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, 2025. 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 Bank of Marin President and CEO Tim Myers and Chief Financial Officer Dave Bonacorso. 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, April 25, 2025, 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, Dave, 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, Chrissy. Good morning, everyone, and welcome to our quarterly earnings call. We delivered a solid first quarter driven primarily by positive trends in our net interest margin and deposit growth while we continued to effectively manage our expenses at an appropriate normalized run rate. Our improved financial performance and continued benefits from prudent balance sheet management fueled a 36 basis point increase in Q1 year-over-year net interest margin and a 67% improvement in Q1 year-over-year earnings per share growth. which drove tangible book value per share growth in the first quarter. On a broad basis, we continue to have stable asset quality within our loan portfolio with a slight decline in non-accrual loans and an increase in classified loans, which was largely driven by two relationships downgraded due to unique issues with each borrower. The decline in non-accrual loans was the result of the proactive sale of an acquired loan due to the rapidly deteriorating financial condition of the borrower and declining collateral value. The loan was placed on non-accrual in Q4 2023, and the sale resulted in a modest charge-off, more than half of which was reserved for in Q4 of 2023. While there is broad macroeconomic concern regarding the impact of economic, fiscal, and trade policies, to date we have not heard of anything within our portfolio that that indicates a meaningful amount of increased risk. Our banking team, reinforced with two new client-facing bankers in the first quarter, is doing a more consistent job of developing attractive lending opportunities and generating improved loan production, while still retaining our disciplined pricing and holding firm on structure and underwriting criteria. While overall loan demand remains fairly consistent, due to the efforts of our banking team, we are seeing a larger volume of opportunities within our markets. During the quarter, total loan originations were $63 million, including $48 million in new fundings. Commercial loan originations were $49 million, with $43 million in fundings, which is a five-fold increase from our level of commercial loan originations in the first quarter of last year. Our originations were a well-diversified mix of both commercial and commercial real estate loans across geographic markets, industries, and property types. While we had a solid level of loan production in the first quarter, that production was exceeded by payoffs, paydowns, and reduced construction line utilization, which Dave will discuss in greater detail. Our total deposits grew in the first quarter, including an increase in non-interest-bearing deposits, that kept our overall mix of deposits relatively consistent, with non-interest-bearing deposits comprising 43% of total deposits. The deposit growth was due to a combination of deposit inflows from both new relationships added during the first quarter, as well as inflows from existing clients. The growth represents a combination of expanded balances from commercial, small business, and consumer clients. While we see some banks looking to win business with assertive deposit pricing, we are not seeing any material losses due to rate. Our customers continue to bank with us for our service levels, accessibility, and commitment to our communities, and not entirely based on rate. As a result, in early January, we made meaningful deposit rate reductions in response to the December Fed Funds rate cut. which helped drive further expansion in our net interest margin in the first quarter. The deposit cost reductions have continued into April, as we are now able to make smaller rate adjustments outside of the Fed funds rate adjustment cycle. Given our improved financial performance and prudent balance sheet management, our capital ratios remain very strong, with a total risk-based capital ratio of 16.69% and a TCE ratio of 9.18%. With that, I'll turn the call over to Dave Bonicorso to discuss our financial results in more detail.

Thanks, Tim. Good morning, everyone. We generated $4.9 million in net income for the first quarter, or 30 cents per share, both of which are 67% higher than the first quarter of last year, as we continue to benefit from the balance sheet repositioning and expense reduction actions we took during 2024. Our net interest income was down slightly from the prior quarter to $25 million last primarily due to a lower balance of average earning assets partially offset by a six basis point increase in our net interest margin. The expansion on our net interest margin was attributable to a seven basis point decrease in our cost of deposits, while our average yield on interest earning assets was unchanged from the prior quarter despite an approximately 30 basis point decline in the average Fed funds rate during the quarter. Our average yield on loans was unchanged from the prior quarter as higher rates on new loan production were offset by the payoff of some higher yielding loans mostly in our construction portfolio. Due to our deposit growth, we have elevated levels of cash balances during the first quarter. In late March and continuing into April, we accelerated our redeployment of this excess liquidity into new loan fundings and securities purchases, which we expect to positively impact our net interest margin in the second quarter. Our non-interest expense increased by $2.9 million from the prior quarter, due primarily to seasonally higher expenses as accruals for salaries and employee benefits reset in Q1, as well as relatively low salaries and employee benefits expense in Q4 2024 due to adjustments in incentive bonus and profit-sharing accruals. Additionally, in order to better serve the timing needs of our nonprofit community, we moved up the timing of our charitable contribution cycle. Last year, nearly 90% of our charitable contributions occurred during Q2, whereas this year, the vast majority of our contributions were pulled forward into Q1, with $403,000 of contributions made in the quarter. We expect approximately $60,000 in contributions in Q2, followed by $20,000 each in Q3 and Q4. The $403,000 of contributions expensed in Q1 2025 compares to $30,000 in Q4 2024, and $12,000 in Q1 2024. Those differentials are worth approximately 1.75 cents per share after tax. Excluding salaries and related benefits and charitable contributions, our Q1 2025 non-interest expense declined almost 1% compared to Q4 2024 and almost 3% compared to Q1 2024. Moving to non-interest income, we had an increase of more than $100,000 from our prior quarter, primarily due to higher earnings on BOLI. Most other areas of non-interest income are relatively consistent with the prior quarter. Our total deposits were $3.3 billion at March 31st, which was an increase of $82 million from the prior quarter, $26 million of which came in non-interest-bearing deposits. As Tim mentioned, this was attributable to inflows from existing clients as well as the addition of new client relationships. Our average cost of deposits declined seven basis points in the first quarter as we had passed through rate cuts to our deposit customers without seeing any material rate-related outflows. And during April, we have continued to see a decline in our cost of deposits. Discipline credit management remains a hallmark of Bank of Marin as well. Due to the stability in our loan portfolio, our provision for credit losses was just $75,000 during the first quarter. The allowance for credit losses declined slightly to 1.44% of total loans from the prior quarter, which was largely driven by the payoff of construction loans that require a higher level of provision. Loan balances of $2.07 billion at the end of the first quarter were down $10 million from the prior quarter. While we had strong new loan production, this was offset by loan payoffs for a variety of reasons, including decreased line utilization on construction loans, paydowns on tenant in common and purchased real estate mortgage loans, and the proactive sale of an acquired loan that had been on non-accrual. Given the continued strength of our capital ratios, our board of directors declared a cash dividend of $0.25 per share on April 24th, the 80th consecutive dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.