Q3 2024 Bank of Marin Bancorp Earnings Call
Replication, which were issued this morning, can be found in the investor relations section of our website at BankOfRent.com. Where this call is also being my web guest.
Close captioning is available during the live webcast as well as on the webcast reply.
Before we get started, I want to note that we will be discussing some non-gap financial measures. Please refer to the reconciliation table in our earnings news release for both Gap and non-gap measures.
Additionally, the discussion on the call is based on information we know as of Friday, October 25, 2024.
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 fileness.
Speaker Change: Following our prepare remarks, Tim, Tani, and our chief credit officer, Massako Stewart, will be available to answer your question. And now, I'd like to turn the call over to Tim Myers.
Tim Myers: Thank you, Christy. Good morning, everyone. And welcome to our Corrioli earnings call.
Tim Myers: A third quarter results reflect the positive benefits of the actions we took in the second quarter to both reposition or balance sheet and reduce operating expenses.
Tim Myers: This resulted in an increase in our net interest margin, a lower level of operating expenses, and improvements in our ROA and efficiency ratios.
Tim Myers: On a broad basis, we continue to have strong asset quality within our lone portfolio and work through previously reported matters with no new issues emerge.
Tim Myers: The combination of these positive trends and some sharing purchases led to an increase in our book value per share.
Tim Myers: are banking team, reinforced with new members, is doing an outstanding job of developing attractive lending opportunities and generating solid loan production while still maintaining our discipline underwriting and pricing criteria.
Tim Myers: During the quarter, we generated $44 million in total on commandments with $28 million funded.
Tim Myers: Along with the portfolio of residential mortgage loans purchased as part of the balance you repositioning.
Tim Myers: This resulted in a small increase in our total loan balances during the quarter.
Tim Myers: We are building a more diversified pipeline of loans consisting of their discipline underwriting that are expected to find in future quarters and positively impact both our total loan balances and our average loan yields.
Tim Myers: We also a positive trans in TNCum.
Tim Myers: Additionally, total deposits increased $96 million in the quarter.
Tim Myers: primarily driven by a 55 million dollar increase in non-interest-faring deposits.
Tim Myers: including $17 million coming from nearly 1200 due to positive accounts during the quarter.
Tim Myers: Our proportion of non-inders-growing deposits increased slightly to 45% of total as we continue to benefit from our relationship banking model with high-touch service.
Tim Myers: We were able to initiate our following rate deposit strategy and anticipation of Fed Fund's rate cuts and deposit balance is increased with typical third quarter seasonling flows.
Tim Myers: In terms of asset quality, we are seeing generous stability in the portfolio, no material and new problem loans.
Tim Myers: Given our improved financial performance and pretty balanced management, our capital ratios remain very strong with a total risk-based capital ratio of 16.4% and the TCE ratio of 9.72%.
Tim Myers: Our strong capital and confidence and credit quality positioned us to resume Sherry purchases last quarter by back $220,000 shares totaling over $4 million.
Tim Myers: We believe this was in the best interest of our shareholders preserving our high cap level of capital and maintaining our flexibility to make capital allocation decisions that will enhance shareholder value.
Speaker Change: With that, I'll turn the call over to Tani to discuss our financial results in more detail.
Tani: Thanks Tim, good morning everyone.
Speaker Change: Thank you, Ryan, continue to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital levels while delivering exceptional service to existing and new customers as we position for further earnings improvement in the future.
Tani: We generated 4.6 million in net income for the third quarter, or 28 cents per share, as we began to realize the full anticipated benefit to profitability of the balance sheet restructuring we did during the second quarter.
Tani: Our net interest in coming increased 8% from the prior quarter to 24.3 million.
Tani: Largely driven by an 18 basis point increase in our net interest margin. Primarily due to balance sheet repositioning and a shift into posit pricing that reversed the upward trend in deposit costs while staying aligned with the broader market.
Tani: By the middle of the third quarter, our net interest margin had increased by 30 basis points over the level just prior to the balance sheet repositioning. Consistent with our expectations, and we continue to see that benefit.
Tani: The yield on loans was negatively impacted by nine basis points in the third quarter as a result of interest reversals on two non-acrual loans, reducing that interest margin for the quarter by six basis points.
Tani: are not interested expense decreased by one and a half million from the prior quarter, mostly due to a decline in salaries and benefits expense through the staff reductions made in the second quarter and continued reallocation of staffing to align with the strategic direction of the bank.
Tani: Additionally, the decline resulting from charitable contributions annually granted in the second quarter was offset by a $615,000 accrual for a non-repeatable legal resolution, which negatively impacted earnings per share by four cents.
Tani: Moving to non-interest income, excluding the loss on security sales that impacted our second quarter results, we had an increase in non-interest income largely due to an increase in wealth management revenue.
Tani: are total deposits for 3.3 billion at September 30.
Speaker Change: As Tim mentioned, we typically see seasonal inflows in the third quarter and due to the nature of our client base with many professional services firms, we expect to see some seasonal outflows in the fourth quarter due to bonus payments.
Speaker Change: Croft it and other distributions and larger business expenses.
Speaker Change: Our average fuss to total deposits increase just one basis point in third quarter compared to a seven basis point increase in the prior quarter.
Speaker Change: Not only does that continue the deceleration of the posit cost increases seen in the first and second quarters, but it also reflects a turn in the posit cost late in the third quarter.
Speaker Change: Since initiating our declining rate to pilot pricing strategy, the average spot rate on deposit, non-deposit network, interest-bearing balances, declined 18 basis points, while the balances themselves went up approximately 10 million by September 30.
Speaker Change: Our pricing strategy weighs rate reductions in the context of relationship pricing, balance sheet growth, and net interest margin considerations.
Speaker Change: This is Glenn Credit Management, remains a hallmark of Bank of Marin as well. Classified assets were down primarily due to one classified non-aclulone for 1.8 million that was paid off and full, including all accrued interest.
Speaker Change: Non-acdual loans had a net increase primarily related to an $8.1 million real estate loan whose renewal negotiations remain ongoing with no expectations for actual losses.
Speaker Change: As Tim mentioned, overall there were no new issues and increases were partially offset by pay-downs, pay-offs, and returns to a cruel status.
Speaker Change: 50% of non-acool loans are paying as agreed and 80% are secured by real estate.
Speaker Change: Duda Distability in our long portfolio, we did not record any provision for credit losses in the third quarter, and we reversed 233,000 in provisions for losses on funded commitments.
Speaker Change: The allowance for credit losses remains high at a level of 1.47% of total loans.
Speaker Change: Long balances of 2.1 billion at the end of the third quarter were up 8 million from the prior quarter.
Speaker Change: We had some movement from construction loans to CRE loans, while the largest area of growth was in residential mortgages, primarily due to the portfolio of high quality in market residential mortgage loans that we purchased with part of the proceeds from the security sales in the second quarter.
Speaker Change: Given the continued strength of our capital ratios, our board of directors declared a cash dividend of 25 cents per share on October 24th. The 78th consecutive quarterly dividend paid by the company.
Speaker Change: Without I'll turn it back over to you, Tim, to share some final comments.
Tim Myers: Thank you, Tani. In closing, we are seeing the positive results of proactive strategic balance sheet and expense management actions taken in the second quarter and we expect you to continue resulting in further improvement in our level of profitability.
Tim Myers: We started reducing rates in late August, on liquid funds earning higher price exception rates.
Tim Myers: and continued to pass the reductions and deposit rates simultaneously with Fed Ray cuts in September.
Tim Myers: We have not seen any meaningful outflow of deposits, which is consistent with the historical experience of our business model, leading with service and relationship pricing, not solely on higher than average rates.
Tim Myers: We expect to see more declines in our cost of deposits, which should contribute to further expansion in our net interest margin as the yield per normalizes.
Tim Myers: We continue to be more active in our business development efforts while remaining conservative in new loan production and maintaining our discipline underwriting and pricing criteria. And our seeing and increase in the loan pipeline due to the higher level of productivity from our banking teams.
Tim Myers: We typically see some seasonal strength and warm production in the fourth quarter each year, and based on current trends, we expect that to be the case again this year.
Tim Myers: The pipeline is well diversified across industries and our markets.
Tim Myers: and while we continue to carefully manage expenses and reduce costs in certain areas of the company.
Tim Myers: We are also continuing to make investments in both town and technology that will further enhance our level of efficiencies.
Tim Myers: and the overall customer experience we can offer and increase our ability to attract new clients to the bank.
Tim Myers: We also continue to have a very strong balance sheet with high levels of capital, liquidity and reserves.
Tim Myers: Given the strength of our balance sheet and the banking talent we have added in the past several quarters, we believe we are a very well positioned to increase our market share, add attractive new client relationships, and generate a higher level of loan growth as economic conditions and loan demand improves.
Tim Myers: We believe that this will help us to consistently generate profitable growth in the future and further enhance the value of our franchise for our shareholders.
Tim Myers: With that, I want to thank everyone on today's call for both your interest and support. We will now open the call to your questions.
Speaker Change: Thank you. At this time, if you would like to ask a question, please click on the raise hand button which can be found on the black bar at the bottom of your screen.
Speaker Change: One of these your turn, you will receive a message on your screen from the host, allowing you to talk, and then you will hear your name called. Please accept, unmute your audio and ask your question.
Speaker Change: We will wait one moment to allow the Q to form.
Speaker Change: Our first question comes from Woodlay. You may now unmute your audio and ask your question.
Speaker Change: Hey, good morning guys.
Woodlay: wanted to start on the, the came in a little bit better than what I was expecting. You had the recent staffing restructures and it sounded originally like a lot of those savings would be used.
Woodlay: Read that live into the company. But just one of your outdated thoughts on sort of the expectation for for to you expensive and and just how you think the expenses trend from here.
Speaker Change: Guazalva of the Kylova Woody and then Pani can add any of the details.
Speaker Change: So the expense savings were yes, both from the reduction in force, other cost saving measures. And frankly, we're ahead of cost spend expectations on a number of our technology and digitalization initiatives. So we'll continue to look for ways to accomplish our strategic objectives there.
Speaker Change: There are some positions still left to fill, but overall I believe we're still ahead of what we thought we would accomplish These are the details cost of setting effort
Speaker Change: Tani Girton does. Yeah, I think that actually no nothing to add, I think that's hunted up quite well why we will have net net time.
Speaker Change: Reductions in our original projections for those investments, they also have been some delays. So some of those costs don't hit exactly when we project in. But I think, and then also, you know, we continue to look for talent, but those expenses will hit when we find the right talent.
Speaker Change: Yo, alright, done.
Speaker Change: That's great color, maybe shifting over to the margin. So we got the bump from the recent restructure in it. It's down to like some interest or bursels were ahead when in their quarter. So we should get a knife.
Speaker Change: and take up in the fourth quarter. But how do you think additional rate cuts from your impact the Ford Outlook for the margin?
Speaker Change: So if we look at this September net interest margin versus the Q.
Speaker Change: The third quarter average, it was higher by about two basis points, but some of that noise was still in there. So I think we're going to get some lift from that. We still have 26 basis points in upward loan repricing and [inaudible]
Speaker Change: are proactive deposit strategy or closely monitoring but continuing forward with that strategy. So that should be a tailwind for us on that. The cash position, that can fluctuate.
Speaker Change: Depending on what's going on with deposit balances and our cash position and then where the Fed goes with rate.
Speaker Change: is that I.
Speaker Change: Could have some impact on it, but if you consider that the most likely scenario is the Fed moves in
Speaker Change: November with a steeper yield curve.
Speaker Change: That could also help.
Speaker Change: While I don't want to put a number on it, I think you identified.
Speaker Change: Some of the bigger movers and then we still have some, you know, there are some things that obviously we can't control but the things we can control we're still watching and working on very diligently.
Speaker Change: God at it. And then last for me I just want to shift to the buy bag.
Speaker Change: The first time you all have repurchased and shared since the start of 2022, could you just talk about what made you comfortable re-engaging on the buyback and is there further appetite from here?
Speaker Change: Yeah, um...
Speaker Change: Certainly our credit quality, you know, as we got more comfortable.
Speaker Change: with the credit quality, the loss potential, certainly in light of our capital ratios, our very strong capital ratios.
Speaker Change: and the valuation obviously would continue to believe the stocks undervalued and
Speaker Change: Once we got a better sense, we didn't think there were a lot of hits to capital lurking in there. We got a lot more comfortable, so we'll continue to look at that. We always have to just suppose that option with all the other available options, but we'll continue to keep an eye on that.
Speaker Change: Alright, thanks for taking my question. Thanks, Woody.
Speaker Change: Our next question comes from Matthew Clark, even though I now will meet your audio and after a question.
Speaker Change: Good morning, everyone. Good morning.
Matthew Clark: I just want to get back to the expense run rate. If you could be a little more specific, I mean, do we net net do we think we're flat here in 4Q to grow and then what's your expectation for?
Matthew Clark: The season only increase in the first quarter. I think historically it's been high single day today but more recently I think you guys have obviously stamped down on that season only increase. Just want to get your updated thoughts there too.
Speaker Change: Yeah, so, you know, typically we do have some expenses hit in the fourth quarter sort of for all our true apps. We also try to true up our...
Speaker Change: are bonus, and incentive payment accruals to the extent we can. And as you said, we are trying very, very hard to minimize the...
Speaker Change: The reverse holes in the first quarter associated with that, but it's always really hard to project exactly what those are going to be. But we will still have, you know, the annual recess of the 401k.
Speaker Change: and then the bonuses. So we will have the typical pop in the first quarter in its expenses that we normally see.
Speaker Change: is called.
Speaker Change: Okay.
Speaker Change: and then you also give us the all-in spot rate on deposits and you excluded some balances there, but just want to get the all-in cost of deposits either total or in-sperren't.
Speaker Change: Yeah, let me grab that. Let me average margin in September, even if it adjusted or on adjusted, I don't want to.
Speaker Change: the average margin in September you mean the net interest margin?
Speaker Change: and that was 270.
Speaker Change: Okay, consistent with the quarter does that include the six basis point negative impact or is that excluding that included
Speaker Change: and then you said you wanted to stop right on the deposit.
Speaker Change: Oh, yep.
Speaker Change: Let me come back to you with that. I've done a lot of pieces of paper in front of me and I want to fix sure I'm looking at the right one. Was there one other thing you had Matthew?
Matthew Clark: Yeah, one of the other questions just around the San Fran office credit from last quarter. I think your specific reserves were 6.7 million and just wanted to get it updated there, whether or not that number has changed.
Matthew Clark: and the ferret was soon those are realized out of existing reserves in the fourth quarter.
Speaker Change: So you talked about the reserve you took in the prior quarter, nothing changed there in fact, but leasing activity spicked up.
Speaker Change: and they've signed three new leases in Q3 on that property so we continue to see that kind of trend overall in San Francisco.
Speaker Change: That provision was down to, you know, a less than 100% loan to value on a recent valuation. Prior to these new leases being signed. So no further deterioration or further provision on that large property.
Speaker Change: Thank you. You're welcome. Matthew is just spot rate on deposits on September 30th was 1.43%.
Speaker Change: Perfect, thank you.
Speaker Change: Our next question comes from David Feaster. You may now meet your line and ask your question.
David Feaster: Hey, good morning everybody. Well maybe just touching on the gross side. I mean, I'm curious kind of what you guys are seeing.
David Feaster: and Regenation's Sloat a little bit. I'm curious, is that a function of demand? And just where are you seeing opportunities and the appetite to continue to supplement organic growth with Central Poor Pursas?
David Feaster: Here, so...
Speaker Change: You know, yes, wind corridor regulations were down, but that's just a function of timing. We don't have a real granular pool of loan types that we do, so there is going to be some lumpiness. We expected to be better. We have closed 10 million since quarter end. It just got pushed over and we feel very good about the quarterly pipeline. So when you're looking from a longer term growth perspective.
Speaker Change: We're very happy with the transverse seeing and activity. Activity begets, reginations, obviously that begets result. So we see a consistent trend in a higher level with activity that are generating higher pipeline. That's pretty diverse rather footprint.
Speaker Change: the loans close were dead births rather footprint. We're seeing kind of a shift from CNI last quarter to more CRA this quarter. But again, that's, you know, they're lumpy.
Speaker Change: Assets, so that'll shift, I think, quarter to quarter. Construction loans, we've had some refinance in the permanent. The new ones we're seeing are much smaller, more granular, $2, $3 million for Intel projects. And no real big.
Speaker Change: Projects coming from there. So it's a lot of blocking and tackling David. It's a nice mix between our new people. We did hire a new producer.
Speaker Change: and that's already resulted in closing.
Speaker Change: but it's a nice mix between that and our existing team. So...
Speaker Change: It's just getting a more consistent approach. You again calling activity that leaves the pipeline building at least a close and so
Speaker Change: While every quarter won't be, let me exact same trend line, we're optimistic of over.
Speaker Change: and the other one.
Speaker Change: Okay. And then, where are you seeing new on-products in the day and then this fall up on your commentary about hiring. You talked about on appetite because then you need to hire, obviously it's got to be the right people at the right time. Here is where you're seeing opportunity. I was conversations are going and any what segments are markets you're looking to add to at this point.
Speaker Change: So if you look at the people we've both hired and the ones we're talking to, it's really stackable throughout the footprint.
Speaker Change: So...
Speaker Change: and if you look at some of the banks that you know are hiring from, they might not have had as much of a regional micro-regional focus as we did, meaning they focus on the entire Bay Area. So there's specific location of not necessarily indicative within the greater Bay Area where that growth might come from.
Speaker Change: Back to the yield question, just looking at the commercial loan glass quarter, we're about 6.5% yields on new loan versus the 5.63 to pay it off. So, you know, it's still very competitive for high quality loans, but those are the loans we're looking.
Speaker Change: You got it.
Speaker Change: and then maybe you ask for me just touching on the court deposit side.
Speaker Change: is great to see the growth, especially on the NIB front. You touched on some of the seasonal impacts there. I was hoping maybe you could quantify how much, you know, seasonal versus, I mean, you guys have been, you know,
Speaker Change: [inaudible] They are going to be a police officer.
Speaker Change: Yes, thank you. We did have the seasonal implos, but also have some seasonal off-lose, about 18 million of the growth and non-interest parenting from the new relationship.
Speaker Change: and the positive accounts we expect to fund up. But again, the timing of that's unclear. So a lot of that was seized now, but we did have a nice game from new funnies and new account openings.
Speaker Change: and about that was about what's pretty evenly between consumer and business.
Speaker Change: and I would say that the new account, that's been pretty consistent over the last several quarters. I mean we've been getting around 12 to 1300 new accounts every quarter for several quarters running now.
Speaker Change: Sigh...
Speaker Change: That's great. Thanks everybody. Thank you David.
Speaker Change: As a reminder, if you would like to ask a question, please use the RAF hand button which can be found at the bottom of your Zoom application. Once called upon, please unmute your line and ask your question.
Speaker Change: and our next question will come from Jeff Rulis. Please go ahead with your question.
Speaker Change: Thanks for coming.
Jeff Rulis: Question on maybe a couple follow-ups Tani if I could, the expense level.
Speaker Change: 20.4 this quarter, but included, you know, elevated.
Jeff Rulis: Magle accrual that you call out, that's 600,000 plus. So think it about fourth quarter and you mentioned some resets or some true ups in the fourth quarter and the bump in maybe first quarter but
Jeff Rulis: I think quarter to quarter sequentially, if we say to assume the legal don't recur and we're flat to down in the fourth quarter, I just wanted to clarify that.
Speaker Change: Yes, there's nothing I'm aware of in particular that would take them higher and that legal settlement that type of claim is not a repeatable once it's settled that one's finished so that won't come back again.
Speaker Change: Okay, and if we net all that out, I just am looking for a broader, if we're thinking about 2025 and given the efficiency improvements you've...
Speaker Change: Undergone this year. What's a good growth rate for next year? Understanding that you'd be opportunistic on talent. It comes up, but as you budget today, should we assume sort of a pre-4% growth rate in 25?
Speaker Change: Um, you know, I think...
Speaker Change: Typically when we start our strategic planning process, we will start with 3% and go from there. But we still have the tail end of some of our strategic investments in there. But if we look forward...
Speaker Change: 25 and forward, we're looking at efficiency improvements every year going forward. So, you know, over the next four, four to five years. So, I know that's not a specific problem if you want, but that's how we do it. Okay, we started three and...
Speaker Change: You're going to be working hard to, okay, fair enough.
Speaker Change: and then I'm in a margin, I just wanted to clarify, Tani, I thought you said that the September margin was a couple basis points above the quarterly average. Yes. Oh, and I said, you're right. I said that wrong. It was 272 in September, not 270. Thank you. Got it. And with.
Speaker Change: Inclusive of some negative headwinds that maybe I think he framed it up as theirs.
Speaker Change: Tailwinds to that going forward even exiting at 272 right? Yes. Okay. Thank you. And then just on the on the credit side, you know, it sounds like the the loan that moved in on a little kind of.
Speaker Change: is administrative in nature. Any more color on that loan, or if I think you've mentioned, maybe real estate, but yeah, it's a it's office, see Iry.
Speaker Change: Some of our loans have a mechanism whereby certain conditions are meant, the loan extends out beyond the original maturity.
Speaker Change: There are times depending on an agreement or disagreement about whether those conditions are the next. It's in a part of San Francisco that has actually an attractive trend for obviously this activity and their sponsorship. It's just a protractive process of...
Speaker Change: and the negotiating those conditions such that that extension can take place. So it's a little more technical and administrative in nature than certainly some of the other ones.
Speaker Change: Ok.
Speaker Change: Last one for me, Tammy, you've mentioned the pipeline a couple times. Do you happen to have the quarter over quarter, like what where we sit today versus where you entered the third quarter just in dollar terms?
Speaker Change: It's quite a bit bigger but I'm really reluctant, Jeff, as you know, to do that, it fluctuates and again, there's a lumpiness aspect to it so we don't give that guidance, but it's considerably bigger today than it was at the start of the quarter.
Speaker Change: and the law score. Okay, so I lied on the tax rate, Tani. Do you have any read on what we should model or think about go forward on taxes?
Speaker Change: Okay.
Speaker Change: Yeah, so for this year that because we had the big loss, the tax rate isn't flated because we, you know, every time we, every quarter that we have income, will basically reversing some of the tax benefit from that loss.
Speaker Change: but I anticipate that the tax rate will return to normal levels in 2025.
Speaker Change: which is around 25. I think you've said previously 25. It was I think closer to 26. Okay. Thank you.
Speaker Change: Our next question will come from David Feescher. Your line is open so if you do ask your question.
David Feaster: Hey, sorry.
David Feaster: I just wanted to hop back in and maybe ask a little bit about the margin.
Speaker Change: and Secretary of State of the United States.
David Feescher: You know, that 26 basis points have embedded loan repricing. Is that all next year?
David Feescher: I'm just looking at the repricing chart and we talked about long growth coming on in the mid-sixes but you know, some of what's matureting's coming on are like coming off around the low-seven. So I'm just going to curious, like how do you think about the trajectory of the margin?
David Feescher: as we look out the next year. Yeah, that 26 faces point is over the next 12 months. Okay.
Speaker Change: So, but the margin is marching higher, but not in any big steps, it's just kind of a march.
Speaker Change: Ok, thank you.
Speaker Change: and our next question comes from Matthew Clark. Please go ahead.
Matthew Clark: Thank you. Your beta, your deposit beta on the way up, interspereying, I think was 47%.
Matthew Clark: This is like, what do you thoughts on the beta on the way down this summer out?
Speaker Change: We use the lower bay to the nut on the way down and we also lag it.
Speaker Change: and...
Speaker Change: So on the interest rate risk position, you'll see it...
Speaker Change: A different position this quarter when we published the Q then we saw last quarter because of the repositioning. So we got a little more sensitive to falling rates because we have higher cash position and also the investments that we made in new securities were at shorter duration.
Speaker Change: and then you know
Speaker Change: I think.
Speaker Change: We also have some swaps on the books that if as rates go down those will also have a negative impact.
Speaker Change: Again, the cash position has a pretty big impact on our sensitivity and that is somewhat dependent on the cash flows associated with our deposits.
Speaker Change: Okay, great, thank you.
Speaker Change: We have no further questions at this time. I'll hand it back to Tim Myers for closing remarks.
Tim Myers: Thank you everybody. We appreciate interest in your questions. Please feel free to reach out if you have any further ones. Thanks
Speaker Change: I'm going to be a good man.
Speaker Change: I'm a man of the same age as me.
Speaker Change: I'm a man of the same age as me.