Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended March 31st, 2024. I'm Yahaira 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 Gerton, 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 bankofmoran.com, where this call is also being webcast. Post captioning is available during the live webcast as well as on the web 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 in 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 26, 2024, 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 statement disclosure in our earnings press release, as well as our SEC filings. Following our prepared remarks, Tim, Connie, and our Chief Credit Officer, Masako Stewart, will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers. Thank you, Yohana.

Good morning, everyone, and welcome to our first quarter earnings call. At a high level during the first quarter, we showed deposit stability, a declining pace of deposit cost increases, and continued strong liquidity. We also added to the foundation we were building for a more robust loan origination engine. Our smaller balance sheet and higher overall deposit costs resulted in slightly compressed net interest margin and core earnings reduction in the first quarter. Operating expenses, which did include some seasonal increases and downward incentive adjustments, were also higher on balance as we added key new commercial banking hires, and our town is already helping pipeline activity in both the North Bay and Sacramento. Importantly, our concerns about overall credit quality and loss potential remain unchanged, despite risk-grade migrations. In the quarter, we capitalized on the dislocation caused by the regional bank failures and, as I noted, attracted proven relationship bankers to help drive new client acquisitions. Notably, the pace of deposit cost increases slowed during February and March, reaching the lowest incremental level since February 2023. These catalysts complement the strategic repositioning of our balance sheet late last year when we divested lower-yielding securities and scaled down short-term borrowings to improve our interest rate risk position for the year ahead. We continued our facilities optimization by consolidating two of our commercial banking offices into one, saving approximately $650,000 this year and an $800,000 annual as-run rate beginning in 2025. We will continue to evaluate a range of strategic possibilities to optimize our balance sheet and expense structure, create efficiencies, and increase profitability on behalf of our shareholders. We also remain firmly committed for a long-established conservative approach to credit. Overall, credit quality remains strong with non-accrual loans at just 0.31% of total loans a quarter end, down from 0.39% the prior quarter. As we've indicated, our relationship banking model enables us to work closely with our commercial real estate borrowers most directly impacted by the current environment. We are also able to manage risk on certain CRE loans with vacancies through enhancements to collateral either by way of cash or other income producing properties or by having the borrower pay down the loan. During the first quarter, we made good progress in this area and it remains a key focus. Classified loan levels did increase in the first quarter. This was due largely to three relationships of different types and geographies. Two are CRE loans that are fully secured and supported with personal guarantees, and we believe there is minimal risk in these credits. We are not seeing the formation of material new problem loans, just previously identified problem loans continuing through the workout and resolution process. In the first quarter, we upgraded four loans totaling more than $10 million from special mention to pass. Our non-owner-occupied office portfolio overall is made up of 151 loans with an average loan size of only $2.4 million. The weighted average loan-to-value was 60%, and the weighted average debt service coverage was 1.6 times, based on our most recent data. There is no notable change from what we reported at year end. Our office CRE book in San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner occupied CRE portfolio. I also want to note that we have minimal exposure to rent-controlled properties within our multifamily portfolio. Only 32 loans with an average balance of only $1.6 million, or 2.5% of our total loan portfolio. Like the rest of our book, we are monitoring this very closely. As I noted, with our new commercial hires, we're seeing more new attractive opportunities with a dramatically improved pipeline, so the timing to close is difficult to predict. As such, our loan portfolio did decrease slightly as our originations in the quarter were offset by payoffs, scheduled repayments, and strategic exits. Much of the payoffs were related to construction loans as a result of project completion. Now turning to deposits. We maintained total deposits with quarter imbalances essentially flat from December 31st. We attracted new customers during the quarter, but some clients also moved cash into alternative investments to capture higher returns, and we also saw seasonal outflows that we often see in Q1 of each year. Our non-interest-bearing deposit level remains favorable at 44% of total deposits. We continue to focus on relationship banking with high-touch service, being appropriately competitive on deposit pricing, and maintaining our strong core deposit franchise. We anticipate our funding costs to further stabilize this year. We also continue to maintain high levels of capital and liquidity, and we are in a position of strength. Our total risk-based capital ratio improved to 17.05% at quarter end, compared to 16.89% at the close of 2023. Total liquidity of approximately $1.9 billion consisted of cash, unencumbered securities, and total borrowing capacity. In summary, we made substantial progress by adding talent and building upon our foundation for profitability improvements and long-term growth, and these efforts are ongoing. With that, I'll turn the call over to Tani to discuss our financial results in greater detail.

Thanks, Tim. Good morning, everyone. With interest rates higher for longer and lingering economic uncertainty, we continue to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital levels. while delivering exceptional service to existing and new customers as we position Bank of Marin for continued earnings improvement in 2024. We generated net income of $2.9 million for the first quarter, or $0.18 per diluted share, compared to net income of $610,000, or $0.04 per share, in the fourth quarter of last year. $4.2 million of the increase in net income quarter over quarter was due to losses on security sales in the fourth quarter of 2023. After repositioning our balance sheet out of borrowings and some securities, lower earning assets combined with the higher cost of deposits to make net interest income $1.6 million lower than the prior quarter. However, during the first quarter, we maintained our non-interest-bearing deposit levels while capturing higher yields on new loans. This largely offset increases in interest-bearing deposit costs, and as a result, our tax-equivalent net interest margin decreased by only three basis points in the first quarter, following a five-basis point increase in the fourth quarter. Taken together, our net interest margin has stabilized over the past two quarters, and we are optimistic that we will see continued stability in the near term, with a bias for improvement from new loans and existing loan repricing. At the same time, we continue to evaluate strategies that support margin expansion. Our non-interest expense base increased somewhat with the new hires Tim highlighted. Additionally, the seasonal increases related to 401k matches tied to bonus payments and lower loan origination cost deferrals contributed to the $1.9 million increase over the fourth quarter. Professional service expenses related to the annual audit also tend to be higher in the first quarter. Increases were somewhat tempered by downward adjustments to incentive accruals in the first quarter, but there were much larger reductions to incentive profit sharing, stock-based compensation, and retirement plan accruals in the fourth quarter of 2023. Moving to non-interest income, excluding the $5.9 million loss on the sale of FF securities associated with our fourth quarter balance sheet restructuring, Non-interest income of $2.8 million was stable quarter over quarter. In addition to the total risk-based capital strength Tim noted, BankCorp's tangible common equity to tangible assets ratio improved to 9.76% in the first quarter from 9.73% at December 31st. Our contingent liquidity is plentiful, and our deposit base is well diversified with businesses representing 59% of balances and 32% of accounts. Our largest depositor represented just 2% of total deposits, while our four largest depositors comprised 5.3%. We maintained our total deposits at $3.28 billion on March 31st without tapping the brokered CD market or running CD campaigns. And non-interest-bearing deposits increased slightly to 44% of total deposits from 43.8% at December 31st. The average cost of deposits increased 23 basis points to 1.38% in the first quarter, compared to a 21 basis point increase in the prior quarter. Underlying these changes is a clear downward trend in monthly increases since the peak in March 2023. We believe we are appropriately competitive in regard to deposit pricing, given our relationship banking model that differentiates Bank of Morant. Disciplined credit management remains a Bank of Marin core value as well. Our $350,000 provision for credit losses in the first quarter compares to a provision of $1.3 million for the previous quarter and brought the allowance for credit losses to 1.24% of total loans compared to 1.21% as of December 31st. Typically, loan originations are lower in the first quarter of the year, and this year, new originations of 12.4 million were more than offset by payoffs of 21.8 million, with rates on new loans averaging 266 basis points above the rates on loans paid off. Loan balances of 2.1 billion for the first quarter were down 18.8 million from the prior quarter after amortization and changes in utilization. our Board of Directors declared a cash dividend of 25 cents per share on April 25th, the 76th consecutive quarterly dividend paid by Bancorp. We didn't repurchase any stock during the quarter. Instead, we concentrated on building upon our strong capital, reinforcing credit protections, deepening relationships with our customers, and developing new business. We regularly evaluate the merits of stock buybacks We also continue to assess additional possible adjustments across our balance sheet and expense structure, with a focus on finding new ways to accelerate net interest income expansion and self-fund efficiency improvement. Potential actions are run through our capital plan and interest rate risk simulations, along with rigorous stress tests to evaluate long-term benefits. In addition to meaningful profitability improvements, we screen for reasonable earn-back periods, ample ongoing liquidity and capital, and sustainable balance sheet strength and profitability. With that, I'll turn it back over to Tim to share some final comments.