Bank of Marin Bancorp Q3 2024 Earnings Call Transcript

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October 28, 2024

There are 8 speakers on the call.

Operator

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the Q3 ended September 30, 2024. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Tim Myers, President and CEO and Tani Guertin, Executive Vice President and Chief Financial Officer.

Operator

Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, October 25, 2024, and may contain forward looking statements that involve risks and uncertainties.

Operator

Actual results may differ materially from those set forth in such statements. For a discussion on these risks and uncertainties, please review the forward looking statements disclosure in our earnings news release as well as our SEC filings. Following our prepared remarks, Tim, Tawny and our Chief Credit Officer, Masako Stewart will be available to answer your questions. And now, I'd like to turn the call over to Tim Myers.

Speaker 1

Thank you, Chrissy. Good morning, everyone, and welcome to our quarterly earnings call. Our Q3 results reflect the positive benefits of the actions we took in the Q2 to both reposition our balance sheet and reduce operating expenses. This resulted in an increase in our net interest margin, a lower level of operating expenses and improvements in our ROA and efficiency ratios. On a broad basis, we continue to have strong asset quality within our loan portfolio and work through previously reported matters with no new issues emerging.

Speaker 1

The combination of these positive trends and some share repurchases led to an increase in our book value per share. Our 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 disciplined underwriting and pricing criteria. During the quarter, we generated $44,000,000 in total loan commitments with $28,000,000 funded. Along with the portfolio of residential mortgage loans purchased as part of the balance sheet repositioning, this resulted in a small increase in our total loan balances during the quarter. We are building a more diversified pipeline of loans consistent with our disciplined underwriting that are expected to fund in future quarters and positively impact both our total loan balances and our average loan yields.

Speaker 1

We also have positive trends in fee income. Additionally, total deposits increased $96,000,000 during the quarter, primarily driven by a $55,000,000 increase in non interest bearing deposits, including $17,000,000 coming from nearly 1200 new deposit accounts during the quarter. Our proportion of non interest bearing deposits increased slightly to 45% of total as we continue to benefit from our relationship banking model with high touch service. We were able to initiate our falling rate deposit strategy in anticipation of Fed funds rate cuts and deposit balances increased with typical 3rd quarter seasonal inflows. In terms of asset quality, we are seeing general stability in the portfolio with no material new problem loans.

Speaker 1

Given our improved financial performance and prudent balance sheet management, our capital ratios remain very strong with a total risk based capital ratio of 16.4% and a TCE ratio of 9.72%. Our strong capital and confidence in credit quality positioned us to resume share repurchases last quarter, buying back 220,000 shares totaling over $4,000,000 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. With that, I'll turn the call over to Tani to discuss our financial results in more detail.

Speaker 2

Thanks, Tim. Good morning, everyone. Bank of America continues 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. We generated $4,600,000 in net income for the Q3 or $0.28 per share as we began to realize the full anticipated benefit to profitability of the balance sheet restructuring we did during the Q2. Our net interest income increased 8% from the prior quarter to $24,300,000 largely driven by an 18 basis point increase in our net interest margin, primarily due to balance sheet repositioning and a shift in deposit pricing that reversed the upward trend in deposit costs, while staying aligned with the broader market.

Speaker 2

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. The yield on loans was negatively impacted by 9 basis points in the 3rd quarter as a result of interest reversals on 2 non accrual loans, reducing net interest margin for the quarter by 6 basis points. Our non interest expense decreased by $1,500,000 from the prior quarter, mostly due to a decline in salaries and benefits expense due to staff reductions made in the 2nd quarter and continued reallocation of staffing to align with the strategic direction of the bank. Additionally, the decline resulting from charitable contributions annually granted in the 2nd quarter was offset by a $615,000 accrual for a non repeatable legal resolution, which negatively impacted earnings per share by $0.04 Moving to noninterest income. Excluding the loss on security sales that impacted our 2nd quarter results, we had an increase in noninterest income, largely due to an increase in wealth management revenue.

Speaker 2

Our total deposits were $3,300,000,000 at September 30. As Tim mentioned, we typically see seasonal inflows in the Q3. And due to the nature of our client base with many professional services firms, we expect to see some seasonal outflows in the Q4 due to bonus payments, profit and other distributions and larger business expenses. Our average cost of total deposits increased just one basis point in the 3rd quarter compared to a 7 basis point increase in the prior quarter. Not only does that continue the deceleration of deposit cost increases seen in the 1st and second quarters, but it also reflects a turn in deposit costs late in Q3.

Speaker 2

Since initiating our declining rate deposit 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 $10,000,000 by September 30. Our pricing strategy weighs rate reductions in the context of relationship pricing, balance sheet growth and net interest margin considerations. Disciplined credit management remains a hallmark of Bank of Marin as well. Classified assets were down primarily due to one classified non accrual loan for $1,800,000 that was paid off in full, including all accrued interest. Non accrual loans had a net increase primarily related to an $8,100,000 real estate loan whose renewal negotiations remain ongoing with no expectations for actual losses.

Speaker 2

As Tim mentioned, overall there were no new issues and increases were partially offset by pay downs, payoffs and returns to accrual status. 50% of non accrual loans are paying as agreed and 80% are secured by real estate. Due to the stability in our loan The of 1.47 percent of total loans. Loan balances of $2,100,000,000 at the end of the third quarter were up $8,000,000 from the prior quarter. 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 securities sales in the 2nd quarter.

Speaker 2

Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on October 24, the 78th consecutive quarterly dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.

Speaker 1

Thank you, Tani. In closing, we are seeing the positive results of proactive strategic balance sheet and expense management actions taken in the Q2 and we expect these trends to continue, resulting in further improvement in our level of profitability. We started reducing rates in late August on liquid funds earning higher price exception rates and continued to pass through reductions in deposit rates simultaneously with Fed rate cuts in September. 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. 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 curve normalizes.

Speaker 1

We continue to be more active in our business development efforts, while remaining conservative in new loan production and maintaining our disciplined underwriting and pricing criteria and are seeing an increase in the loan pipeline due to the higher level of productivity from our banking teams. We typically see some seasonal strength in loan production in the Q4 each year and based on current trends, we expect that to be the case again this year. The pipeline is well diversified across industries and our markets. And while we continue to carefully manage expenses and reduce costs in certain areas of the company, we are also continuing to make investments in both talent and technology that will further enhance our level of efficiencies, improve the overall customer experience we can offer and increase our ability to attract new clients to the bank. We also continue to have a very strong balance sheet with high levels of capital, liquidity and reserves.

Speaker 1

Given the strength of our balance sheet and the banking talent we have added in the past several quarters, we believe we are very well positioned to increase our market share at attractive new client relationships and generate a higher level of loan growth as economic conditions and loan demand improves. 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. 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 3

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. When it is 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. Our first question comes from Woodley.

Speaker 3

You may now unmute your audio and ask your question.

Speaker 4

Hey, good morning, guys.

Speaker 1

Good morning, Woody. I

Speaker 4

wanted to start on expenses. They 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 reinvested into the company. But I just wanted your updated thoughts on sort of the expectation for 4Q expenses and just how you think the expenses trend from here?

Speaker 1

Yes. So I'll talk high level, Woody, and then Tony can add any other details. So the expense savings are 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 1

There are some positions still left to fill, but overall, I believe we're still ahead of what we thought we would accomplish vis a vis those cost saving efforts. Toni, anything to add?

Speaker 2

Yes. Yes, I think that, that actually, no, nothing to add. I think that sums it up quite well. Why we will have net net some reductions in our original projections for those investments, there also have been some delays. So some of those costs don't hit exactly when we projected.

Speaker 2

But I think and then also, we continue to look for talent, but those expenses will hit when we find the right talent.

Speaker 4

Yes. All right. That's great color. Maybe shifting over to the margin. So we got the bump from the recent restructuring.

Speaker 4

It sounds like some interest reversals were a headwind in the Q3. So we should get a nice take up in the Q4. But how do you think additional rate cuts from here impact the forward outlook for the margin?

Speaker 2

So if we look at the September net interest margin versus the Q3 average, it was higher by about 2 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 embedded, considering a flat balance sheet and flat rates. Our proactive deposit strategy, we're closely monitoring, but continuing forward with that strategy. So that should be a tailwind for us on that.

Speaker 2

The cash position, that can fluctuate. So depending on what's going on with deposit balances and our cash position and then where the Fed goes with rates, that could have some impact on it. But if you consider that the most likely scenario is the Fed move in November with a steeper yield curve, that could also help. So while I don't want to put a number on it, I think, you know, you identified 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 4

Yes. Got it. And then last, for me, I just want to shift to the buyback. The first time you all have repurchased some shares since the start of 2022. Could you just talk about what made you comfortable reengaging on the buyback?

Speaker 4

And is there further appetite from here?

Speaker 1

Yes. Certainly, our credit quality, as we got more comfortable with the credit quality, the loss potential, certainly in light of our capital ratios, our very strong capital ratios and the valuation. Obviously, we continue to believe the stock is undervalued. And once we got a better sense that 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.

Speaker 1

We always have to juxtapose that option with all the other available options, but we'll continue to keep an eye on that.

Speaker 4

All right. Thanks for taking my question.

Speaker 1

Thanks, Woody.

Speaker 3

Our next question comes from Matthew Clark. You may now unmute your audio and ask your question.

Speaker 5

Hey, good morning, everyone.

Speaker 1

Good morning, Matthew.

Speaker 5

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? Do we grow? And then what's your expectation for the seasonal increase in the Q1? I think historically, it's been high single digit, I think.

Speaker 5

But more recently, I think you guys have obviously panned down on that seasonal increase. Just want to get your updated thoughts there too.

Speaker 2

Yes. So typically, we do have some expenses hit in the 4th quarter sort of for all our true ups. We also try to true up our bonus and incentive payment accruals to the extent we can. And as you said, we are trying very, very hard to minimize the reversals in the Q1 associated with that, but it's always really hard to project exactly what those are going to be. But we will still have, the annual resets of the 401 and then the bonuses.

Speaker 2

So we will have the typical pop in the Q1 in expenses that we normally see.

Speaker 5

Okay. And then can you also give us the all in spot rate on deposits? I know you excluded some balances there, but just want to get the all in cost of deposits, either total or interest bearing.

Speaker 2

Yes. Let me grab that.

Speaker 5

And the average margin in September, even if it's adjusted or unadjusted, either one?

Speaker 2

The average margin in September, you mean the net interest margin?

Speaker 5

Yes. Yes.

Speaker 2

Yes. That was 2.70.

Speaker 5

Okay. Consistent with the quarter, does that include the 6 basis point negative impact? Or is that excluding the

Speaker 1

6 basis points? Yes.

Speaker 2

That includes it.

Speaker 5

Okay.

Speaker 2

And then you said you wanted the spot rate on the deposits?

Speaker 1

Yes.

Speaker 2

Let me come back to you with that. I've got a lot of pieces of paper in front of me and I want to make sure I'm looking at the right one. Was there one other thing you had, Matthew?

Speaker 5

Yes. One other question just around the San Fran office credit from last quarter. I think your specific reserves were $6,700,000 and just want to get an update there whether or not that's the number has changed. And is it fair to assume those are realized out of existing reserves in the Q4?

Speaker 1

So you're talking about the reserve we took in the prior quarter. No, nothing's changed there. In fact, the leasing activity has picked up. They've signed 3 new leases in Q3 on that property. So we continue to see that kind of trend overall in San Francisco.

Speaker 1

But no, we that provision was down to 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 5

Okay. Thank you. You're welcome.

Speaker 2

Matthew, the spot rate on deposits on September 30 was 1.43

Speaker 1

percent.

Speaker 3

Our next question comes from David Feaster.

Speaker 6

Maybe just touching on the growth side. I mean, curious kind of what you guys are seeing. Origination slowed 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 potential pool purchases?

Speaker 1

Sure. So yes, linked core originations 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 expect it to be better.

Speaker 1

We have closed $10,000,000 since quarter end that just got pushed over. And we feel very good about the quarterly pipeline. And so when you're looking from a longer term growth perspective, we're very happy with the trends we're seeing in activity. Activity begets originations, obviously, that begets results. So we see a consistent trend in higher levels of activity that are generating higher pipelines.

Speaker 1

That's pretty diverse throughout our footprint. The loans closed were diverse throughout our footprint. We're seeing kind of a shift from C and I last quarter to more CRE this quarter. But again, that's they're lumpy assets. So that will shift, I think, quarter to quarter.

Speaker 1

Construction loans, we've had some refinancing to permanent. The new ones we're seeing are much smaller, more granular, dollars 2,000,000 $3,000,000 for infill projects. So no real big projects coming from there. So it's a lot of blocking and tackling, David. It's a nice mix between our new people.

Speaker 1

We did hire a new producer in Q3 and that's already resulted in closings. But it's a nice mix between that and our existing team. So it's just getting a more consistent approach. You again calling activity that leads to pipeline building, that leads to closing. So while every quarter won't be on the exact same trend line, we're optimistic with what we're seeing.

Speaker 6

Okay. And then where are you seeing new loan yields on production today? And then just following up on your commentary about hiring, where you talked about an appetite for continuing to hire. Obviously, it's got to be the right people at the right time. Curious where you're seeing opportunity, how those conversations are going and maybe what segments or markets you're looking to add to at this point?

Speaker 1

Yes. So if you look at the people we both hired and the ones we're talking to, it's really speckled throughout the footprint. So and if you look at some of the banks that we're 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 their specific location is not necessarily indicative within the Greater Bay Area where that growth might come from. Back to the yield question, just looking at the commercial loans last quarter, we're about 6.5% yield on new loans versus the 5.63% that paid off.

Speaker 1

So it's still very competitive for high quality loans, but those are the loans we're booking.

Speaker 6

Okay. And then maybe last one for me, just touching on the core deposit side, it's 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 is seasonal versus I mean, you guys have been pretty successful opening new accounts like you talked about. So just kind of curious what some of those seasonal if you could quantify the seasonal impacts and just how do you think about core deposits going forward and where you're having success?

Speaker 1

Yes. Thank you. We did have the seasonal inflows. We also had some seasonal outflows, About $18,000,000 of the growth in non interest bearing came from new relationships. Those are deposit accounts we expect to fund up.

Speaker 1

But again, the timing of that's unclear. So a lot of that was seasonality, but we did have a nice gain from new fundings and new account openings. And about that was about split pretty evenly between consumer and business.

Speaker 2

And I would say that the new accounts, that's been pretty consistent over the last several quarters. I mean, we've been getting around 1200 to 1300 new accounts every quarter for several quarters running now.

Speaker 1

Okay.

Speaker 6

That's great. Thanks everybody.

Speaker 1

Thank you, David.

Speaker 3

And our next question will come from Jeff Rulis. Please go ahead with your question.

Speaker 7

Thanks. Good morning.

Speaker 1

Good morning, Jeff.

Speaker 7

Question on the maybe a couple of follow ups, Tanya, if I could. The expense level, 20.4% this quarter, but included elevated legal accrual that you called out, that's 600,000 plus. So thinking about Q4 and you mentioned some resets or some true ups in the Q4 and the bump in maybe Q1. But I think quarter to quarter or sequentially, if safe to assume the legal don't recur and we're flat to down in the Q4? I just wanted to clarify that.

Speaker 2

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 7

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 undergone this year, what's a good growth rate for next year, understanding that you'd be opportunistic on talent if it comes up. But as you budget today, should we assume sort of a 3%, 4% growth rate in 'twenty five?

Speaker 2

I think 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, you know, 25 and forward, we're looking at efficiency improvements every year going forward. So, you know, over the next 4 to 5 years. So I know that's not as specific probably as you want, but

Speaker 7

No. But that's

Speaker 2

how we do it.

Speaker 7

Okay. You start at 3 and you're going to be working hard to okay. Fair enough. And then on the margin, I just wanted to clarify. Tania, I thought you said that the September margin was a couple of basis points above the quarterly average.

Speaker 2

Yes. Oh, and I said you're right. I said that wrong. It was 272 in September, not 270. Thank you.

Speaker 7

Got it. Okay. And with inclusive of some negative headwinds that maybe I think you framed it up as there's tailwinds to that going forward, even exiting at 2.72, right?

Speaker 2

Mhmm. Yep.

Speaker 7

Okay. Thank you. And then just on the credit side, it

Speaker 1

sounds

Speaker 7

like the loan that moved to non accrual kind of administrative in nature. Any more color on that loan? Or I think you had mentioned maybe real estate, but

Speaker 1

Yes. It's Office CRE. Some of our loans have a mechanism whereby if certain conditions are met, the loan extends out beyond its original maturity. There are times depending on an agreement or disagreement about whether those conditions have been met. It's in a part of San Francisco that has actually an attractive trends for office lease activity and there is sponsorship.

Speaker 1

It's just a protracted process of 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 7

Okay. Last one for me, Tim. You've mentioned the pipeline a couple of times. Do you happen to have the quarter over quarter like what where we sit today versus where you entered the Q3 just in dollar terms?

Speaker 1

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 last quarter.

Speaker 7

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 2

Yes. So for this year, because we had the big loss, the tax rate is inflated because we, every time we, every quarter that we have income, we're basically reversing some of the tax benefit from that loss. But I anticipate that the tax rate will return to normal levels in 2025.

Speaker 7

Which is around 25%, I think you've said previously, 25%?

Speaker 2

It was, I think, closer to 26%. 26.5%.

Speaker 6

Okay. Great. Thank you.

Speaker 1

Yes. Thank you, Jeff.

Speaker 3

Our next question will come from David Feaster. Your line is open. Feel free to ask your question.

Speaker 6

Hey, sorry. I just wanted to hop back in and maybe ask a little bit about the margin trajectory as we look forward. I mean, you touched on a lot of the dynamics, but that 26 basis points of embedded loan repricing, is that all next year? I'm just looking at the repricing chart and we talked about loan growth coming on in the mid-6s, but some of what's maturing is coming off around the low 7s. So I'm just kind of curious, like how do you think about the trajectory of the margin as we look out to next year?

Speaker 2

Yes. That 26 basis points is over the next 12 months.

Speaker 6

Okay.

Speaker 2

So but the margin is marching higher, but not in any big steps. It's just kind of a March.

Speaker 1

And our

Speaker 3

next question comes from Matthew Clark.

Speaker 5

Hey, thank you. Your beta, your deposit beta on the way up interest bearing, I think was 47% this cycle. What are your thoughts on the beta on the way down this time around?

Speaker 2

We use a lower beta than that on the way down and we also lag it. And so on the interest rate risk position, you'll see a different position this quarter when we published the Q than we saw last quarter because of the repositioning. So we are 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 durations. And then, you know, I think we also have some swaps on the books that if as rates go down, those will also have a negative impact. So 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 3

We have no further questions at this time. I'll hand it back to Tim Myers for closing remarks.

Speaker 1

Thank you, everybody. We appreciate your interest and your questions. Please feel free to reach out if you have any further ones. Thanks.

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Earnings Conference Call
Bank of Marin Bancorp Q3 2024
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