Bank of Marin Bancorp

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the third quarter ended September 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 Myers, President and CEO, and Tawny Gertin, Executive Vice President and Chief Financial Officer. Our earnings news release and supplementary presentation, which were issued this morning, can be found in the investor relations section of our website at bankofmoran.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 in our earnings news release for both GAAP and non-GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, October 25th, 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 on these risks and uncertainties, please review the forward-looking statements disclosure in our earnings news 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 quarterly earnings call. Our third quarter results reflect the positive benefits of the actions we took in the second quarter to both reposition our balance sheet and reduce operating expenses. This resulted in an increase in our net interest margin, a lower level of operating expenses, and improvements in our ROA and efficiency ratios. On a broad basis, we continue to have strong asset quality within our loan portfolio and work through previously reported matters with no new issues emerging. The combination of these positive trends and some share repurchases led to an increase in our book value per share. Our banking team, reinforced with new members, is doing an outstanding job of developing attractive lending opportunities and generating solid loan production while still maintaining our discipline underwriting and pricing criteria. During the quarter, we generated $44 million in total loan commitments with $28 million funded. Along with the portfolio of residential mortgage loans purchased as part of the balance sheet repositioning, This resulted in a small increase in our total loan balances during the quarter. We are building a more diversified pipeline of loans consistent with our discipline underwriting that are expected to fund in future quarters and positively impact both our total loan balances and our average loan yields. We also have positive trends in fee income. Additionally, total deposits increased $96 million during the quarter. primarily driven by a $55 million increase in non-interest-bearing deposits, including $17 million coming from nearly 1,200 new deposit accounts during the quarter. Our proportion of non-interest-bearing deposits increased slightly to 45% of total as we continue to benefit from our relationship banking model with high-touch service. We were able to initiate our falling rate deposit strategy in anticipation of Fed funds rate cuts. and deposit balances increased with typical third-quarter seasonal inflows. In terms of asset quality, we are seeing general stability in the portfolio with no material new problem loans. Given our improved financial performance and prudent balance sheet management, our capital ratios remain very strong with a total risk-based capital ratio of 16.4 percent and a TCE ratio of 9.72 percent. Our strong capital, and confidence in credit quality positioned us to resume share repurchases last quarter, buying back 220,000 shares totaling over $4 million. We believe this was in the best interest of our shareholders, preserving our high cap level of capital and maintaining our flexibility to make capital allocation decisions that will enhance shareholder value. With that, I'll turn the call over to Tani to discuss our financial results in more detail.

Thanks, 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 further earnings improvement in the future. We generated 4.6 million in net income for the third quarter, or 28 cents per share, as we began to realize the full anticipated benefit to profitability of the balance sheet restructuring we did during the second quarter. Our net interest income increased 8% from the prior quarter to 24.3 million, largely driven by an 18 basis point increase in our net interest margin, primarily due to balance sheet repositioning and a shift in deposit pricing that reversed the upward trend in deposit costs while staying aligned with the broader market. By the middle of the third quarter, our net interest margin had increased by 30 basis points over the level just prior to the balance sheet repositioning, consistent with our expectations, and we continue to see that benefit. The yield on loans was negatively impacted by nine basis points in the third quarter as a result of interest reversals on two non-accrual loans, reducing net interest margin for the quarter by six basis points. Our non-interest expense decreased by one and a half million from the prior quarter, mostly due to a decline in salaries and benefits expense due to staff reductions made in the second quarter and continued reallocation of staffing to align with the strategic direction of the bank. Additionally, the decline resulting from charitable contributions annually granted in the second quarter was offset by a $615,000 accrual for a non-repeatable legal resolution which negatively impacted earnings per share by 4 cents. Moving to non-interest income, excluding the loss on security sales that impacted our second quarter results, we had an increase in non-interest income, largely due to an increase in wealth management revenue. Our total deposits were 3.3 billion at September 30th, As Tim mentioned, we typically see seasonal inflows in the third quarter, and due to the nature of our client base with many professional services firms, we expect to see some seasonal outflows in the fourth quarter due to bonus payments, profit and other distributions, and larger business expenses. Our average cost of total deposits increased just one basis point in the third quarter compared to a seven basis point increase in the prior quarter. Not only does that continue the deceleration of deposit cost increases seen in the first and second quarters, but it also reflects a turn in deposit costs late in the third quarter. Since initiating our declining rate deposit pricing strategy, the average spot rate on non-deposit network interest-bearing balances declined 18 basis points, while the balances themselves went up approximately 10 million by September 30th. Our pricing strategy weighs rate reductions in the context of relationship pricing, balance sheet growth, and net interest margin considerations. Disciplined credit management remains a hallmark of Bank of Marin as well. Classified assets were down primarily due to one classified non-accrual loan for $1.8 million that was paid off in full, including all accrued interest. Non accrual loans had a net increase primarily related to an $8.1 million real estate loan whose renewal negotiations remain ongoing with no expectations for actual losses. As Tim mentioned, overall there were no new issues and increases were partially offset by pay downs, payoffs and returns to accrual status. 50% of non-accrual loans are paying as agreed and 80% are secured by real estate. Due to the stability in our loan portfolio, we did not record any provision for credit losses in the third quarter and we reversed 233,000 in provisions for losses on unfunded commitments. The allowance for credit losses remains high at a level of 1.47% of total loans. Loan balances of 2.1 billion at the end of the third quarter were up 8 million from the prior quarter. We had some movement from construction loans to CRE loans, while the largest area of growth was in residential mortgages, primarily due to the portfolio of high quality in-market residential mortgage loans that we purchased with part of the proceeds from the security sales in the second quarter. Given the continued strength of our capital ratios, our board of directors declared a cash dividend of 25 cents per share on October 24th, the 78th consecutive quarterly dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.