Bank of Marin Bancorp (BMRC) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Bank of Marin Bancorp. Please note that today's meeting is being recorded. At the conclusion of the business portion of the meeting today, we will have a question-and-answer session. [Operator Instructions] It is now my pleasure to turn this evening's meeting over to Brian M. Sobel, Chairman of the Board of Bank of Marin Bancorp. Mr. Chairman, the floor is yours.

Thank you, Andrew, and good evening, everyone. During the course of this annual meeting of shareholders, we will make some comments about the future of the bank. This slide is what our counsel says you need to be aware of regarding those comments. The information here is contained in the annual report on the Form 10-K. Please refer to it if you would like to know more about the policy. I now call to order the 2022 Annual Meeting of Shareholders. The matters on which the shareholders at meeting are voting are to elect the 12 nominated directors to vote on an advisory basis to approve the compensation of the company's named executive officers as disclosed in the proxy statement. To ratify the appointment of Moss Adams LLP as the company's independent auditor for the year 2022 and to transact any other business that may properly come before the meeting. Nancy Boatright, Corporate Secretary of the company, will serve as the Secretary of the meeting and record the proceedings. We have previously received an affidavit as to the mailing of the notice of the meeting, which states that on or about April 5, 2022, notice of the meeting, together with the related proxy materials, was mailed to all shareholders of record as of the close of business on March 21, 2022, the record date for the meeting. This affidavit may be inspected by any shareholder upon request and will be filed with the minutes of this meeting. We will dispense with the reading of the legal notice of this meeting and the minutes of the 2020 Annual Meeting of Shareholders. However, a copy of the notice and the minutes are available should any shareholder wish to review them. The Board of Directors has appointed Lisa Brenten of Computershare to serve as Inspector of Election for this meeting. The company's bylaws provide that the inspector shall determine the number of outstanding shares represented at this meeting, count the votes and determine validity of proxies. Lisa has signed an oath, which will be filed with the minutes of this meeting and will be available for inspection by any interested shareholder. If there is any person attending virtually holding a proxy that has not yet submitted it to a vote, you may vote it now by using the online platform. If there is any shareholder attending in person holding a proxy that has not yet submitted it to a vote, please raise your hand, and someone will be around to pick it up. Please note if you have previously voted and choose to vote through the online platform or file a new proxy in person, bearing a later date, voting through the online platform or in person will supersede your prior vote. The inspector has the shareholder list of the company as of the close of business on March 21, 2022, the record date for the meeting, which shows the shareholders and their respective number of shares entitled to vote at this meeting. Lisa, will you give us the quorum report?

A preliminary count indicates that as the 16,001,278 shares of the company's stock outstanding as of March 21, 2022, holders of 12,650,108 shares or approximately 79% of the shares outstanding are present in person or by proxy.

Thank you, Lisa. I request that any proxies be filed with the records of the proceedings of this meeting, as more than a majority of the issued and outstanding stock of the company eligible to vote at this meeting is represented, a quorum is present. So I declare the meeting duly and lawfully convened. The meeting may now continue for the transaction of business. Each shareholder is entitled to one vote for each share of common stock of the company owned by the shareholder on March 21, 2022, which was selected as the record date for this meeting. except in the election of directors where you are entitled to accumulate your votes. Cumulative voting will only change the outcome of the election of directors if there are more nominees for directorships than the company has available positions. Cumulative voting will have no impact in this election. If there are any shareholders attending the meeting online or in person wishing to accumulate votes, please so state now. If attending online, you may indicate so by clicking on the Q&A tab in the upper right corner of the meeting screen.

Mr. Chairman, we have no request for cumulative voting.

Thank you, Lisa. For those of you who have not voted by proxy or wish to cast your votes at this time, if you are attending the meeting online, you may vote using the online voting platform. And if you are here in person, we have ballots available. Additionally, if you have already voted by proxy and wish to change your vote, you may update your vote using the online voting platform. And if you are here in person, a ballot is available for that purpose. Please note that it is not necessary to vote online or fill in a ballot if you have already voted by proxy. Does anyone here present at the meeting wish a ballot at this time? As a reminder, there are 3 agenda items at today's meeting. I will briefly describe those 3 agenda items and then ask for a motion and second to confirm those as the items of business for this meeting. The first item of business is the election of 12 individuals to serve as directors of the company until the next Annual Meeting of Shareholders and until their successors shall be elected and qualified. The nominees receiving the highest number of affirmative votes of the shares entitled to be voted for them shall be elected as directors. The Board of Directors of the company has presented a slate of 12 nominees as set forth in the notice of this meeting and the accompanying proxy statement. The following individuals are the director nominees: Nicolas C. Anderson; Russell A. Colombo; Charles D. Fite; James C. Hale; Robert Heller; Kevin R. Kennedy; William H. McDevitt; Timothy D. Myers; Sanjiv S. Sanghvi; Joel Sklar Brian M. Sobel; Secil Tabli Watson. In accordance with the bylaws of the company, shareholders are required to provide advanced notice of their intent to nominate candidates for directors. No such notice was received. Since no other nominations for directors have been received in accordance with the bylaws of the company, I declare the nominations for directors closed. The second item of business is to approve the compensation of the company's named executive officers as disclosed in the proxy statement. This proposal is a nonbinding shareholder advisory vote. The third and final item of business is the ratification of the appointment of Moss Adams LLP as the company's independent auditor for the 2022 fiscal year. The accounting firm of Moss Adams LLP has been selected by the company's Audit Committee as the company's independent auditor for the 2022 fiscal year and is presently serving in that capacity. Is there a motion to confirm the foregoing 3 agenda items as the items of business to be voted on at this meeting?

So moved.

Seconded.

Thank you for that. Given the number of shares already voted by proxy and having afforded those attending this meeting online, time to lodge their votes through the online voting system, and those attending this meeting in person time to vote by ballot, I now declare the voting polls closed. Will the Inspector of Election, please report the voting results?

On the election of directors, the 12 Board of Director nominees as set forth in the proxy statement received the highest number of votes and have been elected as directors to serve for the coming year and until their successors are elected and qualified. The compensation of the company's named executive officers as disclosed in the proxy statement has received an affirmative vote from a majority of the shares present and voting at the meeting and is, therefore, approved. The ratification of the selection of Moss Adams LLP as the company's independent auditor for the 2022 fiscal year received an infirmative of vote from a majority of the shares represented at the meeting and is, therefore, ratified by the shareholders.

Thank you, Lisa. The report of the Inspector of Election will be on file with the Secretary for inspection by shareholders. At this time, I'm proud to introduce you to the Board of Directors who have just elected to serve for the coming year: Nicolas C. Anderson; Russell A. Colombo; Charles D. Fite; James C. Hill; Robert Heller; Kevin R. Kennedy; William H. McDevitt; Timothy D. Myers; Sanjiv S. Sanghvi; Joel Sklar; Brian M. Sobel; Secil Tabli Watson. I would now like to acknowledge the tremendous efforts of our executive leadership team. Tim Myers; Nancy Boatright; Brandi Campbell; Tani Girton; Bob Gotelli; Andrea Henderson; Rich Lewis; Nikki Sloan; Misako Stewart. And finally, I would like to recognize our shareholder employees. Thank you for your hard work and dedication. There being no further business to be transacted at this time, the Chair will entertain a motion for adjournment.

So moved.

Seconded.

Thank you very much. The 2022 Annual Meeting of Shareholders of Bank of Marin Bancorp is now adjourned. This concludes the business portion of the meeting. But stay tuned. Ladies and gentlemen, this is my last meeting as Chairman of the Board after 7 years. When I assume the chair position in 2015 after many years as a director, the Bank of Marin was a $1.8 billion bank. Today, we are a $4.3 billion bank and growing. In 2015, we were located in 5 counties. Today, we are in 10 counties. Our branch network in 2015 consisted of 21 locations. Today, we have 31. In '15, we were a team of 276 employees. Today, we #334. And over the last 7 years, we have also acquired and merged with 2 institutions, including the Bank of Napa in 2017 and American River Bank in 2021. In addition to our spectacular growth over the 32-year history of the bank and certainly over the last 7 years, we have also dealt with adversity, particularly the COVID pandemic, which we are still dealing with, as evidenced by this meeting tonight. In my time as Chair, our longtime President and CEO, Russ Colombo, retired, while remaining on the Board of Directors. And we welcomed Tim Myers, a 15-year member of the Bank of Marin family as our new President and CEO. As I turn over the chair position, I wish to express my gratitude and great appreciation to the wonderful and hard-working employees of the bank at every level. In particular, I wish to thank Russ Colombo, Tim Myers, Nancy Boatright, Krissy Meyer, our executive officers, all of our employees many of whom I have been in contact with over the years, trading literally thousands of calls, certainly during the week -- during the work week, but depending on the issue, also at night and on weekends as well. I also included in this group, John Stewart and now Ken Moore, our corporate attorneys. As I was thinking about the many hours we spent together on bank issues, it is a good time to also acknowledge and thank the spouses, partners and friends of employees and directors who also give up their time and support of everyone involved in the bank. In that vein, I want to thank my wife, Bonnie, who many times patiently waited as I discussed various bank issues, often at night or on weekends and during a few vacations as well. She is the very best. I also wish to thank our incredibly diligent Board of Directors who protect the shareholder interest at every single turn and who individually are wonderful, dedicated people and a pleasure to work with. Among this group, are those who have left the Board in years past, including most recently, Steve Barlow, Leslie Murphy and Norma Howard. Norma has served with distinction for a quarter century. Then there are new -- then there are our newest Board members, including Secil Watson, Sanjiv Sanghvi, and both Nick Anderson and Chuck Fite, who joined us from American River Bank. Chuck was a long-serving Chairman of the Board for American River and I was so pleased when he agreed to join the combined Board. Our newest Board members, along with the rest of the directors will serve us well in the years ahead. As a final note, owing to good health and circumstances, I was extremely fortunate to have been able to chair every meeting of the Board over my 7 years, never missing a Board meeting. So today, I again say thanks. I look forward to continuing to serve with my colleagues on the Board of Directors, knowing we are helping to lead a high-quality institution that will continue to be the premier community bank in Northern California. Now it is my pleasure and high honor to introduce the next Chairman of the Board. I have known this person for many, many years. He has been Vice Chairman of the Board for 7 years and Chair of the very important Asset Liability Committee better known as ALCO. I hold him in the highest regard, and he will be a sensational Chairman of the Board. Ladies and gentlemen, the new Chairman of the Bank of Marin Bancorp and Bank of Marin is Willy McDevitt. Willy?

Thanks, Brian. Good evening, everybody. I'm Willy McDevitt and it's truly an honor to join you tonight as the next Chairman of Bank of Marin. First, I'd like to thank Brian for his leadership and 7 years of service as Chairman. [Technical Difficulty] and his unwavering commitment to the bank during his tenure as Chair is well known. What most know, Brian extended [Technical Difficulty]. Thank you, Brian for being a great [indiscernible] and a good friend. This moment brings my connection with Community Banking full circle. Around 1979, I went to see Bill Murray, who had later found Bank of Marin. My brother and I were in need of funding for our growing construction company. He took a chance on us that led to a successful company that is still thriving 43 years later. It's unlikely that the [indiscernible] partners will exist today as Bill Murray not to leave [Technical Difficulty] community banks like Bank of Marin. We have the ability to make a difference for local independent businesses, large and smaller. I truly believe that not only because I personally experienced it but because I see the trust and strong relationship [Technical Difficulty]. This is why Community Banking and the specialty banks, they get different [Technical Difficulty] thank you all for your [Technical Difficulty] Tim, over to you.

Thank you very much, Willy. Good evening to everybody, and thank you for joining us. I'm sorry we had to pivot to a virtual format at the last minute, but I am happy to be hosting my first Annual Meeting of Shareholders as the new CEO. I would also like to thank Brian for his years of service and leadership as Chairman and for the support he has given to me personally. Brian consistently demonstrated a strong commitment to the success of the bank and a deep appreciation for the employees who helped drive that success. I'm thrilled that he will remain a director on both boards. I also want to congratulate Willy on his new role. He has a unique appreciation for what makes Bank of Marin special, and I look forward to working closely with them. For more than 30 years, Bank of Marin has been growing and evolving to become one of the leading community banks in Northern California. In 1990, we opened for business in Marin, which just 2 branches and assets under $50 million. As of March 31, 2022, we were $4.3 billion bank with 31 offices across 10 countries, hence the consistent, focused strategic planning and a clear vision for growth. Most recently, we completed our merger with American River Bank shares, a $124 million deal that added $898 million in assets, larger than our 3 previous acquisitions combined. In March of this year, we successfully migrated all legacy ARB clients and employees on the bank and rent systems. We are on track to realize the cost savings and earnings contributions from that merger. Tani will touch on this later in the presentation. The conversion was a strong team effort from every area of the bet. All of our employees, in particular, our customer-facing employees in the branches delivered our trademark legendary service to ensure our newest customers have a smooth transition for the Bank of Marin platform. We also learned a lot from this experience, and we continue to identify best practices in delivery, process and policies between the 2 legacy organizations. Our focus will now be on growing this new dynamic market for the bank. It is exciting to think that we are now shaping the future of Bank of Marin with a larger footprint, energized teams and new growth opportunities. With talented new leaders across the organization and in a largely new executive leadership team, we are also reshaping how we do business. We've inherited a strong successful bank. As we look to the future, we are pleased to accomplish great things while staying true to our core values of relationship banking, disciplined fundamentals and commitment to our communities. The pandemic impacted our ability to build relationships in traditional ways. While we remain focused on delivering legendary service to existing customers, it did affect our ability to be -- to develop new relationships in the market. We are now actively out of those markets across all our regions, and we are seeing positive results from these efforts. By revamping how we think about loan growth, other Commercial Banking, Nikki Sloan, Andrea team build up momentum throughout the second half of 2021 that led to the strongest first quarter for loan originations we've seen in 6 years. The growth is not our sole priority. We are also looking to make investments in our infrastructure, our product offerings and our people. In doing so, we will be able to drive shareholder value by becoming an even better, more efficient organization. It is critical for us to leverage technology to understand and meet our customers' needs effectively. We will continue to streamline the work of our operations teams. Additionally, through our branch network, Head of Retail Banking, Brandi Campbell, will continue to enhance how we deliver exceptional customer service. As we all know, we are only as good as our employees. They are the lifeblood of our relationship banking model. We will continue to seek better ways to train, motivate and develop people in the meaningful careers at Bank of Marin, providing them with the necessary tools to be successful at their jobs either for client relationship management or day-to-day operations remain essential. Together with my leadership team, I'm genuinely excited for the future of Bank of Marin. We have the good fortune of having the opportunity of making a great bank even better. Now let me hand it over to Tani Girton, our Chief Financial Officer, to give you more detail on our financial performance.

Thank you, Tim. Good evening. Bank of Marin is known for executing on its strategic plans. Our last strategic plan, which ended in 2021, contemplated earnings per share growth of 40% organically over the last 4 years and 67% with a $1 billion acquisition layered on top. We exceeded that vision, achieving 81% EPS growth and 2 acquisitions. Our 5-year compound annual loan growth rate of 8.31% was achieved despite the significant drop-off in loan demand and increased payoffs associated with COVID-19 pandemic. On the loan side, banks had to pivot in '20 and '21 and 3,556 PPP loans totaling $550 million were generated by Bank of Marin and American River Bank, or ARB. There are now 191 PPP loans remaining on our balance sheet for $41 million. We recognized $8.3 million in fees on PPP loans in 2021 and have about $1 million left to book when the last loans are forgiven and paid off. On the deposit side, we've seen 5-year compound annual growth rate of 17.8% from our acquisitions, and the substantial liquidity generated by accommodative Fed policy and fiscal stimulus, but also consistent with the historical upward trend since the bank's inception. We have a low-cost deposit base with a 51% concentration in operating accounts, a very valuable deposit franchise. Bank of Marin has consistently delivered solid earnings throughout business cycles and in unusual circumstances. The pandemic has impacted all operations for a prolonged period. At the same time, we closed and integrated our largest acquisition ever, which is already exceeding expectations with earnings accretion above projected levels, onetime costs lower than anticipated due to successful negotiations with vendors and cost savings on target but still not fully baked in yet. We reported earnings 2 weeks ago that included $50 million in first quarter loan originations, a 6-year peak, as Tim said, and utilization on credit lines increasing to 38% from 34% at year-end. We released reserves on loans and unfunded commitments given improvements in the economic forecast underlying our credit loss modeling. Hopefully, you can see the green numbers on this slide, indicating most of our key financial metrics improved quarter-over-quarter and year-over-year. In red, loan originations because even the strongest first quarters rarely outdo the preceding fourth quarter, typically the most active quarter of the year and Q4 2020 was strong. Net interest margin and the efficiency ratio, bear a little more explanation, which I will provide shortly. Numbers on this slide and in our peer comparisons have been adjusted for onetime costs associated with the ARB acquisition for comparability to prior periods and to peers. Here, you can see reported GAAP metrics, and we have included GAAP to non-GAAP reconciliation tables in our financial statements for the last 3 quarters, which can be found in the Investor Relations section of our website. Similar to peers, our net interest margin is compressed. The margin has been under tremendous pressure since the Fed instantaneously dropped rates by 150 basis points in March of 2020. Growth in deposits suppressed loan demand and ARB's lower loan-to-deposit ratio all resulted in the investment portfolio growing to 40% of the total balance sheet. The investment portfolio is composed of high credit quality securities, which means lower yields than comparable vintage loans carefully underwritten by Bank of Marin. A higher proportion of investments reduces net interest margin, while the overall growth in the balance sheet increases net interest income. There were other factors that reduced net interest margin and income in the first quarter, such as fewer days in the first quarter than the fourth, changes in amortization and accretion on acquired loans, lower loan prepayment fees and lower PPP fee recognition. However, we have been able to invest in higher-yielding securities as the yield curve steepened in anticipation of increasing interest rates. We have also seen yields on new loans respond to higher rates. Rates on our existing C&I loans responded immediately when the Fed raises rates. So Bank of Marin is ready and well positioned for further increases in interest rates. As we acquire other banks, our objective is to improve our scale and our operating leverage. On the chart, you can see that Bank of Marin's efficiency ratio is typically lower than peers, except when we are experiencing the onetime costs associated with acquisitions. And as I mentioned earlier, we are on track to achieve the benefits of scale we planned for with the ARB acquisition. Comparing other 2021 metrics to peers, our deposit franchise is consistently one of the best in the industry following in the 93rd percentile. Our loan growth was in the 82nd percentile of peers due to the acquisition. Our 1.1% return on assets and 9.7% return on equity was strong but left room for improvement relative to peers. Bottom line, we continued to build and strengthen our balance sheet and operating leverage. As you can see here, capital ratios are considerably above well-capitalized regulatory levels. Tangible equity also remained strong despite declines associated with deposit balance increases, share repurchases and fair value marks on the available-for-sale investment portfolio. Our sizable liquidity position enabled us to move $358 million from available-for-sale to held to maturity to reduce the effect of future increases in interest rates on tangible equity. Our capital management strategies prioritize shareholder investment -- or dividends, investments in the business, and finally, share repurchases, and we are now shaping our future with the next 5-year strategic plan. In summary, Bank of Marin has produced long-term value over the years through disciplined strategic planning and successful execution. We are excited about how our plans for the future are shaping up and look forward to making them happen. And now back to you, Tim, for some closing remarks.

Thank you, Tani, and thank you to all of you for joining us this evening. Again, we apologize for the change in format. We appreciate your continued support of Bank of Marin. Tani, Brian, Willy and I would now be happy to answer any questions you may have. As a reminder, for guests attending virtually, you can submit your questions by clicking on the Q&A icon on your screen. We have a question coming on. We do not have a question coming in. With that, I want to thank you all again for joining us, and we will conclude the Annual Meeting of our Shareholders. Thank you very much. We look forward to seeing you next year.

This concludes the meeting. You may now disconnect.