Q3 2021 Bank of Marin Bancorp Earnings Call
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Good morning, and thank you for joining bank of Marin Bancorp's earnings call for the third quarter ended September 30, 2021 I'm Andrea Henderson director of marketing 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 at that time. If you have questions. Please press one followed by four on your telephone.
If at any time during the conference call you need to reach an operator, Please press star zero.
This conference call is being recorded on October 25, 2021.
Participating on today's call are Russ Colombo CEO.
Jim Meyers President.
And Chief operating officer.
Tani Girton Executive Vice President Chief Financial Officer.
We have also invited Masako Stewart Executive Vice President and Chief Credit officer to join Us.
Our earnings press release, which we issued this morning can be found on our Investor Relations page at bank of Marin Dot Com, where this call is also being webcast.
Before we get started I want to note that we will be discussing some non-GAAP financial measures on the call.
Please refer to the reconciliation table on page three of the press release for both GAAP and non-GAAP measures.
Additionally, the discussion on this call is based on information, we know as of Friday October 22021, and May contain forward looking statements that involve risks and uncertainties.
Actual results may differ materially from those set forth in such statements or.
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, Russ and Tani and Masako will be available to answer your questions and now I'd like to turn the call over to Russ Colombo.
Good morning, everyone.
Thank you for joining us today on our first earnings call since the completion of our acquisition of American River Bankshares on August six.
Marine is now an organization with over $4 billion in assets, along with 31 branches.
Commercial banking offices across 10, Northern California counties.
The integration is progressing smoothly.
The American River team on Board, we are positioning the bank for long term growth across a much larger.
More diverse footprint.
It is important to note that the third quarter marked the early stages of the integration process and we did take on a substantial portion of the one time merger costs in the quarter impacting earnings and returns.
We reported net income of $5 3 million and return on average assets of 0.56%.
The decreases from $9 3 million net income and one 2% ROA in the second quarter largely reflected the absorption of American River operations.
Merger related costs reduced third quarter net income by $3 9 million.
In addition, a 1.8 million.
Provision was primarily related to purchased loans without credit deterioration.
In addition to the factors above return on average equity of $4, 99% for the third quarter was impacted by approximately 124 million shares issued in conjunction with the merger.
We have provided a reconciliation of GAAP to non-GAAP financial measures in the earnings release that illustrates the impact of the merger related one time and conversion period costs on various performance ratio.
Excluding those expenses year to date, ROA, and ROE would have been 113% and 987% respectively.
Compared to one point <unk>, 3% and 847% for the same period in 2020.
Despite headwinds associated with the merger and the low interest rate environment. These adjusted results demonstrate the earnings power of the combined company.
They also reflect our expanded ability to generate attractive returns for our shareholders.
We continue to maintain one of the best deposit bases in the country.
Now with an expanded team to deliver on our long standing commitment to prudent underwriting and exceptional customer service. We are confident we will continue driving strong returns.
Here are additional key highlights.
Total loans increased to $2 3 billion, including just over $410 million in loans acquired in the third quarter.
Credit quality remained solid non accrual loans in the third quarter were just $8 $4 million or just three 6% of total loans.
Total deposits grew by $1 billion during the quarter to three 7 billion the.
The increase included nearly $808 million of acquired deposits.
Noninterest bearing deposits increased by $378 million in the third quarter and comprised 49% of total deposits.
The average cost of deposits was was just six basis points in the third quarter.
Selecting the low rate environment, and the enduring strength of our relationship banking model.
Thanks to our consistent profitability the board of directors declared a cash dividend of 24 cents per share.
This is the 66th consecutive quarterly dividend paid by bank of Marin Bancorp.
On October 20 <unk>.
The board of Directors also approved an amendment to the $25 million.
Share repurchase program approved on July 16th to increase its size by $32 million to a total of $57 million.
Finally as.
As announced on September 24th I will retire as Chief Executive Officer of Bank of Marin and bank of Marin Bancorp.
On October 31.
I couldnt be more delighted that the board has appointed Tim Myers to succeed me.
I'm confident that Tim is more than ready to take the helm and deliver continued growth and positive results.
Bank of Marine is an excellent strategic position and on solid ground financially.
Our core results for the third quarter of firmness.
I'm very proud of the bank, we have built over the past two decades and the talented team that drives our success.
Now, let me hand, it over to Tim to give an update of our expanded loan portfolio and the paycheck protection program.
Ross I want to thank Ralph for his leadership and support over the years.
We have worked very closely in recent months to ensure leadership continuity and a seamless transition.
I wish you all the best in retirement.
Now taking a look at our loan portfolio.
Excluding PPP loan payoffs in loans acquired from American River legacy <unk> loan portfolio was relatively stable in the third quarter.
We continue to identify attractive opportunities and actively engage customers throughout our expanded footprint from the bay area to greater Sacramento.
New loan originations in the third quarter totaled nearly $33 million.
We are confident our combined resources will enable us to drive further growth across two of the most attractive metropolitan markets in the state of California.
Elevated competition in loan payoffs continue to impact portfolio growth.
Not including PPP payoffs totaled $50 million in the third quarter compared to $41 million in the year earlier.
These payoffs consisted largely of commercial borrower cash pay downs real estate asset sales and <unk>.
Third party refinancing at prices and structures outside of bank of Rins lending appetite.
We are taking a disciplined approach meeting our existing clients' needs and developing new relationships.
Over time, we fully expect the power of our larger platform new markets and added scale to drive increased origination.
Our merger with American River brought together two institutions share complementary values and disciplined fundamentals.
I look forward to leading the combined team as we roll up our sleeves and work hard to ensure a seamless integration.
By committing significant resources to this process. We are building a strong foundation to grow our franchise on a regional scale.
On the PPP from Bank of America, and American River originated a combined total of over 3500 loans amounting to more than $550 million and two rounds of financing.
As of September 30, we had 871 loans outstanding totaling almost $165 million net of $4 2 million in unrecognized fees and costs.
Of the 2876 PPP loans funded by bank of Marin.
The SBA is forgiven and paid off $2 36 loans for a total of almost $285 million.
The bank's PPP activity is winding down and we expect to enter 2022 with this program are essentially complete.
Our pandemic related payment program is also winding down.
As of September 30, we had two borrowing relationships with a total of five loans totaling approximately $24 million remaining.
We monitor monitor the financial situation of these clients closely.
<unk> them to resume payments as the economy continues to gain momentum.
With that I'd like to welcome to the call Masako Stewart, who was promoted to Chief credit Officer on September 30th She will discuss our key credit metrics.
Thank you Tim it's great to join all of you and best wishes to you Brad.
Credit quality remains strong and dress annuity non accrual loans, representing 36% of total loans as of September 30, compared to four 6% at June 32.07% a year ago.
Classified loans of $19 million decreased by just under $12 million from the previous quarter's $38 million. Despite an overall increase in our portfolio attributable to the American River acquisition and compares to $11 million at September 32020.
The allowance for credit losses increased by more than $3 million and was comprised of a $1 $8 million provision primarily related to purchase American levered loans without credit deterioration and a $1 $5 million acquisition data allowance established for purchase credit deteriorated loans, which is recorded on our balance sheet.
Other factors contributing to the allowance for portfolio growth from acquired loans, partially offset by an improvement in the underlying economic forecast.
For comparison, the second quarter of 2021 included a 920000 reversal calculated under CECO in the third quarter of 2020 included a $1 3 million provision for loan losses as determined under the incurred loss methodology.
Due primarily to qualitative factors impacted by the pandemic.
There was no provision for credit losses on unfunded commitments in the third quarter compared to $612000 reversal in the prior quarter and a $248000 provision in the third quarter of 2020.
Importantly, our credit quality has held firm throughout the year, both before and after the merger and it is solid as we move into late 2021 and prepare for next year.
I will now turn the call over to Tony to dig deeper into our financial results.
Thank you Mr <unk>.
First let me also wish Russ farewell.
Your steady leadership has successfully guided bank of Marin through several acquisitions and multiple business cycles, including the recent challenges imposed by the pandemic.
Right.
As Russ noted, we reported net income of $5 $3 million in the third quarter of 2021.
Diluted earnings per share of 35 compares to <unk> 71 cents in the prior quarter and 55 cents in the third quarter of 2020.
Net interest income totaled $27 8 million in the third quarter compared to $24 5 million in the prior quarter and $24 6 million a year ago.
The $3 2 million increase from the prior quarter was primarily attributable to the American River acquisition and the increase from a year ago resulted from the acquisition as well as higher TTP fee recognition.
We recognized $2 $3 million in PTC fee net of cost in the third quarter of 2021 compared to $2 6 million in the prior quarter and $1 7 million in the third quarter of 2020.
American River contributed higher average loan yield lower yields on securities a lower loan to deposit ratio and a lower percentage of noninterest bearing deposits to the combined balance sheet.
<unk> and a tax equivalent net interest margin of three 5% in the third quarter compared to 337% in second quarter.
The decline in year to date tax equivalent net interest margin from 361% in 2020 to $3 two 3% in 2021 was primarily due to the prolonged low interest rate environment.
Noninterest income totaled $3 6 million in the third quarter of 2021 compared to $2 million in the prior quarter and $1 8 million in the third quarter a year ago.
The $1 5 million increase from the prior quarter and $1 8 million from the third quarter of 2020 were mostly attributed to the collection of $1 2 million in benefits on bank owned life insurance policy and increases in fee income from deposit accounts and debit card interchange activity.
Third quarter non interest expense increased by $7 7 million to $22 7 million from $15 million in the third quarter of 2020.
Primarily due to one time and conversion period costs as well as increased staffing related to the acquisition.
Russ shared earlier some of our ratios excluding merger related expenses.
I also like to look at the efficiency ratio is a good indicator of operating earnings trends.
It does not include the impact of the provision for credit losses, which was primarily related to the acquisition this quarter.
The reported efficiency ratios were <unk> 72, 4% for the third quarter 58, 6% for the second quarter and 56, 9% for the third quarter last year.
Excluding merger related expenses, the efficiency ratio would've been 56% for the third quarter, an improvement from 57, 8% in the second quarter and 56, 9% a year ago.
All capital ratios were above well capitalized regulatory requirements.
Total risk capital risk based capital ratios for Bancorp and bank of Marin was 15% and 14, 4% respectively.
Bank core tangible common equity to tangible assets was nine 1% at September 32021, compared to 10, 4% for the prior quarter and 11% a year ago, reflecting the success of our capital management efforts.
Under the latest share repurchase program approved on July 16, we repurchased 445735 shares totaling $15 9 million in the third quarter, bringing the cumulative total to 967683 shares and $35 2 million in the first.
Nine months of 2021.
As Russ mentioned earlier the board of Directors has approved an amendment to increase the current program size by $32 million.
In summary, we generated strong core net income while closing the largest acquisition in our history.
The integration is underway and early indicators point to a successful realization of the synergies of this combination.
With the addition of our American River teammates and new opportunities in the Sacramento market, we are well positioned for success across northern California's key growth market.
And now I'd like to turn it back to Russ for closing comments before we open the call for Q&A.
Thank you Tani.
I want to thank everyone on this call and all of our investors for your interest and support over the years.
It's been an honor to say the least.
The lead bank of Marin and a pleasure to work with all of you.
The bank is in great hands with him and our strong leadership team.
I look forward to staying connected to the bank through my participation on the board.
We appreciate your time this morning, and now we will open it up to your questions.
Yeah.
Thank you.
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Our first question is coming from the line of Jeff Lewis with D. A Davidson. Please go ahead.
Thanks, Good morning, and congrats Raj, it's been a pleasure for the last decade, plus getting value and all the best in retirement.
Thank you very much Jeff appreciate it.
In terms of.
To their release.
You talk about pricing and structure on some of the maybe some on the <unk> on some of the.
Competition.
Financings I guess.
If you could capture where that competition is coming from.
Second has that pressure increased linked quarter has that been pretty.
Sustained.
Yeah, I'll ask Tim Myers to go ahead and answer that question good morning, Jeff.
The pressure has been relatively consistent and it's been if you look at year to date, particularly both bank and non bank lenders.
I'm not going to get into specifics about their terms, but longer term interest only structures.
Sub 3% loans and certainly one could argue that alone at almost any rate is better than cash, but that's a transactional banking approach from our relationship banking approach. We have a lot of other things to consider in that process, but I have not seen that necessarily increase there was just a couple of large ones in the last quarter that.
<unk> really made it look more dramatic in terms of a trend line, it's been pretty consistent.
Okay got you.
Interested in maybe this is for Tani just in the.
Expense run rate.
We can clearly.
Pull out the merger costs, but get a sense for where that would fit.
With American River on in the fourth quarter for a full quarter.
Pre conversion and post conversion any thoughts about the levels.
That's a good run rate.
Yeah.
Maybe what I would do is.
Yes.
Remove the acquisition expenses, and then and then compare Q3 to Q2.
And remember that there were only 25 days.
Combined expenses in the third quarter.
And those expenses would include <unk>.
Both the conversion period.
Yeah.
Uh huh.
So the expenses that you would be removing would include the conversion period expenses, which are accrued and spread over the quarter. So a couple more quarters for those expenses.
And then also the higher ongoing salary and benefits from the retained personnel.
So hopefully that will help them.
Does that answer your question Joe.
Yes.
Understanding that sort.
The guide there.
What you see.
Typically provide so.
Helpful Day gifts and teach their media.
Maybe just last one.
Yes.
On the buyback side.
It shows some pretty big commitment not only the activity in the quarter, but the step up in authorization.
We don't want to read too much into that but I think you guys are pretty focused on.
Great American River, and making sure that the focus but the buyback on the sideline.
We're on the side I should say.
It seems like Youre pretty committed to that and does that indicate anything about.
You'd like to be off the M&A game for at.
At least the short while.
Thanks.
Yes, Jeff it's Russ.
No that does not indicate that we were on the sidelines on the M&A side.
That's kind of a separate deal and frankly speaking.
Every deal is getting done these days I Shouldnt say every but majority is mostly stock not cash. So we just feel like we have an excess amount of Av.
Of capital.
And.
We think the best way at this point.
Is to buyback our shares because we still believe that our shares are undervalued and.
Purchasing bank of Marin stock right. Now is a is it is a good value for us and accretive to earnings for our shareholders and if and if an opportunity presented itself certainly we would we would read that re evaluate the.
The repurchase program, but right now.
We're interested in continuing to look at M&A opportunities as well as buy back stock.
And if I could add.
So really we wanted to just make sure also that we have runway.
That program for when we go into blackout periods et.
Et cetera, so that we don't end up having a pause when we would prefer to be continuing to repurchase under our <unk> 18 plan.
And if I can also correct what I said earlier it was in the quarter. There were 55 days of ongoing conversion period and retain personnel expenses 25 days in August in 30 days in September apologies for that.
No I got you again.
So thanks for the comments I'll step back.
Thanks, Jeff.
Our next question is coming from the line of David Feaster with Raymond James. Please go ahead.
Hey, good morning, Congrats again Russ.
On the retirement and excited to see what's in store.
Your leadership Tim.
Thank you David.
I did just want to start off on that maybe some thoughts on growth appreciative of the commentary on the competitive landscape in your guys sticking to your standards, but just curious what youre seeing on the horizon, maybe how demand is trending what the combined pipeline.
<unk> today, and how you think about production and perhaps net growth on a combined basis now that the deals closed.
Yes. Thank you David its a good question I would say if you look at the trends of how production has.
Progressed over the course of the year the bigger decline for US has been on the consumer side on a dollar basis that was twice the decline in the commercial on a year to date year over year comparisons. So we've got some demand issues, we're dealing with on a tenant in common loans side in San Francisco, but really our focus is and has always been mainly on the commercial banking side.
We are starting to see I know Russ has mentioned many times I've said it too.
The relationship banking model was a little bit stalled during the pandemic getting people back out there getting that engine started.
It has a little bit a little more delayed than we'd like but we are seeing good activity, particularly in some of our new markets, which is very encouraging.
Our biggest contributor in the last quarter was from our new partners in Sacramento on a regional basis. So the pipeline is increasing we never give numbers as you know, but it is increasing the activity in some of our new offices that we're open to rent or just prior to the pandemic is increasing and so those are all signs that we look to.
That now that we're back out there that activity will be get deals, which will be get the production to drive the numbers. So we feel good about where we're at we're going to continue to invest in ways to further that growth prospects.
Okay. That's great color. Thank you and then just wanted to get a sense maybe on the hiring front.
There has been some disruption in your footprint and just given the strong culture your relationship focus as well as the larger scale, whether that's begun resonating and you've seen some more opportunities to hire new talent.
It goes both ways I mean people look at disruptions in the market.
Certainly we get targeted when an acquisition gets announced right. In every recruiter is looking to talk to the people, they're telling a different side of the story, but theres no question with some of the hires that we've made Nicky Sloan in her role as head of commercial banking coming from other institutions, we've seen some really nice activity in hiring opportunities and some action.
We'll hire them someone's, we're looking forward to making in the near future. So the answer to your question is yes, I think all of those things will play in our favor. It is a very competitive hiring environment just like it is for loans for the exact same reason, but we feel optimistic right now that the pipeline to hire to get the growth. We're looking for all trending in the right direction.
That's great and then maybe just touching briefly on the wind portfolio just wanted to get a sense of what youre seeing there how's demand and maybe.
Demand perspective in both Napa and Sonoma and then whether there's been any impacts from the drought at all on credit quality or.
Growth or any just what youre hearing from your clients on that.
And we have now so I'll start in reverse order, we have not seen a real credit impact driven by the drought.
That industry, obviously, there is some cyclicality there in terms of certain types.
Whether there is a glut in the market of supply selling through old inventory. So theres been a lot of factors there beyond just the pandemic certainly people did their fair share of drinking wine and that drove demand and it really helped our customers that were tasting room oriented to shift to a direct consumer model and sell lots of.
Wine online and so.
They really battled through that really well.
We are looking at several new opportunities now, but I wouldn't say there's anything notable.
Notable trend wise, one way or the other in that portfolio right now.
Okay.
Thanks, David I would just make an additional comment in Alaska.
448 hours, we got eight inches of rain.
No I'm.
Im not sure if I was.
Looking outside in the rain was pouring over the last few days in Las power and everything.
We're in a drought relief.
That's correct, yes, let's hope that we are heading out of that drought situations.
And what are the comment about hiring in.
It's a.
The pandemic for for a relationship bank like ours is very significant because having people at home when in fact, we want them out with their clients.
It is it is kind of tough and it's something that we.
We couldnt wouldn't choose and didn't choose but people are back to the office now in fact seeing clients and I think that.
The last year and a half we have we have a fair amount of catching up to do just to make sure. We're out there and seen that but as Tim said, we're we're seeing a pickup in the.
In the.
And the pipeline and that's no coincidence because people are out there.
Getting in front of their clients.
Taking a look at new opportunities, so I personally I'm pretty pretty optimistic and I'm.
Excited about where what the numbers will look like over the over the next.
Six to 12 months.
It's.
I think this is when we're in front of our clients is when our bank side.
That's great.
Thanks, everybody.
Sure.
And our last question in queue is coming from the line of Timothy Coffey with Janney. Please go ahead.
Alright, Thank you Hey, Russ congratulations on your retirement and glad to see that you're still gonna be involved with the bank going forward. Thank you. Thank you Jim I'm excited I will still be on the board. So I will certainly.
<unk>.
Great.
Tim I want to start with you I want to circle back to one of the questions. You had about kind of the activity of your client base certainly see your clients are being more active just the fee income line items, which was good to see.
One of them, specifically about kind of your client base that invest in real estate have you seen them become a little bit more active since the summer.
Not to the extent I have heard in the news and maybe some other parts of the market. We've actually some of that deleveraging that we reference which was really double payoffs of loans, which mostly were investor real estate loans was double this year year to date than last year. So I think.
Yes.
Activity the pace of conversations Tim is picking up the level of interest seems more hasbro the sense of urgency, but we haven't really seen out of our client base, a big spree of going out and actually executing on transactions, but the goal is Russ just said is to be out there talking to them. So when they do we're in a position to do that deal but.
We actually have seen that continued pace of deleveraging by selling properties and the inverse Unfortunately, but again the pace of interest is picking up the pipeline is picking up and we expect that the transition at some point in the near future.
Okay great.
And then historically the company hasn't has operated with much less liquidity than you have right now what's kind of the appetite to become a little more aggressive in allocating that excess liquidity right now.
So Tim we were pretty active in the third quarter and in terms of deploying some of that cash into the investment portfolio. We also received a significant cash balance from American River in the course of the acquisition. We are still active in early October purchasing securities.
So we definitely are working hard to bring those cash balances down.
The duration of our investment portfolio continues to be short enough so that.
Tim needs more money too.
<unk> loans, it will be readily available for him and we.
We are also aware that the.
The upward trend in deposit growth may not continue although we haven't seen it check itself, yet, but we're prepared for that.
If it occurs as well.
Okay, great. Thanks, Tony those are my questions. Thank you very much.
Thank you Tim.
We have no further questions over the phone lines at this time.
Okay.
Yes.
Okay.
Yes.
Russ Colombo and I just wanted to thank everyone for your time this morning as well as over the last 15 years that I've been CEO.
I'd like to say, we look forward to talking to you next quarter, but I would be talking to the team.
It's been a pleasure and I really appreciate the support and <unk>.
Interest in the bank over over the years. So thank you very much.
Okay.
Yeah.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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