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, 2024. I'm Christy Meyers, 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 Dave Bonacorso, 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, January 24th, 2025, and may contain forward-looking statements that involve risks and uncertainty. 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, Dave, 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, Christy. Good morning, everyone, and welcome to our quarterly earnings call. Our fourth quarter results reflect continued improvement in our financial performance due to actions we took earlier in 2024 to both reposition our balance sheet and reduce operating expenses. This resulted in an increase in our net income and earnings per share, largely driven by an expansion in our net interest margin and a lower level of operating expenses. On a broad basis, we continue to have strong asset quality within our loan portfolio. We made progress on previously reported matters with no new issues emerging. During the fourth quarter, our non-accrual loans and classified loans both declined, largely due to pay downs on these loans, and we had an immaterial amount of net charge-offs. We continue to see improvements in leasing activity in San Francisco. A large non-accrual loan for a previously vacant San Francisco property is now 100% occupied with cash flows that meet a conforming debt service coverage. Our banking team, reinforced with new members, is doing an improved and more consistent job of developing attractive lending opportunities and generating solid loan production while still maintaining our discipline underwriting and pricing criteria. While overall loan demand remains fairly consistent, due to the efforts of our banking team, we are getting a larger volume of opportunities that are within our markets. During the quarter, we originated $54 million in loan commitments with $47 million in outstanding balances. Our originations were a well-diversified mix of both commercial and commercial real estate loans. Additionally, we are seeing more granularity in the loan portfolio and made nearly twice as many commercial and construction loans as in the same period last year. The outstanding balances from December's bookings will position the bank to benefit from a higher level of interest income during the first quarter when we have the full quarter contribution of these new loans. Our total deposits declined in the fourth quarter. As we indicated on our last call, this was expected given the typical seasonal deposit outflows we see during the fourth quarter due to the nature of our client base with many professional service firms that have typical year-end fluctuations. Despite the outflows, our proportion of non-interest bearing deposits remained at a high level at 43% of total deposits, as we continue to benefit from our relationship banking model with high touch service. Due to our loyal customer base, we have not experienced any material related deposit outflows as we adjusted our rates in response to the Fed's rate reductions. Given our improved financial performance and prudent balance sheet management, our capital ratios increased during the fourth quarter and remain very strong with a total risk-based capital ratio of 16.5% and a TCE ratio of 9.93%. With that, I'd like to welcome our new CFO, Dave Bonacorso, and turn the call over to him to discuss our financial results in more detail. Thanks, Tim. Good morning, everyone.

We generated $6 million in net income for the fourth quarter, or $0.38 per share. both of which are higher than the prior quarter as we continue to benefit from the balance sheet repositioning and expense reduction actions we took earlier in the year. Our net interest income increased 4% from the prior quarter to $25.2 billion, largely driven by a 10 basis point increase in our net interest margin. The expansion in our net interest margin was attributable to a 10 basis point decrease in our cost of deposits, while our average yield on interest earning assets was unchanged from the prior quarter despite declines in short-term interest rates. Our average yield on loans increased by nine basis points during the fourth quarter, and we expect to see similar improvements in the coming quarters due to repricing benefits within our existing loan book, as well as higher yields from new loan originations. Our non-interest expense decreased by $2.1 million from the prior quarter, mostly due to a decline in salaries and benefits expense resulting from true-ups to accrued incentive compensation. Moving to non-interest income, we had a slight decline from the prior quarter, primarily due to lower wealth management revenue. This was related to an increase in fees during the third quarter for activities to resolve a large trust account and distribute assets. On a year-over-year basis, our wealth management revenue was higher, which reflects our increase in assets under management during 2024. Our total deposits were $3.2 billion at December 31st. As Tim mentioned, we typically see some seasonal outflows in the fourth quarter, which resulted in the decline we saw in deposits from the end of the prior quarter. Our average cost of total deposits declined 10 basis points in the fourth quarter as we have passed through rate cuts to our deposit customers without seeing any material rate-related outflows. During the fourth quarter, our interest-bearing cost of deposits declined by 19 basis points, which is generally consistent with net interest income modeling assumptions disclosed in our third quarter 10Q. Discipline credit management remains a hallmark of Bank of Marin as well. Both non-accrual loans and classified loans declined in the fourth quarter due to paydowns on two relationships and one upgrade to criticized. Due to the stability in our loan portfolio, we did not record any provision for credit losses in the fourth quarter. The allowance for credit losses remains at 1.47% of total loans, which is unchanged from the prior quarter. Loan balances of $2.08 billion at the end of the fourth quarter were down $7 million from the prior quarter. While we had strong new loan production, this was offset by an elevated level of loan payoffs for a variety of reasons, including the sale of assets to businesses, the completion of construction projects, and our efforts to manage weaker credits out of the bank. We also had a higher level of payoffs of residential mortgages than we typically see. Given the continued strength of our capital ratios, a board of directors declared a cash dividend of $0.25 per share on January 23rd, the 79th consecutive quarterly dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.