Q1 2024 Bank of Marin Bancorp Earnings Call
This was due largely to three relationships of different types and geographies too.
Two our CRE loans that are fully secured and supported with personal guarantees and we believe there is minimal risk in these credits.
We are not seeing the formation of material new problem loan.
Just previously identified problem loans, continuing through the workout and resolution process.
In the first quarter, we upgraded four loans totaling more than $10 million from special mentioned in the past.
Our non owner occupied office portfolio. Overall is made up of 151 months with an average loan size of only $2 4 million.
Weighted average loan to value of 60% and a weighted average debt service coverage was one six times based on our most recent data.
There is no notable change from what we reported at year end.
Our office CRA bucket in San Francisco represents just 3% of our total loan portfolio and 6% of our total non owner occupied CRE portfolio.
I also want to note that we have minimal exposure to rent control properties within our multifamily portfolio.
On the 32 loans with an average balance of only $1 6 million or two 5% of our total loan portfolio like the rest of our book we are monitoring this very closely.
As I noted with our new commercial hires we're seeing more new attractive opportunities with a dramatically improved pipeline. So the timing to close is difficult to predict.
As such our loan portfolio did decrease slightly as our originations in the quarter were offset by payoffs scheduled repayments and strategic exits.
Much of the payoffs were related to construction loans as a result of project completion now turning to deposits.
We maintained total deposits with quarter end balances essentially flat from December 31.
We attracted new customers during the quarter, but some clients also moved cash into alternative investments to capture higher returns and we also saw seasonal outflows that we often see in Q1 of each year.
Our noninterest bearing deposit level remains favorable at 44% of total deposits.
We continue to focus on relationship banking with high touch service being appropriately competitive on deposit pricing and maintaining our strong core deposit franchise.
We anticipate our funding costs to further stabilize this year.
We also continue to maintain high levels of capital and liquidity and we are in a position of strength.
Our total risk based capital ratio improved to 17, 5% at quarter end compared to $16 eight 9% at the close in 2020 three.
Total liquidity of approximately $1 9 billion.
Consisted of cash and unencumbered securities and total borrowing capacity.
In summary, we made substantial progress by adding talent and building upon our foundation for profitability improvements and long term growth and these efforts are ongoing.
With that I'll turn the call over to Tony to discuss our financial results in greater detail.
Tony: Thank you Tim.
Tony: Good morning, everyone.
Tony: With interest rates higher for longer and lingering economic uncertainty, we continue to focus on further strengthening our core deposit franchise, and maintaining robust liquidity and capital levels well.
While delivering exceptional service to existing and new customers as we position bank of Marin for continued earnings improvement in 2024.
Tony: We generated net income of $2 9 million for the first quarter or <unk> 18 per diluted share compared to net income of $610000 or <unk> <unk> per share in the fourth quarter of last year.
Tony: $4 2 million of the increase in net income quarter over quarter was due to losses on security sales in the fourth quarter of 2023.
Tony: After repositioning our balance sheet out of borrowings and some security.
Tony: Lower earning assets combined with the higher cost of deposits to meet net interest income $1 6 million lower than the prior quarter.
Tony: However, during the first quarter, we maintained our noninterest bearing deposit levels, while capturing higher yields on new loans.
Tony: Largely offset increases in interest bearing deposit costs and as a result, our tax equivalent net interest margin decreased by only three basis points in the first quarter. Following a five basis point increase in the fourth quarter.
Tony: Taken together, our net interest margin has stabilized over the past two quarters and we are optimistic that we will see continued stability in the near term with a bias for improvement from new loans and existing loans re pricing.
At the same time, we continue to evaluate strategies that support margin expansion.
Tony: Our noninterest expense base increased somewhat with the new hires Tim highlighted.
Tony: Additionally, the seasonal increases related to 401, K matches tied to bonus payments.
Tony: Lower loan origination cost deferrals contributed to the one 9 million increase over the fourth quarter.
Tony: Professional service expenses related to the annual audit also tend to be higher in the first quarter.
Tony: Increases were somewhat tempered by downward adjustments to incentive accruals in the first quarter, but there were much larger reductions to incentive profit sharing stock based compensation and retirement plan accruals in the fourth quarter of 2023.
Moving to noninterest income, excluding the $5 $9 million loss on the sale of <unk> securities associated with our fourth quarter balance sheet restructuring.
Tony: Noninterest income of $2 8 million was stable quarter over quarter.
Tony: In addition to the total risk based capital strength, Tim noted linked quarter with a tangible common equity to tangible assets ratio improved to $9, 76% in the first quarter from $9, 73% at December 31.
Tony: Our contingent liquidity is plentiful and our deposit base is well diversified with businesses, representing 59% of balances and 32% of accounts.
Tony: Our largest depositor represented just 2% of total deposits, while our four largest depositors comprised five 3%.
Tony: We maintained our total deposits at 328 billion on March 31, without tapping the brokered CD market or running CD campaign, and noninterest bearing deposits increased slightly to 44% of total deposits from 43, 8% at December 31.
Tony: The average cost of deposits increased 23 basis points to 138% in the first quarter compared to 21 basis point increase from the prior quarter.
Underlying these changes is a clear downward trend and monthly increases since the peak in March 2023.
We believe we are appropriately competitive in regard to deposit pricing given our relationship banking model that differentiates bank of Marin.
Tony: Disciplined credit management remains a bank of marine core value as well our $350000 provision for credit losses in the first quarter compares to a provision of $1 3 million for the previous quarter and brought the allowance for credit losses to $1, two 4% of total loans compared to $1 two 1%.
Tony: As of December 31.
Tony: Typically loan originations are lower in the first quarter of the year and this year new originations is $12 4 million were more than offset by payoffs of $21 8 million with rates on new loans, averaging 266 basis points above the rates on loans paid off.
Tony: Loan balances of $2 1 billion for the first quarter were down $18 8 million from the prior quarter after amortization and changes in utilization.
Our board of directors declared a cash dividend of <unk> 25 per share on April 25th.
Tony: 76th consecutive quarterly dividend paid by Bank Corp.
Tony: We didn't repurchase any stock during the quarter.
Tony: Instead, we concentrated on building upon our strong capital reinforcing credit protections deepening relationships with our customers and developing new business.
We regularly evaluate the merits of stock buybacks.
Tony: We also continue to assess additional possible adjustments across our balance sheet and expense structure with a focus on finding new ways to accelerate net interest income expansion and self fund efficiency improvement.
Tony: Potential actions are run through our capital plan and interest rate risk simulations, along with rigorous stress test to evaluate long term benefit.
Tony: In addition to meaningful profitability improvement, we screened for reasonable earn back periods ample ongoing liquidity and capital and sustainable balance sheet strength and profitability.
Tony: With that I'll turn it back over to Jim to share some final comments.
Jim: Thank you times and closing our enduring relationship based banking model healthy capital and liquidity levels and favorable mix of deposits and solid funding base.
Jim: Provide bank ran a strong foundation for loan growth margin expansion and increased profitability in coming quarters.
Over the past few months, we have added a number of highly productive bankers implemented a more active approach to developing new client relationships and increase our use of technology to enhance those efforts.
Jim: All of these have positioned us to generate a higher level of loan production going forward, while we maintain our disciplined underwriting.
Jim: We also continue to evaluate our physical footprint and optimization opportunities as well as other ways to manage expenses, while also investing in talent and technology to maximize customer satisfaction attract new clients and further enhance our ability to generate long term profitable returns.
Speaker Change: With that I want to thank everyone on today's call for your interest and support we will now open the call to your questions.
Speaker Change: At this time, we will open the floor for questions if you'd like to ask a question. Please press star five on your telephone keypad, you may remove yourself at any time by pressing star five again.
Speaker Change: Now I'll pause for just a moment.
Speaker Change: Okay. Our first question will come from Jeff <unk> with D. A Davidson. Your line is now open. Please go ahead.
Jeff: Thanks. Good morning, Good morning question on the.
Jeff: Yes.
Jeff: The hires that you hired I know you've you've added folks even last year I just wanted to try to get a sense were there any new.
Jeff: First quarter.
Jeff: Yes.
Speaker Change: Network Okay.
Speaker Change: I think we talked about before not having a team there are spread out among our different regions, but we did have.
Speaker Change: Cost in Q1 associated with that.
Speaker Change: Having had some more of a timing issue have an offset that yet with the cost rationalizations and other areas that we said we do too.
Speaker Change: So that's kind of a timing gap.
Speaker Change: Okay.
And kind of leading to the next slide just trying to get a sense for you have had the seasonal impact bumps in professional services and other.
Speaker Change: Just trying to get a sense John.
Speaker Change: Salaries line Tani.
Speaker Change: Are there some puts and takes that overall expense.
Speaker Change: Moderate from here or is that some of those new adds kind of continue to add to <unk>.
Speaker Change: Growth.
Yeah, I'd say puts and takes.
Speaker Change: We had some positives that are.
Speaker Change: Offset some of the negative seasonal stuff.
Speaker Change: And so when you look at it on balance.
Speaker Change: We do have a higher <unk>.
On the salaries and.
Speaker Change: This is the beginning of the year, so medical insurance costs are up in.
We do have some strategies.
Speaker Change: We will be kicking in the cost for which will be kicking in later in the year.
Speaker Change: Again, we're trying to self fund those but.
Speaker Change: I would say, we we are moving into 2024 with a higher salary base.
And just one more point, Jeff while it's not in the salary line.
Speaker Change: I mentioned in the script that we did.
Holiday two offices so.
In the quarter at the very end of the quarter. So we will save about 800000 a year.
Jeff: And lease expense there.
Jeff: Part are largely so that we can fund the personnel acquisition. So we'll continue to look for ways like that I know, it's hard to quantify at this point, but we'll continue to do those kind of things.
So it makes sense.
Speaker Change: Hey, Timna.
Speaker Change: No.
Timna: That were hired their focus.
Lending is it a.
Timna: That particular area.
Timna: No I think it's more C&I based are focused and we have had but I would call them general selections like much of our back in history. That's been so we are seeing a much more diversified portfolio of professional services.
Timna: General C&I.
Timna: Deals.
Timna: But it is spread out so we're seeing a lot of growth in the pipeline in Sacramento, The North Bay Walnut Creek those are all the different places we have these higher so.
Timna: That was part of our.
Timna: Strategy was to grow at a more regionally specific to how we are aligned rather than I've said before buying a team that's focused on more than one I was just one geography.
Speaker Change: Okay great.
Speaker Change: Maybe just my last one then as it relates to that loan growth immediate you talked about in the release remaining careful of the environment. The pipeline is up.
Got over some maybe some construction payoffs.
Speaker Change: I wanted to.
Big picture on loan growth from here.
Speaker Change: I know, Tim you mentioned timing is difficult but.
Speaker Change: Get a sense for your expectations for loan growth.
Tim: We are targeting a mid single digit that we've talked about.
Tim: It is really we're really getting traction again I can't promise you are going to get those deals approved or ore, but it's really.
Tim: Those people in the markets are getting traction and so we have a much higher confidence level that we'll see more yield churn more activity, which ultimately leads to more closings on the timing of that again, it's hard to predict.
Tim: It can be lumpy.
Tim: We're pretty optimistic at this point of how that's shaping up.
Tim: So Q1's net run off does it deviate from mid single digit for the full year.
Tim: That is still our goal.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question will come from the line of David Feaster.
David Pipkin Feaster: Raymond James Your line is now open.
David Pipkin Feaster: Hey, good morning, everybody. Good morning, Mr finished or how are you all doing.
David Pipkin Feaster: Great.
David Pipkin Feaster: Great.
David Pipkin Feaster: I wanted to maybe follow up on the loan growth commentary.
Speaker Change: Originations were down in the quarter.
Speaker Change: Just curious how.
How do you think about.
Speaker Change: Paul.
Speaker Change: What drove that like how much of that is weaker demand maybe less appetite for credit.
Paul: And just kind of your where do you expect growth to be coming from you touched on more C&I. So it seems like that might be a bigger driver. So just looking at some of those comments.
Speaker Change: Yes, no problem.
Speaker Change: The weaknesses side I think you hit on it I think there is weaker demand, but we are seeing a bit of a normalization as people get more used to the higher rates and higher for longer that we're seeing a lot more activity.
Either they can't wait it out or it's not quite as scary for them as we thought so we are seeing a higher level of interest there is a component of.
No we're not going to do an office property in San Francisco with 30% Bank and see even if it looks good as a smaller property or even in other parts of our footprint work.
Speaker Change: Lease rollover risk and.
You're just not going to step into a situation where it could.
Speaker Change: I'll start deteriorating relatively soon so there is a greater degree of oversight but.
Speaker Change: We're seeing a greater degree of deals where the credit meets our criteria.
Speaker Change: More geographically dispersed and more disperse.
Speaker Change: Dispersed by type of loan so.
Speaker Change: It's always hard to predict from a point in time, what that means but we are seeing all of that all of the above right now.
Speaker Change: Got it.
Speaker Change: And then maybe just touching on the price right you've got a great reputation as an aggressive and proactive manager of credit that's evidenced in a quarter.
Speaker Change: On a few of the credit issues in the quarter, but I'm curious, maybe how do you think about managing those issues.
Speaker Change: Your thoughts after stressing the CRE book and maybe the health of the CRE market in your footprint and just high level. How do you think about our protein potential modifications.
Speaker Change: Great Thats a good question, let me ask Masako steward, our CTO who's on too.
Masako: Jump in she doesn't want it does most of that work.
Good morning.
Masako: So.
Masako: As you mentioned the credit quality and the credit management of our portfolio is still pretty solid I mean, very solid I would say.
In terms of managing the credit immediate.
Masako: It's a close closed management every quarter, we're getting updated information.
Masako: Looking at values and we're talking to our borrowers.
Masako: Our classified loans all of them are supported by personal guarantees or the owners or the direct borrowers and so we are constantly in discussions with them on how to kind of.
Masako: Remediate to find resolution find a mutual.
Masako: Agreement compromise on how to right size or when we get the get the loan to them are more conforming level. If you will and that conversation continues.
Masako: The balances in our graded loans is not always a great reflection of the movement that we see and there is a lot of movement up and down.
In our portfolio and in last quarter, we had very little by way of a migration from past two criticized or classified and even in the downgrades to.
Masako: From our special mentioned towards some standard the majority of those.
Masako: Our vacancy issues, but they're not necessarily that vacancies have gotten worse, they just haven't gotten better and with the passage of time warrants closer attention and those are the reasons for the downgrade. So we do take a pretty aggressive approach and how we monitor the credit.
<unk>.
Great.
Okay.
Masako: Helpful and then just kind of.
Masako: The other part of it.
Masako: But just to help with CRE market across your footprint.
Masako: I'm, sorry, again, David sorry, just to help the CRE market across your footprint.
Masako: Masako, you want to take that.
Masako: Yes, it depends on the asset class you know I think industrial is still continues to perform well.
Masako: Mainly depends on our footprint.
Masako: Office is not you know not bad in nearly every market that we're in and same with retail.
Speaker Change: Oh It is it is different multifamily is still.
Speaker Change: Continues to be continues to be a strong asset class for us.
Ed: So it's Ed.
Ed: It's hard to say how it is overall because it is different in each market.
Speaker Change: Yes. It is.
And David on the valuation declines obviously are most pronounced.
Speaker Change: And our footprint in office, but even then within office and it can be 20% decline from some one region up to the kind of declines we're seeing 40, 50% San Francisco again heavily dependent on the size of the property all of that kind of stuff. So.
It is uneven.
Speaker Change: Industrial was strong and a lot of our footprint and as Masako said multifamily is strong and we haven't had a lot of issues there that arent just weird idiosyncratic.
Speaker Change: Unrelated to what's going on in the world. So.
Speaker Change: It's holding up and many of these categories.
Speaker Change: Okay. That's great and then I just wanted to touch on just kind of get a high level thoughts on how you think about managing the balance sheet are higher for longer environment, you devoted that theres some opportunities that youre. Considering you guys have already been active with the securities book with.
Speaker Change: Cost saves you still investing in the.
Speaker Change: Franchise with new hires, but I was curious what types of initiatives Youre considering.
Speaker Change: Given the like again last quarter, we're talking about rate cuts now we're talking about are higher for longer environment. What are your thoughts on managing the balance sheet.
Speaker Change: Changed at all.
Speaker Change: We're actively contemplating all of those things are all economy jump in here, yes, So we had.
No.
Speaker Change: A series of sales last year, we did about.
Speaker Change: 3 million in the second quarter, and then another $132 million in the fourth quarter, we still have a significant portfolio that gives us a lot of flexibility to them.
Speaker Change: Opportunistically sell those securities and get those funds redeployed into higher.
Speaker Change: Yielding investments alone.
Speaker Change: Whatever opportunities we have there so the timing is important.
Speaker Change: But we are looking at it as Tim said.
Speaker Change: Gary.
Speaker Change: And a very concentrated manner and.
Speaker Change: We will continue to do so.
Gary: Thanks, everybody.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: The next question will come from the line of Andrew <unk> with Stephens. Your line is now open.
Andrew: Hey, good morning, Andrew.
Andrew: Hi, Andrew how are you doing.
How are you guys.
Andrew: Sure.
Andrew: Maybe if I could start just on the deposit front.
Speaker Change: It looks like the interest bearing deposit cost increase this quarter was actually maybe a little bit of an acceleration from from <unk> I've got up 33 basis points.
31, I believe in the fourth quarter I'm, just trying to maybe square that with some of your commentary around the deposit costs deceleration and maybe you mean more on kind of a month to month basis throughout <unk>. So.
Speaker Change: Maybe it'd be helpful could you share just kind of how deposit cost progressed throughout the first quarter.
Speaker Change: 100% right and I'm, sorry, if that was unclear. So yes, we saw a couple of basis point increase in the overall cost quarter over quarter.
Speaker Change: But a big deceleration iconic can give you specifics, but by the time you had March there was the lowest level, we've seen since before the crisis.
Speaker Change: Yeah. So if you look back in March of 'twenty, three we had a 60 basis point.
Speaker Change: Or 60 basis point pipeline interest bearing and 29 overall, so I'll stick with the overall cost of deposit so that has trended down on a monthly basis.
Speaker Change: It.
Speaker Change: Fell down pretty steeply to 16 and 12 and then it popped up a little on the 14th.
By July of 'twenty, three it was down to six and then five and it popped up a little bit in September and stayed up a little bit around seven to nine and then peaked in January at 10.
Speaker Change: And then back down to six in two so you know the.
Speaker Change: It's a clear trend down there are some some peaks and troughs in that trend, but it is it is pretty solid trend down.
Speaker Change: Got it okay very good.
Speaker Change: 10002 in January February March.
Speaker Change: But it seems like a big step down into March though.
Speaker Change: Yeah.
Speaker Change: And then if I could ask another one kind of margin related as well.
Speaker Change: The release mentioned.
Speaker Change: About a 260 basis point spread for new originations versus.
Speaker Change: What was being paid off this quarter I'm just curious your thoughts on if I look at what.
Speaker Change: Paid off most heavily this quarter was construction, which I would imagine there is a little higher yield just ask Lee as I contemplate.
Speaker Change: Tim you guys getting back to that kind of mid single digit type loan growth the growth of ramping later this year would you expect that spread of new originations to payoffs to widened from this 260 level.
Tim: Yes, it's hard because as you said the cost of loans paying off we're probably a little bit higher so the loans came on again, its so small sample, but I think it's consistent what we're seeing is in the low eights 8.18, I think with the rate of the loans that came on in the quarter. So a material difference from a lot of our other fixed rate loans. So just.
Tim: Depends on the timing and the category rate of pay offs, but I think that is a clear trend.
Again also whether it's going to be fixed rate or variable rate some of the fixed rate for attractive real estate lending out there still awfully competitive seem to see the same delta rates coming on Brazil is going up but thats, where we were for the quarter about 818.
Speaker Change: Yes, okay.
Speaker Change: He has.
Speaker Change: On me.
Speaker Change: If you just look at the existing portfolio.
Speaker Change: Assuming a static balance sheet no change in rates, we've got 36 basis points of residual repricing in the loan book for the next 12 months.
Speaker Change: Yes, Okay, and Thats I think pretty consistent with kind of how we thought about loan repricing. When we discussed the last quarter. It was alright, Yep got 17, 18% a year is our run rate of loans repricing of the book.
Speaker Change: Okay.
If I could ask one more just around.
Speaker Change: The dividend I mean, clearly above 100% payout ratio this quarter and I understand you guys have a lot of capital very healthy capital position, just would love to hear kind of your thoughts Tim on comparability around the dividend and where it's at today and whether that's a maybe hold up as you contemplate any incremental capital return opportunities are.
Our securities restructuring.
Tim: I think you just summarize where we're at.
Tim: You answered your own question very well.
Tim: The dividend is really important to us and we understand the importance of that to our investors and so yes, we have a lot of capital as we work through.
Tim: This compressed.
Tim: Compressed NIM rate environment, but as you said also we're looking at restructuring or other things, we can do with our balance sheet to help provide more visibility into an expanded margin where that wouldn't be such a niche.
That is all part of our ongoing discussions that we're currently involved in.
Yeah.
Okay.
Speaker Change: I appreciate it and then actually Tani just one more quickly I think if I look back at 2023.
Speaker Change: Charitable contribution line steps up in the second quarter should we expect something similar in <unk> 24.
Speaker Change: Yes.
Tani: We were very committed to those contributions and the timing is going to stay the same this year in the second quarter.
Tani: Okay.
Speaker Change: That's it for me. Thank you for taking my questions I appreciate it thank you Andrew.
Speaker Change: Yeah.
Wood Neblett Lay: The next question comes from the line of Woody lay with <unk>. Your line is now open.
Wood Neblett Lay: Hey, good morning, guys good morning.
Wood Neblett Lay: I wanted to start on noninterest bearing deposits.
Wood Neblett Lay: They saw a slight increase on the quarter, which was great to see I mean were there any seasonal impact of the non interest bearing bucket.
Woody: Or are you beginning to see that mix shift.
Amir.
Amir: I will I'll start and I'll, let Tom jump in I don't think we saw anything unusual we did have an outflow from noninterest bearing or even in some cases interest bearing into alternate investment higher yielding that was about 27 million.
Amir: But we brought in $97 million total across various highest so we're just going to have those fluctuations. We just I know we've said it in.
Tom: Happening in Q1 of last year compounded the concern, but we get some big fluctuations up and down in our noninterest bearing commercial accounts and we haven't seen any trend that leaves me to believe that anything has changed yeah. I think we often have outflows in the first quarter and the efforts.
Tom: Our team has made to make sure that we bring in inflows to compensate for that is is really good.
Speaker Change: Alright, thats good to hear.
And then maybe turning over to the loan growth I think in the release you.
Speaker Change: You cited some new compensation plans, where we're helping our.
Speaker Change: But just any color you can give on sort of what the new compensation plans are.
Speaker Change: I would say the comp that Theres two components, one is a more frequency frequency of our paying people right.
Speaker Change: <unk> always been an annual shop, and so I think as generations change expectations change.
Speaker Change: That's one area, where I think we can really try to drive behavior.
Speaker Change: People do what they get paid to do and.
The other add would be to bring in some of the really quality producers would be have more upside built into the plan. So face value, it's not going to cost us anymore, unless they really hit a different level of production targets and that was really that's all new that was designed to meaning newly applied that was designed to help.
With the people, we were breaking out and so that was more aimed at getting those people. The former will be MD aimed at behavioral so.
Speaker Change: <unk>, new but that face value don't anticipate are costing us more money necessarily unless again they hit it out of the park and then we'll all be chairing that anyway.
Speaker Change: Yeah, Alright, and then last for me just.
Speaker Change: Another follow up on the classified movement just any additional color you can give on the types of CRE.
Speaker Change: That moves into that bucket, where the where the office portfolio.
The softer do you want to take that please.
Sure Yeah, one was office one with retail in different locations.
Speaker Change: And both are supported by a.
Sure: Strong meaningful support by way of the guarantees with liquidity.
Speaker Change: Alright, that's all from me thanks for taking my questions.
Speaker Change: Thank you Ed.
Speaker Change: There are no further questions on the line I'll now turn the call over to Tim Myers for closing remarks.
Timothy D. Myers: Yeah. It appears we do not have any online questions I want to thank everyone for your diligence and questions and if anyone has any further please by all means call Tommy right and we're happy to further dive into some of these issues with that we'll see you next quarter. Thank you.
Tim Myers: Okay.
Speaker Change: The meeting has now concluded. Thank you for joining you may now disconnect.
Speaker Change: [music].
Yes.
Speaker Change: Yeah.