Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the second quarter ended June 30th, 2024. I am Chrissy Meyer, Corporate Secretary for Bank of Marin Bancorp. 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 Meyers, President and CEO, and Tani Gurtin, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found along with a supplementary presentation in the investor relations section of our website at bankofmarin.com, where this 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 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, July 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 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, 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, Chrissy. Good morning, everyone, and welcome to our second quarter earnings call. At a high level, during the second quarter, we benefited from the more robust loan origination engine that we have built, which resulted in an increase in our total loans primarily in commercial loans, where we are adding full banking relationships that also bring core deposits to the bank, a continued moderation in the level of increase we are seeing in our cost of deposits, an increase in our net interest margin, ongoing disciplined expense control, and on a broad basis, continued strong asset quality within our loan portfolio. With the talent we have added to our banking teams, Along with those teams doing an outstanding job of developing attractive lending opportunities, we are seeing a higher level of loan production while still maintaining our discipline underwriting criteria. During the quarter, we originated $94 million in loan commitments with $64 million in outstanding balances, 69% of which closed in June and will thus positively impact net interest income and margin next quarter. The new loans are coming on the books at higher rates than those paying off, which, along with our continued success in effectively managing our deposit costs, is contributing to positive trends in our net interest margin, which in June was 21 basis points higher than it was in May. During the quarter, we also made some staffing adjustments throughout the company to adjust our expense levels to the current operating environment while investing in talent and technology that will support our future growth and improvement in efficiencies. These staffing adjustments will result in 2.7 million of annualized cost savings going forward. As we announced in June, we also took advantage of our strong capital position to execute on a strategic balance sheet repositioning to improve future earnings. As part of this balance sheet repositioning, we sold $325 million in low-yielding investment securities, which resulted in the net loss reported in the second quarter. The $293 million in proceeds from the security sales are being reinvested into higher-yielding earning assets that will be accretive to both our NIM and our net income. By the end of the second quarter, we had redeployed some of those proceeds to fund new loans, repay 58 million of interim borrowing, and purchase 19 million in new investment securities at a higher rate. July redeployment activity includes additional purchases of investment securities, new loan originations, and the purchase of a $36 million portfolio of high-quality in-market residential mortgage loans with good credit metrics and an expected yield of approximately 6.3% based on our prepayment expectations. So far, the rates at which we are reinvesting confirm the estimated average yield of 5.75% assumed in calculating the capital earned back, accretion to net interest margin, and the accretion to earnings. In terms of asset quality, as I mentioned earlier, We are seeing general stability in the portfolio and we are not seeing the formation of material new problem loans. During the second quarter, we moved a $16.7 million non-owner occupied CRE classified loan to non-accrual status, which was the primary contributor to our provision. The underlying collateral property is a multi-story office building located in San Francisco, that was materially impacted by the pandemic and subsequent remote work and vacancy issues. This isn't the first time we've discussed this credit on these calls as we downgraded the credit to substandard in the fourth quarter of 2021 and have continued to evaluate the occupancy, operating income, underlying valuation and sponsorship support. The loan is guaranteed and payments have always been current with enough pledge cash held at the bank to cover payments to maturity in 2026. Nonetheless, a recent appraisal indicated that the current value of the property would not support the par value of the loan. If the loan were due today, a substantial reduction in the loan balance would be required to repay the loan based on current rents, occupancy, and sponsorship wherewithal. Based on this consideration, we chose to provision for that potential shortfall. The provision amount is based on information we have today and may be adjusted depending on future developments. Leasing activity for the property has seen improvement in recent months and we continue to monitor closely. By placing the loan on non-accrual, the contractual payments we continue to receive from the borrower will go toward paying down the principal, reducing our loan balance at a faster rate. We also had one commercial banking relationship to a consumer goods company that we moved into the non-performing status due to idiosyncratic issues with the borrower. The borrower is actively pursuing refinancing and asset sale options and is currently in the due diligence process of a sale, which will substantially reduce our borrowings. Now, turning to deposits. In the second quarter, we had a decline in total deposits, which was partially attributable to seasonality and deposit flows related to tax payments and bonus distributions, some outflows related to real estate investments, some funds that were transferred by clients to our wealth management business, as well as the intentional runoff of some higher cost deposits. Shortly after quarter end, balances began to climb again. This is consistent with the usual seasonality we see in the third quarter of deposit inflows. Importantly, at June 30th, our non-interest bearing deposits remained at 44% of our total deposits as we continue to benefit from our relationship banking model with high touch service that results in clients choosing Bank of Marin for reasons not solely dependent on the rates we pay on deposits. Even with the loss recognized on the security sales, Our capital ratios remain very strong, with a total risk-based capital ratio of 16.5% and a TCE ratio of 9.92%, which increased from the prior quarter due to a decrease in our tangible assets. In summary, we made substantial progress through our balance sheet repositioning and our growing momentum in business development, further strengthening our foundation for profitability improvements and long-term growth. With that, I'll turn the call over to Tawny to discuss our financial results in more detail.

Thank you, Tim. Good morning, everyone. Bank of Marin continues 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 for earnings improvement in 2024 and beyond. On a reported basis, we incurred a net loss of $21.9 million for the second quarter or $1.36 per share, which was due to the $32.5 million pre-tax loss we recorded on the sale of investment securities as part of our balance sheet repositioning strategy. Excluding the loss on security sales, On a pro forma basis, we had net income of $1 million or 6 cents per diluted share compared to 2.9 million or 18 cents per share in the first quarter. The remaining 1.9 million decline in earnings was primarily due to the 5.2 million second quarter provision for credit losses related to the loans Tim discussed earlier, somewhat offset by a reversal of the tax provision recorded in the first quarter. Other than the security sales and provision, operating earnings were stable quarter over quarter. While net interest income was slightly lower than the prior quarter, we had a two basis point increase in our net interest margin, primarily due to new loans coming on the books at higher rates, a moderation in the pace of deposit cost increases, and the initial benefits of our balance sheet restructuring. Our non-interest expense increased this quarter, mostly due to our annual charitable contributions typically made during the second quarter. Salary and benefits increased $280,000, reflecting both annual merit increases and the costs associated with the staffing adjustments Tim discussed. Aside from those items, most areas of non-interest expense were relatively consistent with the prior quarter. Moving to non-interest income, excluding the loss on security sales, all other areas of non-interest income were also relatively consistent with the prior quarter. Our total deposits were 3.2 billion at June 30th, which was down 70 million from March 31st related to the activity Tim mentioned earlier. Due to the strength of our deposit base, we have not needed to tap the brokered CD market or run CD campaigns and non-interest-bearing deposits continue to account for 44% of our total deposits. And as Tim noted, we have seen total deposits increase so far in July consistent with our typical historical pattern. Our average cost of deposits increased just seven basis points in the second quarter compared to a 23 basis point increase in the prior quarter, and monthly trends continue to show a moderation in the pace of deposit price increases. Disciplined credit management remains a Bank of Marin core value as well. We continue to prudently add to our level of reserves and the 5.2 million provision for credit losses we recorded in the second quarter increased our allowance for credit losses to 1.47% of total loans. Importantly, actual charge offs remain low. Loan balances of 2.1 billion at the end of the second quarter were up 28 million from the prior quarter with a notable percentage increase in our CNI portfolio. Given the continued strength of our capital ratios, our board of directors declared a cash dividend of 25 cents per share on July 25th, the 77th consecutive quarterly dividend paid by the company. With that, I'll turn it back to Tim to share some final comments.