Bank of Marin Bancorp (BMRC) 2022 Q1 法說會逐字稿

Good morning, and thank you for joining Bank of Marin Bancorp's earnings call for the first quarter ended March 31, 2022. I am Andrea Henderson, Director of Marketing for Bank of Marin. (Operator Instructions) This conference call is being recorded on April 25, 2022.

Joining us on the call today are Tim Myers, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer.

Our earnings press release, which we issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast.

Before we get started, I want to note that we will be discussing some non-GAAP financial measures on the call. Please refer to the reconciliation table on Page 3 of our earnings press release for both GAAP and non-GAAP measures.

Additionally, the discussion on this call is based on information we know as of Friday, April 22, 2022, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release as well as our SEC filings.

Following our prepared remarks, Tim and Tani will be available to answer your questions.

And now I'd like to turn the call over to Tim Myers.

Thank you, Andrea. Good morning, everyone, and welcome to our call. We completed the final step in our 2021 acquisition of American River Bank shares in March 2022 with the core system conversion. This collaborative process brought together people from across the company to ensure a smooth transition for our customers. With this milestone behind us, our combined team throughout Northern California can leverage our substantially larger balance sheet to drive long-term growth.

We have already seen traction on this front in the first quarter of 2022. With our expanded footprint and talent pool, we generated robust loan production in the quarter, marking our strongest first quarter in 6 years and continuing the momentum from Q4 in 2021. Our pipelines reflect steady loan demand, healthy economic activity across our markets and our bankers' reenergized business development efforts.

Loan originations, excluding PPP, totaled $50 million for the first quarter, nearly double the year earlier level, and commercial line utilization increased to 38% of total commitments from 34% at year-end.

Even as we pursue growth, we remain vigilant and committed to our foundation of sound underwriting. While provision reversals were due to improvements in economic forecasts, underlying credit loss calculations, we also saw improvement in our already strong portfolio credit quality. This was evidenced by a 10% improvement in special mention loans, the majority of which was due to payoffs and upgrades to past risk rating.

Loan payoffs remain elevated in this competitive environment. While we continue to win new business and deepen relationships with existing clients, we may choose not to retain loans that fall outside of the bank's lending appetite. In the long run, this commitment to our disciplined lending principles have served us well as our loan portfolio continues to perform through all credit cycles.

Importantly, we have also begun to see the early benefits of a rising rate environment. Yields on new loans, including real estate, are increasing as well as yields on existing variable rate commercial loans in our portfolio. We expect improvement across the portfolio following additional rate increases as forecasted by Fed officials. This should provide support for our net interest margin and earnings as we progress through 2022.

Now I'll turn to first quarter results. We generated net income of $10.5 million and diluted earnings per share of $0.66. Both were up 8% from the prior quarter. Loan balances of $2.3 billion reflecting increase of $17 million in non-PPP loans and $71 million in PPP loans forgiven and paid off. At quarter end, only $40.6 million in net PPP loan balances remain.

Deposits grew by $53 million to $3.9 billion, with most of the growth coming from noninterest-bearing balances related to normal fluctuations in our customers' operations. Noninterest-bearing deposits made up 51% of total deposits. The cost of average deposits is just 6 basis points, flat for the prior period.

As I noted, credit quality remains strong, with nonaccrual loans representing only 0.35% of total loans, and classified loans unchanged from year-end. We reversed $485,000 in loan loss provisions and $318,000 in provisions for losses on unfunded loan commitments.

Our Board of Directors declared a cash dividend of $0.24 per share on April 22, 2022. This represents the 68th consecutive quarterly dividend paid by Bank of Marin Bancorp.

Finally, as we previously announced, the Bancorp and Bank of Marin Board have appointed current Vice Chairman, William McDevitt for the role of Chairman effective May 10, 2022. A Director since 2007, Vice Chair since 2015 and a valued Bank of Marin customer since 1993, Willy brings with him more than 40 years of experience investing in and managing commercial real estate and other businesses in Marin and Sonoma County. Current Chairman, Brian Sobel, will remain on both Boards. We thank Brian for his 7 years of tireless service, the longest tenure of any Chairman in the bank's history.

Now I'll hand the call over to Tani to discuss our financial results.

Thank you, Tim. Good morning, everyone. We are pleased with our first quarter results. We generated solid earnings by deploying excess liquidity into investment securities and new loan production and by managing expenses. We have a strong balance sheet, and we expect to benefit from rising interest rates.

As Tim noted, we reported net income of $10.5 million and $0.66 per share in the first quarter of '22, up from $9.7 million and $0.61 per share in the fourth quarter of '21. Net income also compared favorably to $8.9 million and $0.66 per share in the first quarter of '21 despite much larger provision reversals last year. The $3.5 million provision reversal in the first quarter of 2021 and the $803,000 in '22 both derived from improving economic forecast underlying credit loss calculations.

Net interest income totaled $29.9 million in the first quarter compared to $30.6 million in the prior quarter and $22 million a year ago. The decrease from the fourth quarter was primarily due to changes in acquired loan amortization and accretion, lower loan prepayment fees, lower PPP fee recognition and fewer days in the quarter. Partially offsetting the combined effect of those changes was higher interest income from the larger investment portfolio as cash was deployed into securities during the rising interest rate environment.

The $7.9 million increase in net interest income over first quarter '21 was reflective of the ARB mergers, a larger allocation of the loan portfolio to higher rate loans, the deployment of cash into investment securities and the costs associated with the early redemption of subordinated debt in 2021. Those increases were partially offset by a lower average yield on the investment portfolio.

The tax equivalent net interest margin was 2.96% this quarter compared to 3.03% last quarter and 3.19% in the first quarter of '21. Average yields on the loan and investment portfolios are beginning to reflect recent increases in interest rates. At the same time, the PPP portfolio is winding down.

Noninterest income totaled $2.9 million in the first quarter compared to $2.7 million in the prior quarter and $1.8 million in the first quarter last year. The improvement from the fourth quarter was primarily related to payments on bank-owned life insurance policies. The improvement over first quarter '21 was mostly attributable to increased activity associated with the acquisition.

First quarter noninterest expense increased $400,000 from fourth quarter to $19.4 million, primarily due to seasonal increases related to annual incentives, stock-based compensations and 401(k) contributions in salaries and related benefits. Professional services also increased due to financial statement and acquisition-related audit work performed in the first quarter. Increases were partially offset by a decrease in acquisition-related onetime data processing expenses.

First quarter '22 relative to Q1 '21 reflects a higher expense base from the acquisition. Most notably, salaries and related benefits rose $2.3 million due to increased numbers of employees, regularly scheduled annual merit increases and lower deferred loan origination costs.

The improving operating leverage of Bank of Marin is evident in our 57.5% efficiency ratio, excluding merger-related onetime and conversion costs, compared to 64.6% in the first quarter of 2021. The increase over 53.6% in the fourth quarter of '21 is largely related to the seasonal first quarter increase in salary and benefit expenses.

During the first quarter, our strong liquidity position enabled us to transfer $358 million in available-for-sale securities to our health maturity portfolio to partially insulate other comprehensive income and equity from future changes in interest rates. The transfer had no impact on net income. The rapid increase in interest rates during this quarter led to a $37.3 million after-tax other comprehensive loss associated with transfers and other available-for-sale securities. That led to an 80 basis point decline in tangible common equity to 8%.

In closing, we are in excellent financial shape with a strong balance sheet and ample liquidity to efficiently fund loan growth. Return on assets would have been 1.01% without onetime and conversion-related costs compared to 0.97% in the fourth quarter. Likewise, return on equity would have been 9.96% versus 9.19% in the fourth quarter. The increases in investment portfolio balances and yields over the first quarter are expected to provide a lift of roughly $8 million per year in net interest income. The bank is well positioned to continue delivering strong returns for our shareholders.

And with that, I'll turn it back to Tim to share some final comments.

Thank you, Tani. This is an exciting time at Bank of Marin. Our ability to successfully complete a conversion larger than our prior [state] combined is a testament to the skill and dedication of both the legacy Bank of Marin and American River Bank teams. Now that we are all under one brand and on one system, we look forward to a bright future ahead.

We are also optimistic about trends in loan demand as a result of our bankers' refocused calling activity post pandemic and the addition of several new hires throughout our expanded footprint. Originations over the last few quarters have shown marked improvement. We are seeing returns on growth initiatives made prior to and in the early months of the pandemic with our Walnut Creek and San Mateo Commercial Banking offices having the highest loan production in 2022.

As always, we remain committed to our relationship banking model, driving growth with disciplined lending and a durable low-cost deposit base. We will continue to add talent throughout our markets in the Bay Area and across the Greater Sacramento region while also carefully managing expenses as we strive to serve our customers and drive value for our shareholders.

Thanks to everyone on today's call for your interest and support. We will now open the call to your questions.

(Operator Instructions) Our first question comes from the line of Jeff Rulis, D.A. Davidson.

A question on the American River conversion. With that complete, have you hit the targeted cost saves with that? Or is this a clean quarter if I were to kind of back out the merger costs on expenses?

We are on track with the cost saves. We had about 90% of those modeled into this year one. I'll let Tani elaborate. But we are on track, yes.

Yes. So I would say our run rate is reasonable for steady state. Just like all companies, we do have some vacancies that we're trying to fill in terms of staffing and any future investments that we're going to make. Those aren't -- obviously, are not reflected in here. But as Tim said, the acquisition costs were less than expected. The acquisition saves are on target, and we're not done with what we had planned to do in terms of our cost saves on the acquisition side. So I think we're in a good position for our operating leverage to continue to strengthen.

Okay. So if I kind of read that right, there might be a little more stage that might mute kind of expense growth, but kind of the core would still have increases across -- I mean, the industry is seeing wage inflation and such and if you get hires. So next couple of quarters might be muted because you've got the advantage of further cost saves to a degree?

[Perfect.]

Okay. And maybe, Tim, just to kind of circle around to American River now. It's kind of through conversion. How has the retention been of those folks as lockups expire? And maybe secondarily, kind of touch on the competition for lending talent not only kind of in the Sacramento area, but kind of across your footprint.

Sure. So we have had some departures, which we've experienced and it is normal in M&A activity. And that's happened in a number of places, but we actually have made some very good hires. We have 2 key but strong -- very strong managers joining. We've had added talent. And so that's helping drive loan demand. It's helped drive the originations that we've seen over the last 2 quarters in terms of the ramp-up for us, driving our pipeline activity. It is very -- the competition is very fierce out there, but we continue to hire to replace. We have very talented bankers, so it's really not a surprise that others would seek to try to take ours. But the goal is to just continue to drive higher talent and drive growth through quality people.

Our next question comes from the line of David Feaster with Raymond James.

Maybe just kind of following up on that same line of questioning. Just touching on the growth. We've got 1Q originations at a 6-year high, improving origination activity. We got new hires on the docket, and hopefully, slowing payoffs and paydowns in a rising rate environment. I guess just how do you think about your growth outlook going forward? Do you think we should see growth beginning to accelerate? And then, I guess, within that, how do you think about your C&I contribution? Or just in general, how do you think about the drivers of that growth as we look forward?

Thank you. Good questions. We are counting on, or I'd say, planning for a higher growth -- net growth. The payoffs, as you noted, have been elevated. It's very competitive in the market, but we continue to add to the pace of origination. So we certainly look for that net number to improve. Some of these new hires are certainly driving that, but also in the geographic footprint. So even though one of our regions had good loan growth, that was actually because we were -- had a presence and the relationships with Sacramento. So we looked for our new market there, so that's continued to help drive growth.

And I'm sorry, what was the second part of your question?

And just kind of how you -- yes, the composition of growth...

So we -- what's nice, I apologize, is we continue to see over the last few quarters adding a good number of new relationships. And some of those are obviously C&I. We've seen our C&I commitments go up. That doesn't always get reflected, obviously, in outstanding. But we have a concerted effort to continue our calling efforts on C&I.

Okay. That's helpful. And then maybe shifting gears to the margin. I guess maybe could you update us on your expectations for rate sensitivity just given some of the portfolio changes in the quarter and the CLO purchases? And then just combining improving new loan yields like you talked about your commentary, new -- better new securities purchases, prospects of additional hike and an improving earning asset mix as you continue to drive growth, do you think the margin is troughed here and that we should start seeing expansion as we look forward?

Yes. I think we should see expansion going forward. Q1 did have a lot of effects that were based on fee amortization and accretion on acquired loans. So there was some noise in the margin this quarter. We did see -- we are seeing some improvement in rates on loans originated. So -- but there still is -- with the large CRE portfolio, those loans are some of our highest rates. So getting the list over the existing portfolio rates is -- we're still working through that. I think future rate increases will really help with that.

Just to refresh our loan repricing. Less than or equal to 1 year is roughly 20% of the portfolio. And then within 5 years, 60% of the portfolio would turn over. We've got a small percentage of loans on floors that I think with the next increase, we'll pretty much clean that out, and 51% on noninterest-bearing deposits, and also the investment portfolio is throwing off a lot of cash flows. So as those get reinvested, we should see some lift as well.

So yes, we are definitely asset-sensitive and looking forward to future interest rate increases.

Okay. That's helpful. And then just maybe touching on credit more broadly. I mean, look, you've got phenomenal asset quality, a tremendous track record and an extremely conservative approach to credit. But just kind of listening to your prepared remarks talking about remaining disciplined, and it sounds like maybe passing on some more deals perhaps? Just curious your thoughts on the competitive landscape and whether you're starting to see more pressure on structures or standards. And if so, where? And whether you've begun tightening the credit box at all as a result of some of this.

Thank you. Out in the market, I see the structure of deals -- new deals looking similar to what we've been experiencing over the last year or so. If you're talking about some of the payoffs that have happened from third-party refinancing, I would say those, in some cases, have been done in structures where we just say that doesn't make sense for Bank of Marin. I'm not going to disparage my competitors. So I don't see it necessarily worsening on new deals per se.

In terms of our approach, we're not tightening right now. I think, obviously, we always, as you just pointed out, take a conservative approach to credit underwriting, but we will continue to look for deals very similar to how we have.

Our next question comes from the line of Matthew Clark with Piper Sandler.

Maybe just first on the securities purchases in the quarter. Can you give us a sense for the expected yield on those purchases and how that compares to the opportunities you might be seeing since quarter end in terms of rate?

Yes. I'd say that we -- that was -- we were putting those on an increasing rate. So obviously, the ones we put on towards the end were -- had higher yields than the ones we put on at the beginning. But on average, the yields on that -- those purchases compared favorably by category to the -- where we added them to the portfolio. So I would say as we continue to deploy cash, we're going to get the benefit of those rising rates.

Okay. And then on the earning assets mix. Obviously, an unfavorable mix shift this quarter, securities contributing more to earning assets relative to loans, with some additional PPP runoff and the deposit growth you ended the quarter with. Do you feel like that loan-to-earning asset percentage might decline one more quarter before it starts to migrate higher?

Boy, that's a tough question. We've got -- we're rebuilding the pipeline in the loans -- on the loan side because we've had some really good activity, but I'll let Tim speak to that. So there might be -- timing is always uncertain on when the loan originations come through. But on the investment side, we're really trying to make sure that we're staying fully invested but retaining ample liquidity to move that into loans as soon as needed.

So I'll turn it over to Tim to talk about that.

The pipeline continues to be robust. As you know, we don't give guidance on that. And certainly, the timing of that is always hard to predict, but we expect to continue the trend we've been on.

Okay. And then, Tani -- got it. And then, Tani, maybe in terms of the contribution of purchase accounting accretion in the quarter and PPP as well in terms of fees, if you have the 2 numbers.

Yes. Let me see if I can find those. There were a lot of moving parts up and down. So let me come back to you on that, Matt.

Okay. And then just to clarify on the expense outlook. First quarter, it tends to be seasonally higher, and it tends to trail down in terms of the run rate historically. If we exclude the merger charges and you have an $18.8 million run rate, is it fair to assume that you'll -- consistent with prior years, that, that run rate should come down in addition to the benefit of the cost saves?

Yes. Yes.

Okay. Okay. And then last one for me, just on the buyback. It slowed a bit this quarter. Was that just a -- taking into consideration the AOCI swing? Or was that more a function of being cautious on the economic outlook and whether or not your appetite might increase from here?

I would say, yes, it was being cautious due to the AOCI impact of rising rates. It was also due to the continued rise in our deposit base and the potential impact of that on capital ratios. And so we just have taken a cautious view to see where those trends go, but it's certainly something we will continue to consider, yes.

Our next question comes from the line of Andrew Terrell with Stephens.

So everything sounds good on kind of the loan growth side, but I wanted to touch on the kind of other side of the balance sheet. I guess just with kind of the Fed's current stance, just was hoping to get kind of some updated expectations around deposit growth throughout the year.

So we continued to see deposit growth in the first quarter. Subsequent to the first quarter, there's always fluctuations, but we have seen a little bit of a decline. Whether that's going to stick or not, I'm not sure. And obviously, we originally thought that the deposits would run off quite some time ago as this -- especially the money that was deposited associated with PPP lending program. But if you look back at the -- what happened during the financial crisis, there was a big lift in liquidity throughout the system. And back then, everybody thought that the liquidity was going to go out, and everybody's percentage of noninterest-bearing deposits would go down. But in fact, ours stayed up.

And so if we look at -- if we look back at history and then try to extrapolate what that might mean, we could see some deposit outflows. But in general, we are on an upward trend. We've been on a pretty steady upward trend throughout the cycle. So I think we have some -- there will probably be some rate shoppers that go out there and start investing in CDs. We're not a big CD shop, so we won't compete on that side. But I think in general, most of our customers are operating account customers, and there are a lot of inflows and outflows, but on average, an upward trajectory. So we'll see. But it's a new day.

Yes. Okay. I appreciate the color. I want to go back to just some of the securities build. It was good to see some of the liquidity got deployed this quarter. I think there was about $170 million or so of cash still on the balance sheet at the end of the period. I guess, one, do you view that as kind of a normalized cash position? And then, two, just update expectations on could we see more of a build in securities as we roll throughout the year? Or is the repricing benefit more of just kind of the [role] of the securities book?

Yes. I think that if you look -- we've been kind of paring down that cash position for some time, and we did invest opportunistically. So it's coming down. And my preference is to take it down a little bit more. We've got plenty of contingent liquidity that we've never used, and we still have $180 million in off-balance sheet deposits. So we're not concerned about liquidity. So running a little bit closer on the cash position should be completely fine. And as long as rates are going up or at an elevated place, we will continue to invest.

Okay. Perfect. I appreciate taking my questions. And I would also echo kind of an earlier comment. I think some of the moving pieces in the core loan yield this quarter would be helpful. And I'll step back.

(Operator Instructions) Our next question comes from the line of Stuart Lotz with KBW.

Most of my questions have been asked. But Tani, maybe just one more on the margin and how you're kind of thinking about -- given the expectation for a little bit more of aggressive Fed this year, if we do see a 50 basis point hike in May, how are you thinking about deposit betas this cycle? And just given with the 57% loan-to-deposit ratio, I mean, do you anticipate having to move rates? Or how are you guys thinking about the direction of your interest-bearing deposit costs from here?

Yes. I -- we've always maintained a low cost of deposits, and I think we will continue that discipline. I think in the entire industry, I think you'll probably see the betas be lower this cycle than they have been in last cycle. But I think for us, we model pretty conservatively based on historicals, and we have recently run a historical study and seen that our actual betas are lower than what we've been modeling. So we are going to lower the betas in our models going forward just so that they -- the numbers that you see in the queues will reflect that.

But yes, I'd say it's not going to be a lot different than in the past. We're going to be slow to respond because, like I said, those operating accounts, that's where we focus our energy and make sure that we have enough liquidity to absorb the fluctuations of large movements in the operating account.

Okay. Great. And maybe one more kind of an accounting question and not to circle back to the AOCI. But given we've seen rates move further this quarter, is there any more appetite for remixing from AFS in the held maturity? And how are you thinking about another potential hit to book from AOCI this quarter? I mean, do you have plans to try to limit that further? And how does that ultimately play into your buyback appetite with about $35 million left in your authorization?

Yes. So yes, we run stress tests on that, and we've obviously run them on the revised AFS portfolio and are pretty comfortable with where we stand now after that movement. So we -- what I would say is probably additional purchases for the time being are most likely directed to the HTM portfolio as opposed to AFS just so that we won't exacerbate our existing position. But I'd say we're comfortable with where we are now. We have a good capital cushion for that. And as Tim said, we'll take a look at the share repurchases going forward in light of how quickly things move and whether or not we're comfortable with that.

Our next question comes from the line of Tim Coffey with Janney.

Tim, the payoffs that you're seeing, what percentage of those would you say are related to rate you just aren't interested in versus structures that you still want -- you want to be part of?

If you look at the biggest chunk of the payoffs in the quarter, so a good chunk of it was still just people selling underlying assets or paying off with cash. That was a fairly good portion of the entire amount. If you look at the third-party refinancings, some of it was rate, but the largest one in there was over structure. So we have continued to see that. And certainly, we want to be competitive, but we're disciplined, as you know, Tim. So -- but the largest chunk of that third-party refi in the quarter was over structure as opposed to rate.

Okay. And then follow on to that, to the extent that you have fallout out of the pipeline, is it related to price or structure?

Probably a combination thereof, meaning some of one, some of the other. It's a competitive market, but the team -- our new Head of Commercial Banking, Nikki Sloan, the new regions, they've really been able to deliver a lot out of the pipeline over the last couple of quarters. So I feel more solidly about that migration of deals in the pipeline to closed loans.

No. Absolutely, the first quarter was very strong on that front. And then, I guess, my last question would just be kind of on your thoughts on M&A going forward. You've completed a sizable conversion for you. And now that you're on the other side of that, what do you think about the landscape?

In terms of the overall landscape, my thoughts are probably no better than yours. I do think, we will always continued to have conversations, but you know how banks are sold, not bought. So I can't control the timing of that. But right now, we're just happy that we completed this conversion. The team did a great job. We're happy to be operating under one banner on one system and excited to see how we can grow that combined platform.

So while that's always the topic and always something to consider, at this time there's nothing going and we want to focus on organic growth in the meantime.

I do have the answer to that burning question. So the acquired loan amortization and accretion had an impact of $485,000. The fees on the SBA PPP loans were lower by $287,000. This is quarter-over-quarter. And then the prepayment penalties were lower by $332,000 versus the last quarter. So if you guys want the absolute numbers, I can send those out via e-mail, but those are kind of the -- that gives you a magnitude of the drivers of the differences between Q4 and Q1.

We have a follow-up question from the line of Andrew Terrell, Stephens.

I just wanted to circle back. Can you just disclose where weighted average, new origination yields were coming on at in the first quarter? And then, Tim, I know you spoke to some of kind of the lift in new loan pricing. Are you able to kind of quantify to what extent you've seen kind of new origination yields pick up so far?

Yes. Thank you. I don't have specifics on that. I mean the yield, in some cases, is pretty marginal -- or the incremental increase is pretty marginal at this point, but we continue to see that rise. And I don't have that weighted average number for you, Andrew.

We have no further questions on the phone lines.

We did have a couple of webcast questions, so I'll just read those off. The first one was, any color on the slowdown and buyback pace in the quarter? And what your appetite might be for the remainder of the year with the stock in the low 30s? So my answer will be similar to the question earlier, where we did take a cautious approach in the quarter. We'll continue to look at that because of the ongoing impact of rising rates on the securities portfolio and OCI and the deposits, but it's certainly something we're keenly interested in going forward. We just have to be cautious and make sure we can do that without -- in a disciplined way.

The second question is going into Q2, what is the size of the pipeline? And what are you expecting for loan growth in Q2 and the rest of the year? So as the frequent callers on here know, we don't give guidance. It continues to stay robust. And as I mentioned before, the conversion of pipeline opportunities into closed loans has continued to improve. And so we continue to be optimistic, but that is guidance we don't typically give. But thank you for the question.

There are no questions from the phone lines at this time.

Thank you very much. Thank you, everyone, for your questions and for joining us.

Thank you.