Bank of Marin Bancorp

Good morning, everyone. Welcome to the Bank of Marin Bancorp's Q3 2020 earnings call. If you would like to ask a question during the Q&A period of this call, please press star 5 to enter the queue. You may also press star 5 to remove yourself from the queue. If at any time during the conference call you need to reach an operator, please press star 0. I will now turn the call over to Yahida Garcia-Parea.

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 30th, 2023. I'm Yahida Garcia-Perea, Marketing and Corporate Communications Manager 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. Joining us on the call today are Tim Myers, President and CEO, and Tani Gertin, Executive Vice President and Chief Financial Officer. Our earnings press release and supplementary presentation, which we issued this morning, can be found in the investor relations portion of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non-GAAP financial measures. Please refer to the reconciliation table on 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 20th, 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 a discussion on these risks and uncertainties, please review the forward-looking statement disclosures in our earnings press release, as well as our SEC filings. Following our prepared remarks, Tim, Tawny, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Thank you, Yehada. Good morning, everyone, and welcome to our third quarter earnings call. Our improved third quarter results reflect meaningful progress that we made to reposition our balance sheet out of borrowings and securities and into deposits and cash to expand our net interest margin, increase our liquidity diversification, and improve our interest rate risk position. We generated 16% sequential growth in net income while maintaining comparable loan balances, strong credit quality and well-managed expenses. We further strengthened our core deposit franchise during the quarter by engaging new customers and deepening ties with existing clients through exceptional service and our local market expertise. These efforts led to strong deposit growth for the second consecutive quarter, including growth and non-interest bearing deposits, which continue to represent 48% of our total deposits. Notably, during the quarter, we added more than 1,200 new accounts, 38% of which were with new clients. While deposit costs increased in the quarter, The pace of increase slowed dramatically from the second quarter as we continue to effectively manage our deposit costs in an ongoing competitive environment. Interest-bearing deposit costs increased 31 basis points between June and September compared to 77 basis points between March and June. Historically, our overall cost of funds has trended well below peer averages, reflecting our long-term approach to customer engagement which emphasizes building connections with a full suite of products and services rather than competing on price alone. We continue to work hard at improving our net interest margin by executing on our balance sheet initiatives which not only include raising deposits and building our loan pipeline but also reallocating part of our investment portfolio to cash and applying fair value hedges to other securities. Those actions enabled us to expand net interest margin by three basis points from the second quarter. We also substantially paid down our short-term borrowings during the quarter with cash flows from our securities and loan portfolios, as well as deposit growth as part of an ongoing strategy to reduce interest costs and support our net interest margin. While borrowings and cash fluctuate with day-to-day changes in deposits, the borrowing balance net of cash fell to zero earlier this month. We expect our funding cost increases to remain moderate in coming quarters, given expectations that Fed rate hikes and customer migration of funds from operating accounts to interest bearing accounts will continue to slow. Our loan portfolio and loan production was relatively stable in the third quarter, as we remained disciplined in our underwriting. However, Our loan pipelines have expanded meaningfully and fourth quarter loan production is shaping up to be strong, particularly in the area of commercial and industrial where we are seeing a nice diversity of attractive opportunities. We generated momentum in the third quarter that has continued into the fourth quarter and since quarter end have funded or approved for funding amounts exceeding Q3 total originations. In most cases, our new loans are coming onto our books at meaningfully higher rates than those being paid off, and we expect this will provide further support for our NIM. David Bloom, who joined us as executive vice president and head of commercial banking in July, is emblematic of our ongoing recruiting efforts and the results that follow. A commercial banking veteran with more than 25 years of experience, David is responsible for the vision and growth of the bank's commercial banking division comprised of eight regional offices located throughout Northern California, including our wine practice. We believe his growing team is well positioned to drive further momentum late this year and moving into the new year. Importantly, with new commercial client relationships comes the potential for fee-based opportunities and new deposits. We believe that this will help the bank generate improved profitability, continued robust earnings generated capital, and strong returns on behalf of our shareholders. Critically, as we pursue growth, we remain focused on prudent risk management and strong credit quality that reflects our consistent underwriting standards and customer selection across cycles. We also continue to proactively manage our credit and support our borrowers, building momentum with high quality credits while carefully monitoring our loan portfolio and rating risk appropriately. Non-accrual loans totaled 0.27% of the loan portfolio at September 30, compared to 0.1% at June 30. We moved two loans totaling $4 million to non-accrual status in the third quarter. The increase was driven by a legacy acquired bank loan, and we are working with that bar to ensure the best possible outcome. All of our non-accrual loans are collateralized by real estate with no expected credit loss as a quarter end. Classified loans comprised only 1.9% of total loans at quarter end, up only slightly from the prior quarter. Looking closer at our commercial real estate portfolio, which accounted for 74% of our total loan balances of September 30, 23% were owner-occupied, which we believe carry a different risk profile than non-owner-occupied loans in this environment. Our $364 million non-owner occupied office portfolio is granular and consists of 142 loans with an average loan size of $2.6 million, the largest loan being $17 million. The weighted average loan-to-value was 56% and the weighted average debt service coverage was 1.68 times based on our most recent data. Earlier this quarter, we conducted a review of the refinance risk in our non owner occupied commercial real estate portfolio, the results of which can be seen on slide 13 of the earnings presentation. We evaluated 36 loans totaling $97 million with total commitments over $1 million each that mature or reprice in 2023 or 2024. We determined that the refinance risk on these loans is manageable with weighted average debt service coverage ratios ranging from 1.28 to 2.01 times across the four cohorts based on current rates. In summary, we made important progress on both sides of our balance sheet in the third quarter and continue to make headway as we position the bank for improved profitability in the quarters ahead. Finally, the bank is pleased to welcome Cheatham Gensler to its board of directors as announced in our recent 8K. Cheatham brings extensive leadership and financial services experience to the board, including the development and execution of transformative growth, expansion, and investment strategies for organizations. In 2021, she established an executive coaching and organizational consulting firm in which she also serves as an executive coach. With that, I'll turn the call over to Tani to discuss our financial results in more detail.