter compared to $2.30 per share the prior year. Non-interest bearing deposits accounted for 51.5% of total deposits at the close of the year, down slightly from the third quarter, but our average cost of deposits remained very low at just eight basis points. While the market anticipates interest rates will climb further in the first quarter, We will continue to carefully manage deposit pricing on a customer-specific basis. Credit quality, as I noted, is strong and improving, with fourth quarter non-accrual loans declining $8.2 million, or 77% in the fourth quarter, and representing only 0.12% in total loans, down from 0.49% at September 30. Our efficiency ratio for the fourth quarter was 50.92%, compared to 52.2% for the prior quarter and 56.92% in the fourth quarter of 2021. The improvement was driven by lower operating expenses and higher net interest income on both loans and securities. Given the consistency of our performance and record earnings, our board of directors declared a quarterly cash dividend of 25 cents per share payable on February 10, 2023. This represents the 71st consecutive quarterly dividend paid by Bancom Marin Bancorp. Now I'll turn the call over to Tani to discuss our financial results in more detail.

Thank you, Tim. Good morning, everyone. We're proud of our fourth quarter earnings, which translated into a return on assets of 1.2% and return on equity of 12.8%, up from 1.1% and 11.7% in the third quarter. Net interest income of $33.4 million in the fourth quarter increased $343,000 over the prior quarter as higher yields more than offset the 2.2% sequential decline in earning assets and the two basis point increase in cost of deposits. For the full year, net interest income was $127.5 million 21.4% from 2021 as a result of higher earning assets generated from the acquisition as well as deposit growth in 2021 and lower funding costs primarily related to the early retirement of subordinated debt in 2021. Loan balances were down 3% in the fourth quarter as $55 million in payoffs consisting largely of real estate asset sales and cash paydowns More than offset new production of 36 million. Deposits were also down in the fourth quarter, decreasing by 329 million, or 8.4% from the prior quarter. While some of the decline can be attributed to our commercial customers' year-end activity and specific planned events, we have been anticipating outflows of pandemic surge deposits for some time. At the end of 2021, the bank held $521 million in cash and deposit network balances in anticipation of expected and potential unexpected outflows. Over the course of the year, those balances, as well as $112 million in borrowings and $164 million reduction in loans, financed deposit outflows and growth in the securities portfolio. Our fourth quarter tax equivalent net interest margin improved 10 basis points driven by the higher yields on interest earning assets partially offset by a six basis point increase in our cost of interest bearing liabilities. There was no provision for credit losses on loans in the fourth quarter compared to a provision of $422,000 in the third quarter. and increase in qualitative risk factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance was offset by the decrease in loan balances. Fourth quarter non-interest income of 2.6 million was down slightly from the third quarter mostly due to the reduction in fee generating deposit network balances. 2022 non-interest income decreased increased $773,000 over 2021 due to higher fees on balances held at deposit networks and more transaction volume due to the larger size of the bank. Those increases were partially offset by the reduction in earnings on bank-owned life insurance. Non-interest expense of $18.3 million in the fourth quarter was down $368,000 in the third quarter. Decreases from the prior quarter included a $957,000 reduction in salaries and employee benefits largely due to a bonus accrual adjustment and an increase to the discount rate applied to retirement plans. In addition, other real estate-owned expenses declined due to a $345,000 valuation adjustment in the prior quarter. Full-year non-interest expense increased $2.6 million over 2021 as a result of our larger size, investments in software and equipment, the valuation adjustment on real estate owned, and accelerated costs associated with upcoming branch closures. Those increases were partially offset by the $5.6 million reduction in pre-tax merger-related and conversion costs. We continue to reap the positive benefits of operating leverage as our efficiency ratios were 50.9% and 54.4% for the fourth quarter and full year respectively, both improved from 52.2% in the prior quarter and 63.1% in 2021. As there were substantially more acquisition-related expenses in 2021, the year-over-year improvement on a non-GAAP basis was 374 basis points. All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.9% at December 31 compared to 15.1% at September 30. And the bank's risk-based capital ratio was 15.7% at December 31 compared to 14.7% at September 30. Year-end tangible common equity of 8.2% for Bancorp and 8.1% for Bank of Marin were up 76 and 85 basis points respectively from the prior quarter due to the decrease in after-tax unrealized losses on available-for-sale securities associated with interest rate decreases during the fourth quarter, as well as the contribution from our strong earnings. Overall, Bank of Marin's strong balance sheet, liquidity, and capital continue to yield healthy results, as has been the case across many interest rate and economic cycles. We believe that this will continue in 2023, enabling us to further invest in our strategic initiatives that will further improve profitability and strengthen our franchise. With that, I'll turn it back over to Tim to share some final comments.