Yahoo Finance Bank of Marin Bancorp (NASDAQ:BMRC) Q1 2024 Earnings Call Transcript
Bank of Marin Bancorp (NASDAQ:BMRC) Q1 2024 Earnings Call Transcript April 29, 2024
Bank of Marin Bancorp misses on earnings expectations. Reported EPS is $0.18 EPS, expectations were $0.28. BMRC isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Yahaira Garcia-Perea: Good morning and thank you for joining Bank of Marin Bancorp's Earning Call for the First Quarter ended March 31st, 2024. I'm Yahaira Garcia-Perea, Marketing and Corporate Communications Manager 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. 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 and supplementary presentation, which we issued this morning, can be found in the investor relations portion 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 web replay.
Before we get started, I want to note that we will be discussing some non-GAP financial measures. Please refer to the reconciliation table in our earnings 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 26, 2024, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion 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, Tani, and our Chief Credit Officer, Misako Stewart, will be available to answer your questions.
And now I'd like to turn the call over to Tim Myers.
Tim Myers: Thank you, Yahaira. Good morning, everyone, and welcome to our first quarter earnings call. At a high level, during the first quarter, we showed deposit stability, a declining pace of deposit cost increases, and continued strong liquidity. We also added to the foundation we are building for a more robust loan origination engine. Our smaller balance sheet and higher overall deposit costs resulted in slightly compressed net interest margin and core earnings reduction in the Q1. Operating expenses, which did include some seasonal increases and downward incentive adjustments, were also higher on balance as we added key new commercial banking hires and our talent is already helping pipeline activity in both the North Bay and Sacramento.
Importantly, our concerns about overall credit quality and loss potential remain unchanged despite risk rate migration. In the quarter, we capitalized on the dislocation caused by the regional bank failures and as I noted attracted proven relationship bankers to help drive new client acquisition. Notably, the pace of deposit cost increase has slowed during February and March reaching the lowest incremental level since February 2023. These catalysts complement the strategic repositioning of our balance sheet late last year when we divested lower yielding securities and scaled down short-term borrowings to improve our interest rate risk position for the year ahead. We continue our facilities optimization by consolidating two of our commercial banking offices into one, saving approximately $650,000 this year and an $800,000 annualized run rate beginning in 2025.
We will continue to evaluate a range of strategic possibilities to optimize our balance sheet and expense structure, create efficiencies and increase profitability on behalf of our shareholders. We also remain firmly committed for a long established conservative approach to credit. Overall, credit quality remains strong with non-accrual loans at just 0.31% of total loans at quarter end, down from 0.39% the prior quarter. As we've indicated, our relationship banking model enables us to work closely with our commercial real estate borrowers, most directly impacted by the current environment. We are also able to manage risk on certain CRE loans with vacancies through enhancements to collateral either by a way of cash or other income producing properties or by having the borrower pay down the loan.
During the first quarter, we made good progress in this area and it remains a key focus. Classified loan levels did increase in the first quarter. This was due largely to three relationships of different types and geographies. Two are CRE loans that are fully secured and supported with personal guarantees and we believe there is minimal risk in these credits. We are not seeing the formation of material new problem loans, just previously identified problem loans continuing through the workout and resolution process. In the first quarter, we upgraded four loans totaling more than $10 million from special mention to past. Our non-owner occupied office portfolio overall is made up of 151 loans with an average loan size of only $2.4 million. The weighted average loan to value was 60% and the weighted average debt service coverage was 1.6 times based on our most recent data.
There is no notable change from what we reported at year-end. Our office CRE book in San Francisco represents just 3% of our total loan portfolio and 6% of our total non-owner occupied CRE portfolio. I also want to note that we have minimal exposure to rent control properties within our multifamily portfolio, only 32 loans with an average balance of only $1.6 million or 2.5 % of our total loan portfolio. Like the rest of our book, we are monitoring this very closely. As I noted, with our new commercial hires, we're seeing more new attractive opportunities with a dramatically improved pipeline, but the timing to close is difficult to predict. As such, our loan portfolio did decrease slightly as our originations in the quarter were offset by past, scheduled repayments and strategic exits.
Much of the payoffs were related to construction loans as a result of project completion. Now turning to deposits. We maintained total deposits with quarter end balances essentially flat from December 31st. We attracted new customers during the quarter, but some clients also moved cash into alternative investments to capture higher returns and we also saw seasonal outflows that we often see in Q1 of each year. Our noninterest-bearing deposit level remains favorable at 44% of total deposits. We continue to focus on relationship banking with high-touch service, being appropriately competitive on deposit pricing and maintaining our strong core deposit franchise. We anticipate our funding costs to further stabilize this year. We also continue to maintain high levels of capital and liquidity, and we are in a position of strength.
Our total risk-based capital ratio improved to 17.05% at quarter end compared to 16.89% at the close of 2023. Total liquidity of approximately $1.9 billion consisted of cash, unencumbered securities and total borrowing capacity. In summary, we made substantial progress by adding talent and building upon our foundation for profitability improvements and long-term growth and these efforts are ongoing. With that, I'll turn the call over to Tani to discuss our financial results in greater detail.
Tani Girton: Thanks, Tim. Good morning, everyone. With interest rates higher for longer and lingering economic uncertainty, we continue to focus on further strengthening our core deposit franchise and maintaining robust liquidity and capital level while delivering exceptional service to existing and new customers as we position Bank of Marin for continued earnings improvement in 2024. We generated net income of $2.9 million for the first quarter or $0.18 per diluted share compared to net income of $610,000 or $0.04 per share in the fourth quarter of last year. $4.2 million of the increase in net income quarter-over-quarter was due to losses on securities sales in the fourth quarter of 2023. After repositioning our balance sheet out of borrowings and some securities, lower-earning assets combined with the higher cost of deposits to make net interest income $1.6 million lower than the prior quarter.
However, during the first quarter, we maintained our noninterest-bearing deposit levels while capturing higher yields on new loans. This largely offset increases in interest-bearing deposit costs. And as a result, our tax equivalent net interest margin decreased by only three basis points in the first quarter, following a five basis point increase in the fourth quarter. Taken together, our net interest margin has stabilized over the past two quarters, and we are optimistic that we will see continued stability in the near term with a bias for improvement from new loans and existing loan repricing. At the same time, we continue to evaluate strategies that support margin expansion. Our noninterest expense base increased somewhat with the new hires Tim highlighted.
Additionally, the seasonal increases related to 401(k) matches tied to bonus payments, and lower loan origination cost deferrals contributed to the $1.9 million increase over the fourth quarter. Professional service expenses related to the annual audit also tend to be higher in the first quarter. Increases were somewhat tempered by downward adjustments to incentive accruals in the first quarter, but there were much larger reductions to incentive, profit sharing, stock-based compensation and retirement plan accruals in the fourth quarter of 2023. Moving to noninterest income. Excluding the $5.9 million loss on the sale of AFS securities associated with our fourth quarter balance sheet restructuring, noninterest income of $2.8 million was stable quarter-over-quarter.
In addition to the total risk-based capital strength Tim noted, Bancorp's tangible common equity to tangible assets ratio improved to 9.76% in the first quarter from 9.73% at December 31st. Our contingent liquidity is plentiful and our deposit base is well diversified with businesses representing 59% of balances and 32% of accounts. Our largest depositor represented just 2% of total deposits while our four largest depositors comprised 5.3%. We maintained our total deposits to $3.28 billion on March 31st without tapping the brokered CD market or running CD campaign. And noninterest-bearing deposits increased slightly to 44% of total deposits from 43.8% at December 31st. The average cost of deposits increased 23 basis points to 1.38% in the first quarter compared to a 21 basis point increase from the prior quarter.
Underlying these changes is a clear downward trend and monthly increases since the peak in March 2023. We believe we are appropriately competitive in regard to deposit pricing given our relationship banking model that differentiates Bank of Marin. Disciplined credit management remains a Bank of Marin core value as well. Our $350,000 provision for credit losses in the first quarter compares to a provision of $1.3 million for the previous quarter and brought the allowance for credit losses to 1.24% of total loans compared to 1.21% as of December 31st. Typically, loan originations are lower in the first quarter of the year. And this year, new originations of $12.4 million were more than offset by payoffs of $21.8 million with rates on new loans averaging 266 basis points above the rates on loans paid off.
Loan balances of $2.1 billion for the first quarter were down $18.8 million from the prior quarter after amortization and changes in utilization. Our Board of Directors declared a cash dividend of $0.25 per share on April 25th, the 76th consecutive quarterly dividend paid by Bancorp. We didn't repurchase any stock during the quarter. Instead, we concentrated on building upon our strong capital, reinforcing credit protections, deepening relationships with our customers and developing new business. We regularly evaluate the merits of stock buyback. We also continue to assess additional possible adjustments across our balance sheet and expense structure with a focus on finding new ways to accelerate net interest income expansion and self-fund efficiency improvement.
Potential actions are run through our capital plan and interest rate risk simulations, along with rigorous stress tests, to evaluate long-term benefits. In addition to meaningful profitability improvement, we screen for reasonable earn-back period, ample ongoing liquidity and capital and sustainable balance sheet strength and profitability. With now I'll turn it back over to Tim to share some final comments.
Tim Myers: Thank you, Tani. In closing, our enduring relationship-based banking model, healthy capital and liquidity levels and favorable mix of deposits and solid funding base provide Bank of Marin a strong foundation for loan growth, margin expansion and increased profitability in coming quarters. Over the past few months, we have added a number of highly productive bankers, implemented a more active approach to developing new client relationships and increased our use of technology to enhance those efforts. All of these have positioned us to generate a higher level of loan production going forward while we maintain our disciplined underwriting. We also continue to evaluate our physical footprint and optimization opportunities as well as other ways to manage expenses while also investing in talent and technology to maximize customer satisfaction, attract new clients and further enhance our ability to generate long-term profitable returns.
With that, I want to thank everyone on today's call for your interest and support. We will now open the call to your questions.
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