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00:08 Good morning, and thank you for joining Bank of Marin Bancorp’s Earnings Call for the Third Quarter Ended September 30, 2021. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question-and-answer session.

[Operator Instructions] This conference call is being recorded on October twenty five, twenty twenty one. 00:46 Participating on today's call are Russ Colombo, CEO; Tim Myers, President and Chief Operating Officer; and Tani Girton, Executive President, Chief Financial Officer.

We have also invited Misako Stewart, Executive Vice President and Chief Credit Officer to join us. Our earnings press release, which we issued this morning can be found on our Investor Relations page at bankofmarin.com, where this call is also being webcast.

01:16 Before we get started, I want to note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on Page three of the press release for both GAAP and non- GAAP measures.

Additionally, the discussion on this call is based on information we know as of Friday, October twenty two, twenty twenty one, and may contain forward-looking statements that involve risks and uncertainties. 01:42 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, Russ, Tim, Tani, and Misako will be available to answer your questions. 02:00 And now, I'd like to turn the call over to Russ Colombo..

02:06 Good morning, everyone. Thank you for joining us today on our first earnings call since the completion of our acquisition of American River Bankshares on August six.

Bank of Marine is now an organization with over four billion dollars in assets, along with thirty one branches in eight commercial banking offices across ten Northern California county. The integration is progressing smoothly.

The American River team onboard, we are positioning banks for long term growth across a much larger and more diverse footprint. 02:41 It is important to note that the third quarter marked the early stages of the integration process. And we did take on a substantial portion of the one-time merger costs in the quarter, impacting earnings and returns.

We reported net income of five point three million dollars and return on average assets of zero point five six percent. The decreases from nine point three million dollars net income and one point two percent ROA in the second quarter, largely reflected the absorption of American River operations.

03:15 Merger related costs reduced third quarter net income by three point nine million dollars. In addition, a one point eight million dollars provision was primarily related to purchased ARB loan without credit deterioration.

In addition to the factors above, return on average equity of four point nine nine percent for the third quarter was impacted by approximately one hundred and twenty four million dollars or shares issued in conjunction with the merger.

03:48 We have provided a reconciliation of GAAP to non-GAAP financial measures in the earnings release that illustrates the impact of the merger related one-time in conversion period costs on various performance ratio.

Excluding those expenses, year-to-date ROA and ROE would have been one point one three percent and nine point eight seven percent, respectively. Compared to one point zero three percent and eight point four seven percent for the same period in twenty twenty.

Despite headwinds associated with the merger and a low interest rate environment, these adjusted results demonstrate the earnings power of the combined company. They also reflect our expanded ability to generate attractive returns for our shareholders. 04:35 We continue to maintain one of the best deposit bases in the country.

Now with an expanded team to deliver on our longstanding commitment to prudent underwriting and exceptional customer service, we are confident we will continue driving strong returns. 04:52 Here are additional key highlights.

Total loans increased to two point three billion dollars, including just over four hundred and ten million dollars in loans acquired in the third quarter. Credit quality remains solid. Non-accrual loans in the third quarter were just eight point four million dollars or just zero point three six percent of total loans.

05:16 Total deposits grew by one billion dollars during the quarter to three point seven billion dollars. The increase included nearly eight hundred and eight million dollars of acquired deposits. Non-interest bearing deposits increased by three hundred and seventy eight million in the third quarter and comprised forty nine percent of total deposits.

05:37 The average cost of deposits was just six basis points in the third quarter, reflecting the low rate environment and the enduring strength of our relationship banking model. Thanks to our consistent profitability, the Board of Directors declared a cash dividend of zero point two four dollars per share.

This is the sixty six consecutive quarterly dividend paid by bank of Bank of Marin Bancorp. 06:05 On October 22nd, the Board of Directors also approved an amendment to the twenty five million dollars share repurchase program approved on July sixteen, to increase its size by thirty two million dollars to a total of fifty seven million dollars.

Finally, as announced on September twenty fourth, I will retire as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp on October, thirty one. I couldn't be more delighted that the Board has appointed Tim Myers to succeed me. I'm confident that Tim is more than ready to take the helm and deliver continued growth and positive results.

06:45 Bank of Marin is in excellent strategic position and on solid ground financially. Our core results for the third quarter are firmness. I'm very proud of the bank we have built over the past two decades and the talented team that drives our success.

7:02 Now let me hand it over to Tim to give an update of our expanded loan portfolio and the Paycheck Protection Program..

07:09 Thank you, Russ. I want to thank Russ for his leadership and support over the years. We have worked very closely in recent months to ensure leadership continuity and a seamless transition. I wish you all the best in retirement.

07:23 Now taking a look at our loan portfolio, excluding PPP loan payoffs, and loans acquired from American River, legacy Bank of Marin’s loan portfolio was relatively stable in the third quarter. We continue to identify attractive opportunity, and actively engage customers throughout our expanded footprint from the Bay Area to Greater Sacramento.

07:45 New loan originations in the third quarter totaled nearly thirty three million dollars. We are confident our combined resources will enable us to drive further growth, across two of the most attractive metropolitan markets in the State of California. Elevated competition and loan payoffs continue to impact portfolio growth.

Not including PPP, payoffs totaled fifty million dollars in the third quarter, compared to forty one million dollars in the year earlier. These payoffs consist of largely of commercial borrower cash paydowns, real estate asset layout and third-party refinancing at prices and structures outside of Bank of Marin’s lending appetite.

08:26 We are taking a disciplined approach, meeting our existing clients needs and developing new relationships. Over time, we fully expect the power of our larger platform, new markets and added scale to drive increased origination.

Our merger with American River brought together two institutions that share complementary values and disciplined fundamentals. I look forward to leading the combined team as roll up our sleeves and work hard to ensure a seamless integration.

By committing significant resources to this process, we are building strong foundation to grow our franchise on our regional scale. 09:05 On the PPP front, Bank of Marin and American River originated combine total of over three five hundred loans, amounting to more than five hundred and fifty million dollars in two rounds of finance.

As of September thirty, we had eight hundred and seventy one loans outstanding, totaling almost one hundred and sixty five million dollars net of four point two million dollars in unrecognized fees and costs. 09:29 Of the two thousand eight hundred and seventy six PPP loans funded by Bank of Marin.

The SBA has forgiven and paid off two thousand thirty six loans for a total of almost two hundred and eighty five million dollars. The bank's PPP activity is winding down and we expect to enter twenty twenty two with this program essentially completing. 09:51 Our pandemic related payment program is also [indiscernible].

As of September 30th, we have two borrowing relationships with a total of five loans, totaling approximately twenty four million dollars remaining. We monitor the financial situation of these clients closely and expect them to resume payments as the economy continues to gain momentum.

10:12 With that, I'd like to welcome to the call Misako Stewart, who was promoted to Chief Credit Officer on September, thirty. She will discuss our key credit metrics..

10:22 Thank you, Tim. It's great to join all of you today and best wishes to you Russ. Credit quality remained strong, as Russ noted, with non-accrual loans representing zero point three six percent of total loans as of September thirty, compared to zero point four six percent at June thirty and zero point zero seven percent a year ago.

Classified loans of nineteen million decreased by just under twelve million dollars from the previous quarters thirty point eight million dollars, despite an overall increase in our portfolio attributable to the American River acquisition, and compares to eleven million dollars at September thirty, twenty twenty.

10:58 The allowance of credit losses increased by more than three million dollars and was comprised of one point eight million dollars provision, primarily related to purchased American River loans without credit deterioration and a one point five million dollars acquisition date allowance established for purchase credit deteriorated loans, which is recorded on our balance sheet.

11:18 Other factors contributing to the allowance for portfolio growth from acquired loans, partially offset by an improvement in the underlying economic forecast. For comparison, the second quarter of twenty twenty one included a nine hundred and twenty thousand reversal calculated under CECL.

In the third quarter of twenty twenty included a one point three million dollars provision for loan losses as determined under the incurred loss methodology due primarily to qualitative factors impacted the pandemic.

11:48 There was no provision for credit losses on unfunded commitments in the third quarter compared to a six hundred and twelve thousand dollars reversal in the prior quarter and a two hundred and forty eight thousand dollars provision in the third quarter of twenty twenty.

Importantly, our credit quality helped firm throughout the year both before and after the merger and it is solid as moving to late twenty twenty one and prepare for next year. 12:12 I will now turn the call over to Tani to dig deeper into our financial results..

12:18 Thank you, Misako. First, let me also wish Russ farewell. Your steady leadership has successfully guided Bank of Marin through several acquisitions and multiple business cycles, including the recent challenges imposed by the pandemic. Thank you, Russ.

12:36 As Russ noted, we reported net income of five point three million dollars in the third quarter twenty twenty one. Diluted earnings per share of zero point three five dollars compares to zero point seven one dollars in the prior quarter and zero point five five dollars in the third quarter of twenty twenty.

12:53 Net interest income totaled twenty seven point eight million dollars in the third quarter compared to twenty four point five million dollars in the prior quarter and twenty four point six million dollars a year ago.

The three point two million dollars increase from the prior quarter was primarily attributable to the American River acquisition and the increase from year ago resulted from the acquisition as well as higher PPP fee recognition.

13:19 We recognized two point three million dollars in PPP fees net of costs in the third quarter twenty twenty one, compared to two point six million dollars in the prior quarter, and one point seven million dollars in the third quarter of twenty twenty.

13:36 American River contributed higher average loan yields, lower yields on securities, a lower loan to deposit ratio and a lower percentage of non-interest bearing deposits to the combined balance sheet, resulting in a tax equivalent net interest margin of three point one five percent in the third quarter compared to three point three seven percent in second quarter.

The decline in year-to-date tax equivalent net interest margin from three point six one percent in twenty twenty to three point two three percent in twenty twenty one was primarily due to the prolonged flow interest rate environment.

14:14 Non-interest income totaled three point six million dollars in the third quarter of twenty twenty one compared to two million dollars in the prior quarter and one point eight million dollars in the third quarter year ago.

The one point five million dollars increased from the prior quarter and one point eight million dollars from the third quarter of twenty twenty were mostly attributed to the collection of one point two million dollars in benefits on bank-owned life insurance policies and increases in fee income from deposit accounts and debit card interchange activity.

14:45 Third quarter non-interest expense increased by seven point seven million dollars to twenty two point seven million dollars from fifteen million dollars in the third quarter of twenty twenty, primarily due to one-time and conversion period costs, as well as increased staffing related to the acquisition.

15:05 Russ shared earlier some of our ratios excluding merger related expenses. I also like to look at the efficiency ratio was a good indicator of operating earnings trends, because it does not include the impact of the provision for credit losses, which was primarily related to the acquisition this quarter.

The reported efficiency ratios were seventy two point four percent for the third quarter, fifty eight point six percent for the second quarter and fifty six point nine percent for the third quarter last year.

15:37 Excluding merger related expenses, the efficiency ratio would have been fifty six percent for the third quarter, an improvement from fifty seven point eight percent in the second quarter and fifty six point nine percent a year ago. All capital ratios were above well capitalized regulatory requirements.

The total risk-based capital ratios for Bancorp and Bank of Marin were fifteen percent and fourteen point four percent respectively.

16:08 Bancorp tangible common equity to tangible assets was nine point one percent as September thirty, twenty twenty one, compared to ten point four percent for the prior quarter and eleven percent a year ago, reflecting the success of our capital management efforts.

Under the latest share repurchase program approved on July sixteen, we repurchased four hundred and forty five thousand seven hundred and thirty five shares totaling fifteen point nine million dollars in third quarter, bringing the cumulative total to nine hundred and sixty seven thousand, six hundred eighty three shares and thirty five point two million dollars in the first nine months of twenty twenty one.

As Russ mentioned earlier, the Board of Directors has approved an amendment to increase the current program size by thirty two million dollars. 16:56 In summary, we generated strong core net income while closing the largest acquisition in our history.

The integration is underway and early indicators point to a successful realization of the synergies of this combination. With the addition of our American River teammates and new opportunities in the Sacramento market, we are well positioned for success across Northern California's key gross market.

17:23 And now, I'd like to turn it back to Russ for closing comments before we open the call for Q&A..

17:30 Thank you, Tani. I want to thank everyone on this call and all of our investors for your interest and support over the years. It's been an honor to steadily, to lead Bank of Marin and a pleasure to work with all of you. The Bank is in great hands with Tim and our strong leadership team.

I look forward to staying connected to the bank who might participation on the board. 17:55 We appreciate your time this morning, and now we will open it up to your questions..

18:38 Thank you. [Operator Instructions] Our first question is coming from the line of Jeff Rulis with D.A. Davidson. Please go ahead..

18:46 Thanks. Good morning and congrats, Russ. It's been pleasure for the last decade plus getting know you and all the best in retirement..

18:55 Thank you very much, Jeff. Appreciate it..

18:59 In terms of -- to the released, and you talk about pricing and structure on some of the -- maybe some on the ease and some of the competition of refinancings.

I guess, if you could capture where that competition is coming from and second, has that pressure increased linked quarter, has that been pretty sustained?.

19:27 Yeah. I'll ask Tim Myers to go ahead and answer that question..

19:31 Yeah. Good morning, Jeff.

The pressure has been relatively consistent and it's been if you look at year-to-date, particularly, both bank and non-bank lenders, I'm not going to get into specifics about their terms, but longer term interest only structures, sub three percent loans and certainly one could argue that a loan at almost any rate is better than cash, but that's a transactional banking approach from relationship banking approach.

We have a lot of other things that consider in that process. But I have not seen that necessarily increase. There was just a couple of large ones in the last quarter that really made it look more dramatic in terms of a trend line. It's been pretty consistent..

20:16 Okay. Got you.

Interested in -- maybe this is for Tani, just in the expense run rate, we could clearly pull out the merger costs, but get a sense for where that would fit with American River in the fourth quarter for a full quarter, sort of pre-conversion and post conversion, any thoughts about the levels that's the good run right?.

20:49 Yes. What I -- maybe what I would do is remove the acquisition expenses and then compare Q3 to Q2. And remember that they were only twenty five days of combined expenses in the third quarter.

And those expenses would include both the conversion period, so the expenses that you would be removing would include their conversion period expenses, which are accrued and spread over the quarter, so a couple of more quarters for those expenses.

And then also the higher ongoing salary and benefits from the retained personnel, so hopefully that will help.

Does that answer your question Jeff?.

21:45 Yeah. Understanding that sort of a guide there is not what you typically provide, so helpful to get some pieces there. Maybe I just -- last one is on the buyback side that shows some pretty big commitment not only the activity in the quarter, but the step up in authorization.

I don't want to read too much into that, but I think you guys are pretty focused on integrating American River and making sure that's the focus, but the buyback on the sidelines, or on the side, I should say, it seems like you’re pretty committed to that and does that indicate anything about you'd like to be off the M&A game for at least the short while? Thanks..

22:39 Yeah, Jeff. It’s Russ. That does not indicate that we are – on the sidelines on the M&A side, that's kind of a separate deal and frankly speaking, every deal that’s getting done these days, I shouldn't say every, but you already – it’s mostly stocked, not cash.

So, we just deel like we have an excess amount of capital and we think the best way at this point is to buyback our shares because we still believe that our shares are undervalued and purchasing Bank of Marin stock right now is a good value for us and accretive to earnings for our shareholders.

And if an opportunity presented itself, certainly we would reevaluate the repurchase program, but right now, we're interested in continuing to look at M&A opportunities as well as buyback stock..

23:37 And if I could add, so really, we want to just make sure also that we have runway in that program for when we go into blackout periods, et cetera, so that we don't end up having a pause when we would prefer to be continuing to repurchase under our 10B-18 plan.

And if I can also correct what I said earlier, it was -- in the quarter, there were fifty five days of ongoing conversion period and retain personnel expenses, twenty five days in August and thirty days in September, apologies for that..

24:17 No. I got you there, Tani, so thanks for the comments. I'll step back..

24:24 Thanks, Jeff..

24:27 Our next question is coming from the line of David Feaster with Raymond James. Please go ahead..

24:33 Hey. Good morning.

Congrats again Russ on the retirement and it’s excited to see what's in-store under your leadership Tim?.

24:41 Thank you, David..

24:43 I did just want to start off on the -- maybe some thoughts on growth. Appreciative of the commentary on the competitive landscape in, you guys sticking your standards.

But just curious what you're seeing on the horizon, maybe how demand is trending, what the combined pipeline stands at today and how you think about production and perhaps net growth on a combined basis now that the deal is closed?.

25:07 Yes. Thank you, David. It's a good question. I would say, if you look at the trends of how production has progressed over the course of the year, the bigger decline for us has been on the consumer side on a dollar basis that was twice the decline and the commercial on an year-to-date year-over-year comparison. So, we've got some demand issues.

We're dealing with on a tenant common loan side in San Francisco. But really our focus is and has always been mainly on the commercial banking side.

We are starting to see I know Russ has mentioned many times I've said it too, the relationship banking model was a little bit stalled during the pandemic getting people back out there, getting that engine started has little bit -- a little more delayed than we like, but we are seeing good activity, particularly in some of our new markets, which is very encouraging.

Our biggest contributor in the last quarter was our new partners Sacramento, on a regional basis. So, the pipeline is increasing. We never give numbers, as you know, but it is increasing the activity in some of our new offices that were opened [indiscernible] are just prior to the pandemic is increasing. And so those are all signs that we look to that.

Now that we're back out there, that act activity were big at deals, which will be get the production to drive the numbers. So, we feel good about where at. We're going to continue to invest in ways to further that growth prospect..

26:29 Okay. That's great color. Thank you. And then, just wanted to get a sense maybe on the hiring front.

There has been some disruption in your footprint, just given the strong culture your relationship focus as well as the larger scale, whether that's begun resonating and you've seen some more opportunities to higher new talent?.

26:49 It goes both ways. I mean, people look at disruptions in the market. Certainly, we get targeted when an acquisition gets announced, right? And every recruiter is looking to talk too.

The people there are telling their different sizes of the story, but there's no question with some of the hires that we've made Nikki Sloan and her role has had a commercial banking coming from other institutions.

We've seen some really nice activity in hiring opportunities and some actual hires and some ones we're looking forward to making in the near future. So the answer your question is, yes, I think all those things will play in our favor. It is a very competitive hiring environment just like it is for loans for the exact same reason.

But we feel optimistic right now that the pipeline to hire to get the growth we're looking for all trending in the right direction..

27:35 Okay. That's great. And then maybe just touching briefly on the wine portfolio.

Just wanted to get a sense of what you're seeing there? How is demand? And maybe a demand perspective in both Napa and Sonoma, and then whether there's been any impacts from the drought at all on credit quality or growth or any just what you're hearing from your clients on that?.

27:58 Yeah. We have – I’ll start in reverse order. We have not seen a real credit impact driven by the drought. That industry, obviously, there are some cyclicality there in terms of certain types whether there's a [indiscernible] in the market of supply selling through old inventory.

So there's been a lot of factors there beyond just the pandemic, certainly people did their fair share of drinking wine and that drove demand and it really helped our customers that we're tasting room oriented to shift to a direct consumer model and sell lots of wine online. And so they really battle through that really well.

We are looking at several new opportunities now, but I wouldn't say there's anything notable trend wise one way or the other in that portfolio right now..

28:49 Thanks..

28:49 David, I just -- an additional comment, in the last twenty four, forty eight hours, we got eight inches of rain. I'm not sure looking it outside and rain is pouring in the last days and lost power and everything I thought what, we're going to drought really. Let's hope that we are heading out of that drought situation.

And one other comment about hiring, the pandemic for relationship bank like ours is very significant because having people at home when in fact, we want them out with their clients, is it -- is kind of tough and so being we couldn't and wouldn't choose and didn't choose, but people are back to the office now that’s seeing clients.

And I think that last year and a half, we have a fair amount of catching up to do just make sure we're out there and seeing that. But as Tim said, we're seeing a pickup in the pipeline, and that's no coincidence because people are out there and getting in front of their clients and taking a look at new opportunities.

So I personally I’m pretty optimistic and I'm excited about what the numbers will look like over the next six to twelve months, I think this is when we're in front of our clients is when our bank..

30:23 That's great. Thanks, everybody..

30:29 And our last question in queue is coming from the line of Timothy Coffey with Janney. Please go ahead..

30:35 Thank you. Hey, Russ congratulations on your retirement and glad to see you, you're still being involved with the bank going forward..

30:41 Thank you, Jim. Yeah. I'm excited. I’ll still be on the Board, so I will certainly be around..

30:48 Great. Tim, I want to start with you. I want to circle back to one of the questions you had about kind of the activity of your client base, generally you see your clients are being more active just in the fee and income line items, which is good to see. One is specifically about kind of your client base that investment in real estate.

Have you seen them become a little bit more active since the summer?.

31:11 Not to the extent I've heard in the news and maybe some other parts to the market, we've actually some of that deleveraging that we referenced, which was really double payoffs of loans mostly were investor real estate loans was double this year, year to date than last year.

So, I think the activity, the pace of conversations, Tim is picking up the level of interest seems more has by a sense of urgency, but we haven't really seen out of our client base a big spree of going out and actually actually getting on transactions. But the goal as Russ just said is to be out there talking to them.

So when they do, we're in a position to do that deal, but we actually have seen that continued pace of deleveraging by selling properties the inverse, unfortunately, but again, the pace of interest is picking up the pipelines picking up and we expect that the transition at some point in near future..

32:10 Okay, great. And then historically the company hasn't as operated with much less liquidity than you have right now.

What's kind of the appetite to become a little more aggressive and allocating that excess liquidity right now?.

32:20 So, Tim, we were pretty active in the third quarter in terms of deploying some of that cash into the investment portfolio. We also so received a significant cash balance from American River in the course of the acquisition. We are still active in early October purchasing securities.

So, we definitely are working hard to bring those cash balances down. The duration of our investment portfolio continues to be short enough, so that if Tim needs more money to fund loans, it will be readily available for him. And we are also aware that the upward trend and deposit growth may not continue, although, we haven't seen it check itself yet.

But we're prepared for that if it occurs as well..

33:16 Okay, great. Thanks, Tani. Those are my questions. Thank you very much..

33:20 Thanks, Tim..

33:21 Thank you, Tim..

33:23 We have no further questions over the phone lines at this time..

33:29 Okay. Well, Russ Colombo and I just want to thank everyone for your time this morning as well as over the last fifteen years that I've been CEO. I'd like to say look more to talking you next quarter, but I won’t, if you talking to the teams. It's been a pleasure and I really appreciate support and interest in the banks over the years.

So thank you very much..

34:02 That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line..