Q3 2022 Bank of Marin Bancorp Earnings Call
Good morning, and thank you for joining bank of Marin Bancorp's earnings call for the third quarter ended September 32022, I am Andrea Henderson director of marketing for bank of Marin.
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This conference call is being recorded on October 24, 2022.
Joining us on the call today are Tim Myers, President and CEO , and Tani, Girton Executive Vice President and Chief Financial Officer, Our earnings press release, which we issued this morning can be found on our website as bank of Marin Dot com.
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 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 October 21, 2022 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 and Tony will be available to answer your question and now I'd like to turn the call over to Tim Meyer. Thank.
Thank you Andrea good morning, everyone and welcome to our call.
Our record third quarter results highlighted our unwavering commitment to disciplined fundamentals are balanced and measured approach supported solid loan originations excellent credit quality and improved efficiency.
We also continued to benefit from ongoing earnings accretion from our 2021 acquisition of American River Bank.
We remain focused on building long term customer relationships based on great service and local market expertise.
As such with rates rising our funding costs have remained low as our customers continue to value our high touch approach.
We have an exceptionally strong base of core noninterest bearing deposits that allows us to grow methodically and efficiently while delivering consistent performance in all rate environments.
More than half of total deposits were noninterest bearing at September 30, while.
While our cost of deposits was flat rising rates positively impacted our earning asset portfolio, increasing our net interest margin by 11 basis points in the third quarter.
Positive loan origination trends persisted in the quarter on a year over year basis.
We grew our core loan portfolio boosted net interest income and expanded our margins.
Excluding PPP, our loans were up $5 $1 million in the quarter.
That primarily by payoffs related to construction project completions.
We generated $52 million in originations in the quarter up 60% from the year earlier quarter.
Our year to date originations of $204 million double what we produced during the first nine months of 2021.
I've noted we are seeing some easing in demand in certain segments of our business as rising rates impact borrowing costs and borrower sentiment.
We are mindful of recessionary concerns both from where we sit today, we are cautiously optimistic about the economic health of our markets through the through the remainder of the year.
Additionally, our excellent asset quality and strong credit culture position us well to weather any slowdown.
In fact, our credit quality continues to improve with classified loans down almost 10% and non accrual loans, representing just half a percent of total loans.
Subsequent to quarter end.
$7 $1 million and longstanding sub standard loans paid off and.
This will lead to further improvement in our credit metrics.
As a result, there are no longer any pandemic related payment relief loans on our books.
Now I'll turn to some final highlights from the third quarter.
We delivered record net income of $12 2 million.
Compared to $11 1 million in the second quarter.
Diluted earnings per share of <unk> 76.
Compared to 69 in the second quarter.
We are realizing the expected earnings accretion from the American River Bank acquisition and remain on track to meet the targets announced when the merger became public.
With fit with 53% of total deposits being noninterest bearing the average cost of deposits was just six basis points.
Unchanged from the prior quarter and better by one basis point on a year to date basis with.
With rates rising we anticipate that deposit costs will increase in the coming quarters. So we expect a gradual shift and we will carefully manage this on a customer specific basis.
Given the enduring strength of our financial performance, our boarder board of directors declared a quarterly cash dividend of <unk> 25 per share payable on November 14 2022.
This represents the 17th consecutive quarterly dividend paid by bank of Marin Bancorp.
Now I'll turn the call over to Tony to discuss our financial results in greater detail.
Thank you Tim.
Good morning.
Our third quarter earnings translated into a return on assets of 111% and return on equity of 11, six 5% up from one 3% and 10, 74% in the second quarter.
Net interest income totaled $33 million in the third quarter compared to $31 2 million in the second quarter.
The increase was primarily driven by higher average balances and yields on investment securities that added $1 4 million in interest income, while our cost of deposits remained flat.
Year to date net interest income of $94 million with more than 25% higher than the first three quarters of 2021.
This demonstrates the value added by our acquisition other deposit growth and higher interest rates, which overwhelmed the $6 million decline in PPP income year over year.
Are there changes during the third quarter included increases in cash and deposit balances as network deposits were returned to the balance sheet to replenish expected deposit outflows.
Also stockholders equity decreased due to market value adjustments to the available for sale investment portfolio, partially offset by earnings.
As Tim highlighted our third quarter tax equivalent net interest margin improved 11 basis points.
Driven by higher average balances and yields on interest, earning assets and a stable cost of funds.
We recognized 260000 PPP fees during the quarter down from 573000 in the second quarter.
At the end of the third quarter, our loan portfolio had only $7 6 million remaining in PPP loans net of 161000 in unrecognized.
There was a provision for credit losses on loans of 422000 in the third quarter compared to no provision in the second quarter.
The provision this quarter was primarily due to an increase in qualitative factors to account for the ongoing deterioration in the economic outlook not captured in the quantitative portion of the allowance.
There was no provision for credit losses on unfunded commitments in either the third or second quarter.
Third quarter non interest income was consistent with the second quarter at $2 $7 million with some line items, increasing and others showing modest decline.
Of note, we took the opportunity to replace some short term lower yielding securities in the investment portfolio with higher yielding investments, which generated the 63000 loss on sale of investment securities.
That loss will be recovered before year end with the additional yield on the new investments.
Noninterest expense of $18 7 million in the third quarter was down 200000 from the second quarter.
Charitable contributions were down as grant funding related to the bank's corporate giving program substantially occurs in the second quarter.
Additionally, there was a $345000 valuation adjustment to other real estate owned based on a recent appraisal.
Finally, a favorable resolution on a vendor contract termination fee in the third quarter resulted in a partial reversal of amounts accrued in the second quarter, reducing expenses by 200000 quarter over quarter.
As we continue to integrate and build on our most recent acquisition efficiency ratio illustrates that.
As we continue to integrate and build on our most recent acquisition the efficiency ratio illustrates that illustrates that.
Five 6% for the third quarter and year to date, respectively. Both improved from 55, 7% in the prior quarter and 65, 7% in the first nine months of 2021.
As there were substantially more acquisition related expenses in the comparable period.
The improvements on a non-GAAP basis were 257 basis points quarter over quarter, and 433 basis points year over year.
All capital ratios were above well capitalized regulatory requirements.
Total risk based capital ratio for Bank core was 15, 1% at September 30, compared to 14, 7% at June 30.
And the banks total risk based capital ratio was 14, 7% at September 30, compared to 14, 2% at June 30.
September 30 tangible common equity at seven 5% for Banc Corps, and seven 3% for bank of Marin were down, 24% and 53 basis points, respectively. Due to a $22 million increase in after tax unrealized losses on available for sale Securities.
With rising interest rates during the third quarter.
Partially offset by earnings.
Overall bank of Marin strong balance sheet liquidity and capital continue to generate profitability across interest rate and economic cycles and enable us to execute on strategic initiatives going forward.
With that I'll turn it back to Tim to share some final comments. Thank you tani.
We believe the bank of Marin is well positioned to build upon our long track record of delivering strong and consistent performance and attractive returns to our shareholders throughout all cycles.
We have a well established franchise built upon a disciplined banking model one of the lowest cost deposit bases in this sector and carefully constructed loan portfolio and solid credit quality.
We are focused on deepening relationships with long standing clients and continuing to expand our commercial lending the new clients across northern California.
While we know that excellent and personal service and financial expertise of our bankers will always be vital we also know that customers increasingly manage their finances online.
As a result, we continuously evaluate enhanced digital offerings.
<unk> our delivery channels, we will continue to identify cost saving opportunities to offset potential investments in technology.
In closing I want to thank everyone on today's call for your interest and support.
We will now open the call to your questions.
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One moment please for the first question.
Okay.
Our first question comes from Matthew Clark with Piper Sandler.
Please proceed.
Hey, good morning, good morning, Matthew.
Good morning, how are you.
Good thanks.
Maybe just starting on on deposit pricing it sounds like you're starting to.
Be a little bit of pressure obviously.
Costs were unchanged this quarter, but I guess what are you assuming for your your deposit beta through the cycle at this point.
Your budget.
So the deposit beta is.
We haven't changed our assumption since we.
We last published it.
We brought it down to closer to our historical betas, but not quite all the way.
The historical betas were running a little over 20%, but the model betas are a little higher than that we do understand that we're in a different environment.
We do see competitors raising their rates and we are hearing a little bit of noise. So we will continue to evaluate.
Rate change requests on a relationship by relationship basis, it's really about the whole relationship.
What about.
Sort of raising rates across the board so.
Go ahead, sorry, yes, and I would just say that the run off that we did show net bringing stuff back on the balance sheet was really both the resi as a result of significant deposit customers and their seasonal or normal course of business. So it was not deposit outflow due to our lagging in raising rates, we will raise categories, where prudent but as Tony said.
Look at all these relationships on a case by case basis and be prudent about it but we continue to believe we can manage that with our strong noninterest bearing.
Okay, and then 20% historical is that interest bearing or is that total deposit costs or double check but.
That was total.
Okay. Okay.
And then just on.
Rates on new loans.
I guess, how are they trending here in the third quarter and even in the fourth kind of getting trying to get a sense for the weighted average rate on new production.
Yes, they are trending up there are some categories it'll trend up faster in the fourth quarter.
If you look at I think the loans that came on in the quarter were up in every category, but one versus the prior quarter.
We just had some higher that's a finite pool. So its affected by individual examples, but we had a couple loans that paid off there were a higher rate for the loans that paid off were actually 10 basis points higher on a dollar weighted average in the loans that came on but if you look at it on a category by category basis, we are trending up and every cat.
<unk>.
Okay, and then Tony do you happen to have the monthly NIM monthly margin in September .
You want the September net interest margin.
If you had it.
Yes.
Yeah.
Hello.
Once you go ahead and not all of them. Okay ill give you just have to pull it out.
Sure and then maybe Tim.
Back on loan growth.
Loan balances.
Down a little bit.
I guess what are your what are your thoughts on production basically got cut in half.
It sounds like demand has obviously slowed for for obvious reasons, but what I.
What's your sense for.
Net loan growth going forward I mean, do you feel like you can kind of hold the line or do you feel like we might shrink a little bit.
So we feel positive I mean, I looked at it a little bit differently ex the payoffs in PPP loans were up slightly and I am not trying to overemphasize the slightly up but the production was up $20 million over last year's quarter, Yes. It was down on a linked quarter basis, but like a lot of people in the industry that prior quarter had a lot of pull through because.
Of rates and so our pipeline, we're happy with our pipeline going into the fourth quarter.
If you look at the payoffs that we've had $169 million of commercial loan payoffs year to date.
105 of that we're in categories that really aren't controllable asset sales.
Cash deleveraging or deleveraging with cash.
And project completions and so sometimes it takes some time to bring some of that back on for example in the construction loans pay off those tend to be lumpy, we brought in $13 million of payoffs last quarter, but we brought in $18 million.
New loans 12 of them not committed or not used yet so we feel good about where we're at in terms of trends. This is unfortunate we can't predict the timing of these payoffs, but we don't we don't expect them to continue at that pace is no reason to believe but it did have an unfortunate offset to what's been really really good loan production this year.
Sure.
Okay, and then last one for me just on the bump up in non accruals of five new credits I think three of them are related just can you give us the situation there and any plans for resolution <unk>.
<unk>.
Any potential loss content.
I'm sorry, Matthew I was going through my notes can you repeat your question again.
Sure just wanted to touch on the <unk>.
Five new credits on non accrual I think three of them are related to one relationship, but just wanted to get a sense for what the situation is there and plans for resolution.
Yes, so that to some extent was a pandemic impact customer.
However that customers exploring selling assets and reducing our debt. So we have a plan.
For that but.
The biggest one in that category was the frankly, the one that happened as the subsequent event because that loans then.
And that category for a long long time, so getting that monkey off our back was great.
Okay. Thank you.
So Matthew going back to your question.
Yeah.
Let's go with roughly five basis points higher than.
Third quarter NIM.
For September .
Great. Thanks again.
Hmm.
Our next question comes from Jeff <unk> with.
D. A davidson. Please proceed.
Thanks, Good morning.
Good morning, Jeff.
Just a few follow ups.
On a couple of those topics.
Yes.
While the originations maybe down linked quarter.
Certainly the payoff activity.
Difficult to forecast, but but that was down.
Meaningfully.
I just wanted to get your sense, that's a tough number to peg, but given where we are with rates.
Do you think that that headwind.
Forward.
The trend linked quarter was down quite a bit.
How is that translated into the fourth quarter and.
And your expectations for payoffs.
I'll, let 23 on a relative basis to 22.
Well that is a tough one to predict Jeff I mean, we feel good about our pipeline going into the fourth quarter. We do have some payoffs that we know are going to happen, but by and large there is no reason to believe I think overall outside of some specific cases.
Rate environment is going to affect sales.
Just similar to how it's affecting everyones pipeline activity, which is people taking a pause because borrowing costs are way up.
And certainly we're seeing that in fixed rate commercial real estate lending.
Rates arent historically high in the bigger scheme of things. So we think activity will continue its just hard to predict how long people sit on the sidelines.
Yes demand is down from where it was in Q2.
We don't.
Outside of those specific payoffs have any reason to believe they're going to continue at the pace that they have and we're going to continue originating loans and like I said loans have a bit of a seasonal character for us.
We feel good about where we were this quarter relative to the same period last year.
<unk>.
Our.
Guess, what the word tentatively.
Optimistic about the fourth quarter net growth.
Got it.
And then just looking at within the <unk>.
Rates on the on the funding side I guess, a little surprised.
The average rate on money market came in linked quarter that was down is there anything going on with that that balance that would be.
Sequentially lower.
So we have some customers that have.
Seasonality to their own businesses with high inflows and outflows and one of those customers had significant outflows during the quarter and they had significant balances in money market.
Okay.
Fair enough.
And then yes.
Last one.
Subsequent.
Pay off.
Again what.
All right.
The detail on the type of loans that debt.
We're paid off.
Within that $7 million.
That was one loan it was a.
One of the pandemic.
Payment relief loans, but it also has been a sub standard for many years and non accrual for some time.
I'd, rather not give specifics on the type of business, but the business was sold and asked us would fold in.
We were paid off.
Is there any recoveries.
Relative to the Mark.
Anything that we can expect.
And fourth quarter.
<unk> is coming down, but anything else tied to that.
Not to that one though.
Okay.
Alright, I'll step back thank you.
Our next question comes from David Feaster with Raymond James. Please proceed.
Hey, good morning, everybody.
Good morning, gentlemen.
I don't want to beat the loan side to death, but I just wanted to get your sense on the pulse of the market.
Are you seeing any.
You talked about higher rates kind of starting to impact things, but are you seeing much change in demand just given the uncertainty in the economic backdrop and like you said, maybe some projects that just don't pencil and our fallen out of the pipeline and then just any commentary on the competitive landscape from your perspective, and if you could remind us of the seasonality.
<unk> in your loan portfolio that'd be helpful.
Yes, so that's it.
Good question Theres a lot in there.
There is no question the pipeline is down from what it was in Q1 Q2, and everyone was fighting to get sell through right.
At those low rates demand was very strong we have seen a falloff in demand we haven't seen a fallout because as you said deals don't pencil out meaning the credit quality of the things. We're working on seems to be generally within our appetite theres always once we pass on but they tend to follow the pipeline pretty quickly. So it's.
The demand side.
Again, we feel good about our prospects for net growth in Q4, we expect PE expect payoffs to be down in the quarter length.
Seasonality I do tend to compare year over year, it's not always equal in that seasonality, but you tend to have after a really strong production quarters lower production quarters.
There are a number of years, where Q4 was just a blowout quarter from an origination standpoint, so I do tend to look and it's just positive when I look and say, okay, well, yes, it's down linked quarter.
<unk> of the rate movement, we are up significantly over where we were a ladder, which means we're still doing a lot right Nikki Sloan and her group are are continue to drive really hard to build a strong pipeline I would like it to be bigger, yes that is where I think the demand.
These rate levels is affecting it.
But there's nothing that leads me to believe we won't be able to be competitive I think throughout the quarter you saw I would've liked to see in our commercial loan rate yields go up more than they did but especially early in the quarter. There was a lot of competition, there was sort of tamping that down.
Im going up at the rate the market rates were so I think going into this quarter that will be more on even footing.
Okay.
Good color and then you know.
Bringing some of the off balance sheet deposits back on balance sheet. We saw the liquidity position increased just curious how you think about that near term would you.
We expect to deploy that or.
Whether in the loans or securities or do you think you are.
Reserve and that for potential deposit deposit flows, which it sounds like it was really more a function of seasonality, but just curious how you think about that.
Yeah, exactly so we tend to maintain a higher.
A fairly high level of liquidity on the balance sheet, because we do have some.
Some large customers that have big movements in their cash so.
The.
The movements of balances tend to be a little bit on the lumpy side.
So that's that's what we were doing there the other thing is that.
As rates have increased.
The earnings on the off balance sheet.
The deposits.
With the deposit networks are not as competitive as they were.
And so to the extent that we have.
Bit we're leaning a little bit more towards investing in the securities portfolio as opposed to off balance sheet.
That's to capture these higher yields.
Okay.
Makes sense and then staying on the Securities book.
A bit of securities actions in the quarter, you talked about the lower back makes it all or a sense of the world. Just curious if there is as you look at the Securities book are there other opportunities on the docket.
And how do you think about the securities portfolio going forward, I mean, how where cash flows.
Quarterly cash flows what our roll off yield.
With those cash flows are you likely to reinvest into the securities book or would you rather use that to potentially fund some of the loan growth.
Well, we'll always fund the loan growth first we've got healthy cash flows off of the investment portfolio.
Depending on the.
The rates scenario, they run from $75 million to $150 million.
On a year.
And.
So we have.
With our loan to deposit ratio down in the mid fifties, we have plenty of.
Room to grow the loan portfolio, so our number one.
Priority on the securities portfolio is to support loan growth. So to the extent, we can redeploy that money into loans, we will do that.
That said.
It will take us a while probably to get back up to our desired loan to deposit ratio and so in the meantime.
We can use the loan I mean, the securities portfolio.
And Thats why we were able to transfer a significant portion to held to maturity back in March because we.
Still have ample balances in the portfolio.
Okay. That's helpful. Thanks, everybody.
Thank you David.
So it comes from Andrew Terrell with Stephens. Please proceed.
Good morning, Andrew Good morning, Bonnie.
Hi.
Hey, if I could maybe just start going back to the margin Tony I think you mentioned.
The month of September was maybe five basis points above the <unk> average.
I heard the commentary just around rising kind of deposit costs, but it sounds like from a loan production is coming in at a better yield as well I'm just curious as you look out over the next kind of.
Few quarters do you think the margin Ken can move higher from that call. It three.
320 level from here.
While deposit costs, mainly offset that potential expansion.
I am optimistic that our margin will increase.
We continue to be asset sensitive.
And we continue to manage the deposit costs very closely.
<unk>.
If I had to make a projection I'd say, we're still moving in an upward in an upward direction, yes, I agree with that again, if you look at the loans that came on versus loans that came off the yields on those some of the ones that one off were lumpy like in construction and those tend to have a higher rate that were that was variable and went up with the mark.
And so it didn't have the same net impact we'd like.
The new loans, we have been funding in that group as well as other categories, we think will expand the yield side.
We can't predict the timing of when.
Deposit costs might increase but as Tony said, we're being very cautious and we're all optimistic about further NIM expansion.
Okay.
Great. That's very helpful. I appreciate all the color.
Tony I think maybe it was last quarter, you mentioned there might be some some lingering cost saves coming out of.
Come out of the American River deal.
So are those completed layered into the <unk> expense run rate at this point and then I guess, just how should we be thinking about the cadence of expense growth into 2023.
And maybe what seems like a tougher macro backdrop.
Yes, so we are not completely done with all of the AARP synergies. So there is.
Sure.
Cost saves coming.
And again this could it could be a little lumpy to the extent that.
When we do initiate actions there there might be some upfront costs and then the follow on.
<unk> savings, but obviously the returns on those are pretty good which is why we would do them.
Tim did you want to add something to that okay.
But I think I'd say.
The run the run rate absent all of that activity is the third quarter runway rate is good.
Good proxy.
Okay.
Very good.
And if I could.
Pam I saw there were no buybacks this quarter.
Just any update you can provide from a capital standpoint.
How are you thinking about capital are you targeting trying to grow the capital base from here and then any appetite for buyback at this point.
Yes, I would say right now we continue to be cautious for capital are leaning towards capital preservation.
It doesn't mean that as this progresses, so that doesn't change we continue to look at the impact of <unk>.
<unk> adjustments in.
Potential opportunities out in the market and just continue to weigh all of those but by.
By and large a concept we're still committed to its more a matter of assignment and right now are still leaning towards the cautious capital preservation side for this quarter.
Yeah understood. Okay. Thanks for taking the questions.
Thank you.
Our next question comes from Woody lay from key BW. Please proceed.
Hey, good morning, guys.
Good morning, Larry.
The non accruals ticked up but that feels like a pretty onetime in nature event and they are still at a low level, but just overall how are you feeling about credit in their local markets.
We feel good that those moved over there was three loans I think they moved over there we're all tied to one relationship.
Like I said, we expect some resolution relatively soon on some of that we feel very good about the large one that dropped off subsequent that's been the big one there for a long time.
And a lot of our markets with a lot of our lot of our customers. We're not seeing a lot of signs of recessionary pressure on sales or.
Rents, we continue to see pressure on office rents and occupancy in certain markets in places like San Francisco remain a concern, but we haven't seen material deterioration from prior quarters. Some of the properties are issues, we've already talked about.
Got it.
You did increase the reserve based on increasing some qualitative factors.
How do you think about the reserve going forward.
Especially just as the unemployment rate remains low, but there is a considerable considerable.
Considerable amount of macro uncertainty.
Well, there is and Thats a very good question because under the seasonal model an increase to the forecast Moody's unemployment rate in California, and some of the other macro factors, which are frankly somewhat redundant.
Volatility factors.
Would drive that number up.
We spent a lot of time talking about that this quarter and feel comfortable with the reserve. We took here, but there's no question that when that number moves that's going to affect all of us using those qualitative factors.
And in our procurement.
I would add that to the extent that the the.
Underlying forecast starts to reflect that.
That could lead to reduction in the qualitative factors right now we just feel that its forecasted.
Not quite onerous.
Yes.
Alright, Thats good color that's all for me thanks, guys.
Thank you.
Our next question comes from Tim Coffey with Janney Montgomery Scott. Please proceed.
Hey, good morning, everybody.
Good morning, gentlemen.
Hey, Tim I appreciate your commentary on the local economies and what you're seeing in your footprint. There. So most of my questions have been asked and answered already but I just wanted to kind of circle the wagons on the deposit outlook.
You have a lot of levers to pull to maintain a low deposit costs and I'm wondering if we look out forward and recognizing you had a really good quarter in deposit growth do you anticipate deposit balances to be static to slightly down with that would be the right way to think about them.
I think it would but our balances have been somewhat hard to predict like Tani has talked about we have some large clients with some seasonal and sometimes of non seasonal large inflows and outflows and so the timing of that I think we alluded to the large outflow. We saw from one of those this quarter at the end of last quarter.
We don't always know exactly the timing of that so it is hard to predict but you are right. We have a lot of levers we have a lot of liquidity.
It's a strong balance sheet Tani has managed and Randy and the retail side of the bank are doing a really good job of.
Managing this on an incremental case by case basis, and we'll just continue that approach.
We have to be fair with customers, but.
And on our relationships, but we are being very cautious to manage the overall impact that that shows a net runoff for some manageable extent that might be the case, but it's really been hard to predict because we've had some big inflows as well from other ongoing business activities of existing clients.
Yes, I would I would add that what we do is we plan for it and we've been planning for outflows for quite some time and even after the financial crisis, we plan for outflows, but on.
Trend historical trend basis, it's always it's always gone up and Thats what we.
Try to do but I think what's really important in this environment as we're really focused on right sizing at the right price.
<unk> not bringing deposits in.
<unk>.
With pricing, it's really relationship focus.
Okay. That's great. That's very helpful color. Thank you very much.
Okay.
There are no further questions at this time.
Okay.
Well. Thank you everybody for joining us on this call. If you have any questions I want to discuss further please give me alright. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Okay.
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Yes.
Okay.
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Okay.
Okay.