Bank of Marin Bancorp Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2025

There are 11 speakers on the call.

Operator

Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the First Quarter Ended 03/31/2025. I am Krissy Meyer, Corporate Secretary for Bank of Marin Bancorp. During the presentation, all participants will be in a listen only mode. After the call, we will conduct a question and answer session. Joining us on the call today are Bank of Marin President and CEO, Tim Myers and Chief Financial Officer, Dave Bonacorso.

Operator

Our earnings news release and supplementary presentation, which were issued this morning, can be found in the Investor Relations section of our website at bankofmarin.com, where this call is also being webcast. Closed captioning is available during the live webcast as well as on the webcast replay. Before we get started, I want to note that we will be discussing some non GAAP financial measures. Please refer to the reconciliation table in our earnings news release for both GAAP and non GAAP measures. Additionally, the discussion on the call is based on information we know as of Friday, 04/25/2025, and may contain forward looking statements that involve risks and uncertainties.

Operator

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

Speaker 1

Thank you, Christy. Good morning, everyone, and welcome to our quarterly earnings call. We delivered a solid first quarter driven primarily by positive trends in our net interest margin and deposit growth, while we continue to effectively manage our expenses at an appropriate normalized run rate. Our improved financial performance and continued benefits from prudent balance sheet management fueled a 36 basis point increase in Q1 year over year net interest margin and a 67% improvement in Q1 year over year earnings per share growth, which drove tangible book value per share growth in the first quarter. On a broad basis, we continue to have stable asset quality within our loan portfolio with a slight decline in non accrual loans and an increase in classified loans, which was largely driven by two relationships downgraded due to unique issues with each borrower.

Speaker 1

The decline in nonaccrual loans was the result of the proactive sale of an acquired loan due to the rapidly deteriorating financial condition of the borrower and declining collateral value. The loan was placed on nonaccrual in Q4 twenty twenty three and the sale resulted in a modest charge off, more than half of which was reserved for in Q4 of twenty twenty three. While there is broad macroeconomic concern regarding the impact of economic, fiscal and trade policies, to date, we have not heard of anything within our portfolio that indicates a meaningful amount of increased risk. Our banking team, reinforced with two new client facing bankers in the first quarter, is doing a more consistent job of developing attractive lending opportunities and generating improved loan production, while still retaining our disciplined pricing and holding firm on structure and underwriting criteria. While overall loan demand remains fairly consistent, due to the efforts of our banking team, we are seeing a larger volume of opportunities within our markets.

Speaker 1

During the quarter, total loan originations were $63,000,000 including $48,000,000 in new fundings. Commercial loan originations were $49,000,000 with $43,000,000 in fundings, which is a fivefold increase from our level of commercial loan originations in the first quarter of last year. Our originations were a well diversified mix of both commercial and commercial real estate loans across geographic markets, industries and property types. While we had a solid level of loan production in the first quarter, that production was exceeded by payoffs, pay downs and reduced construction line utilization, which Dave will discuss in greater detail. Our total deposits grew in the first quarter, including an increase in non interest bearing deposits that kept our overall mix of deposits relatively consistent with non interest bearing deposits comprising 43% of total deposits.

Speaker 1

The deposit growth was due to a combination of deposit inflows from both new relationships added during the first quarter as well as inflows from existing clients. The growth represents a combination of expanded balances from commercial, small business and consumer clients. While we see some banks looking to win business with assertive deposit pricing, we are not seeing any material losses due to rate. Our customers continue to bank with us for our service levels, accessibility and commitment to our communities and not entirely based on rate. As a result, in early January, we made meaningful deposit rate reductions in response to the December Fed funds rate cut, which helped drive further expansion in our net interest margin in the first quarter.

Speaker 1

The deposit cost reductions have continued into April as we are now able to make smaller rate adjustments outside of the Fed funds rate adjustment cycle. Given our improved financial performance and prudent balance sheet management, our capital ratios remain very strong with a total risk based capital ratio of 16.69 and a TCE ratio of 9.82%. With that, I'll turn the call over to Dave Bonacorso to discuss our financial results in more detail.

Speaker 2

Thanks, Tim. Good morning, everyone. We generated $4,900,000 in net income for the first quarter or zero three zero dollars per share, both of which are 67% higher than the first quarter of last year as we continue to benefit from the balance sheet repositioning and expense reduction actions we took during 2024. Our net interest income was down slightly from the prior quarter to $25,000,000 primarily due to a lower balance of average earning assets, partially offset by a six basis point increase in our net interest margin. The expansion on our net interest margin was attributable to a seven basis point decrease in our cost of deposits, while our average yield on interest earning assets was unchanged from the prior quarter despite an approximately 30 basis point decline in the average Fed funds rate during the quarter.

Speaker 2

Our average yield on loans was unchanged from the prior quarter as higher rates on new loan production were offset by the payoff of some higher yielding loans, mostly in our construction portfolio. Due to our deposit growth, we had elevated levels of cash balances during the first quarter. In late March and continuing into April, we accelerated our redeployment of this excess liquidity into new loan fundings and securities purchases, which we expect to positively impact our net interest margin in the second quarter. Our non interest expense increased by $2,900,000 from the prior quarter due primarily to seasonally higher expenses as accruals for salaries and employee benefits reset in Q1, as well as relatively low salaries and employee benefits expense in Q4 twenty twenty four due to adjustments in incentive bonus and profit sharing accruals. Additionally, in order to better serve the timing needs of our non profit community, we moved up the timing of our charitable contribution cycle.

Speaker 2

Last year, nearly 90% of our charitable contributions occurred during Q2, whereas this year, the vast majority of our contributions were pulled forward into Q1 with $403,000 of contributions made in the quarter. We expect approximately $60,000 in contributions in Q2, followed by $20,000 each in Q3 and Q4. The $403,000 of contributions expense in Q1 twenty twenty five compares to 30,000 in Q4 twenty twenty four and 12,000 in Q1 twenty twenty four. Those differentials are worth approximately $0.01 $75 per share after tax. Excluding salaries and related benefits and charitable contributions, our Q1 twenty twenty five non interest expense declined almost 1% compared to Q4 twenty twenty four and almost 3% compared to Q1 twenty twenty four.

Speaker 2

Moving to non interest income, we had an increase of more than $100,000 from our prior quarter, primarily due to higher earnings on BOLI. Most other areas of non interest income were relatively consistent with the prior quarter. Our total deposits were $3,300,000,000 at March 31, which was an increase of $82,000,000 from the prior quarter, 26,000,000 of which came in non interest bearing deposits. As Tim mentioned, this was attributable to inflows from existing clients as well as the addition of new client relationships. Our average cost of deposits declined seven basis points in the first quarter as we had passed through rate cuts to our deposit customers without seeing any material rate related outflows.

Speaker 2

And during April, we have continued to see a decline in our cost of deposits. Disciplined credit management remains a hallmark of Bank of Marin as well. Due to the stability in our loan portfolio, our provision for credit losses was just $75,000 during the first quarter. The allowance for credit losses declined slightly to 1.44% of total loans from the prior quarter, which was largely driven by the payoff of construction loans that require a higher level of provision. Loan balances of $2,070,000,000 at the end of the first quarter were down $10,000,000 from the prior quarter.

Speaker 2

While we had strong new loan production, this was offset by loan payoffs for a variety of reasons, including decreased line utilization on construction loans, pay downs on tenant and common and purchased real estate mortgage loans and the proactive sale of an acquired loan that had been on non accrual. Given the continued strength of our capital ratios, our Board of Directors declared a cash dividend of $0.25 per share on April 24, the eightieth consecutive dividend paid by the company. With that, I'll turn it back over to you, Tim, to share some final comments.

Speaker 1

Thank you, Dave. In closing, we believe we are very well positioned to continue generating solid financial performance in 2025 as we expect to continue to see positive longer term trends in our net interest margin and revenue. While there is more economic uncertainty now than at the beginning of the year, our expectations for a higher level of loan growth this year continue to be based more on the additions to our banking team we have made and the higher level of productivity that we are now seeing rather than any expectations that we would see a meaningful increase in market wide loan demand. As such, we continue to expect to see improving loan growth this year and our loan pipeline continues to be very healthy. While we always tightly manage expenses, we will also continue to take advantage of opportunities to add banking talent that we believe will help support the continued profitable growth of our franchise, while also investing innovation and technology to further enhance our level of efficiencies and the quality of service we provide to our customers.

Speaker 1

With the strength of our balance sheet, we believe we are very well positioned to increase our market share at attractive new client relationships, generate profitable growth and further enhance the value of our franchise in 2025 and the coming years. And while we did not repurchase any shares during the first quarter, with our high level of capital, we can continue to evaluate repurchases as we look at the best uses for our capital at any particular time and make the decisions that we believe are in the best long term interest of our shareholders. With that, I want to thank everyone on today's call for your interest and your support. We will now open the call to your questions.

Speaker 3

Once prompted, please unmute your line and ask your question. We will now pause a moment to assemble the queue. Our first question will come from Andrew Terrell at Stephens.

Speaker 1

Good morning, Andrew.

Speaker 4

Maybe we'll just start at the end there. Tim, I mean, you've got pretty impressive capital. The stock trades at 90% of tangible. Growth is still a little bit slow. Just talk us through expectations around the buyback moving forward.

Speaker 4

Any other capital actions we should be contemplating? Maybe just big picture on capital to start.

Speaker 1

Sure. So we just went through our exam with our regulators. We'll be meeting with them soon to talk about our capital plan, dividend request, all that. So we continue to contemplate it. We still have the authorization in place from the Board.

Speaker 1

And we agree that buying back below tangible book is a wise thing to do. We were just on the sidelines, if you will, pending the outcome of the exam and discussions about some of the other strategic options. As you note, there are some available. And so that's where we're at right now.

Speaker 4

Understood. Okay. And then could you maybe provide a little bit more color on that? Think it was three commercial loans that moved into classified, and obviously, a massive dollar amount. But just want to understand what those three credits were, any commonalities between them and just kind of expectations working forward with this?

Speaker 1

Yes. So the vast majority of that was really within two credits. One is a contractor and the other is real estate multifamily. So no relation between the two, performance issues unique to each of them, operational on the contractor side and a shift in strategy on the multifamily from short term furnished rentals to longer term. And so both are expected to be profitable or both expect to be profitable this year.

Speaker 1

We don't currently expect any further deterioration, but we felt it prudent to put those in that bucket for the time being.

Speaker 4

Got it. Okay. And then, Dave, if I could ask around just the expense expectations. Is the right way to think about the expense base in the coming quarters, just normalizing the charitable contributions down to that, I think it was 60 ks next quarter? Any other puts and takes we should be thinking about for expenses in the coming quarters?

Speaker 2

Sure. So at a high level, going back to 2021, our compound annual growth rate of expenses has been about 4%. That's arguably a reasonable place to start any modeling on an annual basis. In 2024, we were up almost 3%. That was in a year in which we didn't meet some important internal goals.

Speaker 2

So that caused incentive comp to be lower than it would have been otherwise. So that's kind of the overarching framework. And then this quarter, we or in Q1, I should say, we pulled forward contributions that were normally in Q2. We expect for the remainder of the year, as we laid out in the release, another 100,000 or so in contributions expense. And then things like things that are unique to Q1, like payroll taxes and insurance adjustments and four zero one matching being on the high side, I mean, those will start to drift lower.

Speaker 2

And then I'd say some project related expenses that really kick off probably more in Q2 will start hitting. So those are the various puts and takes there. But again, I would kind of steer you back to what we've done the last couple of years on an annual basis, and then you can adjust from there.

Speaker 4

Our

Speaker 3

next question comes from Woody Lay at KBW. Go ahead.

Speaker 5

Good morning, guys.

Speaker 1

Hi, Woody.

Speaker 5

Wanted to start on deposit growth. It was pretty impressive to see in the quarter. But was there any seasonality impact in there? Do you think all of this growth is pretty sticky? And if it is sticky, what do you attribute the growth to?

Speaker 5

Is it some new hires that are making progress or just thoughts there?

Speaker 1

It's kind of the flip side of the coin. We've had a couple of the other quarters, Woody, where we do get some big seasonal inflows, if not seasonal episodic with our customers. We did have another 1,000 plus accounts open up. That total dollar amounts maybe onethree of the total. So we get the inflows, outflows.

Speaker 1

We expect tax outflows in this month. So it's really hard to say the exact where that will land. But yes, agreed. I think we continue to do the right things. There's the C and I effort.

Speaker 1

If you take in the commitments, the unused commitments, C and I was at 20% of our loan originations. That's second quarter in a row, I think, where we've been up there. And certainly, that brings to deposits. But it's a combination of all the above. And I would hate to speak to my ability to forecast how those fluctuations go because we do have those large DDA customers that have in and outflows.

Speaker 5

Yes. Appreciate the color there. And then maybe turning to deposit costs. It sounds like you did some heavy lifting in early January. But do you think there is room to continue to move deposit costs lower here if all else equal rates stay the same?

Speaker 1

I mean, I'll let Dave on the course to answer that. I mean, we think we have some flexibility, but obviously, we start testing some limits at some point. But go ahead, Dave.

Speaker 2

Yes. Obviously, it's easier with the cover of a Fed funds rate cut. So and in that regard, we've done better than the ALM modeling assumption that we disclosed. And I think as you noted in earlier report you put out, our beta accelerated in Q1 relative to Q4, so positive from that perspective. But on your question about I think what I'm hearing is, can you do anything away from Fed funds rate cuts?

Speaker 2

And the answer is, in April, we actually cut rates on about $260,000,000 in balances by an average of about six basis points. So it's not huge. It ends up working out to about nineten of a basis point for interest bearing deposits, about 0.5 basis point for total deposits fully phased in. But demonstration that we can do it, and it's something we'll continue to look at.

Speaker 5

Got it. And then maybe last for me, just shifting over to loan production. First quarter remained strong, but was offset by some payoffs. I mean how did production trend toward the end of the month? And just given all the macro uncertainty, are you seeing customers opt to delay deals at this point?

Speaker 1

Yes. So I'll start at the end there. We're not seeing that. We're not going to pretend that the loan originations well, let me step back. It was very exciting for the quarter to have the origination.

Speaker 1

It's been a long time since we've had a Q1 that equaled our Q4 origination. So we really are seeing the benefit of some of the hires we've made. So we're not seeing a rising tide of demand. There's no question. There's a lot of uncertainty out there.

Speaker 1

What we're seeing is production from the people we're hiring with former clients with their pipelines. So our pipeline is about 50% higher than it was a year ago this time with those originations. So we're seeing a nice trend that appears sustainable, but you can never predict the timing. So it's pretty even. Obviously, it always kind of gets back into towards the quarter.

Speaker 1

But what's nice is the pipeline is still high, and we didn't get all that through and then have to start rebuilding. So we're pretty enthusiastic. But again, that's new hire driven. We did add another new hire in San Francisco on top of the two we hired early in the quarter in Sacramento and one of our markets here. And so yes, we remain optimistic that we're getting the right people in the right chairs to continue and smooth out that trend.

Speaker 1

On the paydowns, pretty flat to a year ago, down for the quarter. Very little of that, maybe a couple of million dollars was things that were funded outside of the bank. The biggest chunk continues to be asset sales or cash deleveraging, small amount of workouts, but it was really desperate. In fact, I think the single biggest component within there of type was consumer loans, the residential mortgages we acquired as part of the securities repositioning, TIC loans and some indirect auto loans. So it's not really part of a trend that's affecting our commercial banking activity.

Speaker 1

Nonetheless, they're paydowns, but they're we seem to be controlling to the extent we can, those we can control, and we just keep that origination going and the latter will offset the former here.

Speaker 5

Our

Speaker 3

next question comes from Jeffrey A. Rulis at D. A. Davidson.

Speaker 6

Question on the, I guess, on the margin, just kind of following back up. It sounds, if you look at spot rates and the March average, the trend is good there and then kind of got your commentary about continuing to make efforts to lower. I guess, as we look at the margin well, do you have a March average on the NIM?

Speaker 2

Yes, it was two eighty five.

Speaker 6

Okay. And Dave, anything on

Speaker 2

There's distortions in Q1 with the day counts, the 31, 20 eight, 30 one. So that's the March number. But the overall quarter is impacted by the differences in day counts.

Speaker 6

Just in the release, it sounds optimistic of further improvement on the margin. Anything else to kind of from a liability sensitivity is there. So obviously, cuts would likely help, but just expectations on the go forward margin.

Speaker 2

Yes. So I think you hit on it. We're slightly more liability sensitive this quarter than last quarter. And maybe an easy way to think about it is we have roughly 4x as many floating rate liabilities as we do floating rate assets. And so if you assume the floating rate assets have 100% beta, it just means that the needs that our floating rate liabilities need to have a beta above 25% to keep pace.

Speaker 2

And as I noted, we for our the entirety of our floating rate liabilities are non maturity deposits, and we had a 40% beta this past quarter. So we're tracking well there to improve there. And I think when we gathered last time on our last quarterly call, markets were expecting about 50 basis points in cuts for the year. And at least as of Friday, we were looking at 90. So that's to the positive for us margin wise.

Speaker 6

Great. And maybe a couple of questions on the expense side, just to follow-up. First, on the charitable contributions, is the Board engaged? Or does that need to be approved at that level? Or is that a management call?

Speaker 6

And then overall expenses, you talked about managing them, but also being opportunistic on strategic items. I guess, you consider any other cost rationalization given the kind of flat line on loans? Is that on the table? So two part on the charity and then the looking at any cuts potentially.

Speaker 1

So the answer to your first question about the Board, yes, when we budget, we budget charitable contributions. And we have a long history at the bank of trying to give at least 1% of pretax profit to the communities. The communities know that. We are a traditional community bank in the respect that we have branches in markets, or at least a lot of them, and behave that way. And so we're very actively engaged.

Speaker 1

We have a lot of people on boards. And so that is a very big part of what we do. In terms of the total contributions, we are down with our PPNR and as you mentioned, asset growth. And so the total contributions are less. The reason it got highlighted this quarter is historically, we ran a very over the last few years, I would say, a formal process, like a grant giving process.

Speaker 1

And so the money would all leave in relatively a short period of time. Because we're doing it in that second quarter, the feedback we got in the communities was it'd be more impactful, easier for them to budget, etcetera, if we brought it up. So we just accelerated the timing. That's the only thing different than what we did other than reduce the total amount. But again, yes, it is something the Board looks at as part of our overall budgeting process.

Speaker 1

I hope I answered your question, Jeff.

Speaker 6

Yes. I get the pull forward. That's okay. I mean year over year, it's a similar amount. I'm just thinking about just generally the approach.

Speaker 6

So you touched on it. I guess the part of do you look at further expense rationalizations this year? Or at this point, that's be something that you've got your budgeted investments, and right now, you're not looking for any other cuts on the expense side?

Speaker 1

So we did our staffing reductions last year, if you'll recall, and I think we're pretty comfortable with where we're now being selective in our hiring. Our expense run rate is down, and Dave can talk about that. And yes, there was some noise in the quarter regarding the personnel related expenses and the charitable contributions and sponsorships. But our overall run rate continues to trend positively. So, do want to talk about the run rate?

Speaker 2

Yes. And there were some comments in the prepared remarks around this. But obviously, we have noise pretty much every year, Q4 and Q1 related to salaries and related benefits. And then we had the charitable contributions noise this quarter. So yes, sequential quarter basis, we're down almost 1%.

Speaker 2

Setting aside salaries and related benefits and also charitable contributions. And then for that same breakout, we're down almost 3% from a year ago. So I think that's evidence that we're managing it pretty tightly in the areas that are not affected by some of the noise we had this quarter. One thing I just wanted to add on charitable contributions, we break that out separately in our financials. And that number will be down this year optically, but some of that has been reallocated to community sponsorships, which is rolled into other expense.

Speaker 2

And so it's a similar level of community commitment that we've had in recent years, just kind of hitting two buckets this year rather than primarily in contributions alone.

Speaker 3

Our next question comes from David Feaster at Raymond James.

Speaker 7

You know, you we we touched a bit on the broader uncertainty, you know, just given the trade wars and all that. And, obviously, you've got more tailwinds for originations just given the new hires that you you've alluded to. But I'm just hoping you could touch a bit on the pulse of your clients in this backdrop. Are you are you hearing any concerns, or are you anticipating maybe, you know, slower pull through of the pipelines or maybe more potential fallout or anything? Just kinda curious what you're hearing from from your clients today and their willingness to continue to invest just given the uncertainty.

Speaker 1

I would say the one segment by and large, David, we're not hearing a ton. But we're not in a big manufacturing base or other areas that are going to be more immediately. We don't have a lot of ag in our market and do even less of what there is. So we're not impacted by some of the noise you hear out there and nor our clients. The one area we are hearing it is with the nonprofits, less around the trade wars than fiscal economic policy or general politics about what kind of funding is going to be available as pass through from federal through state to local.

Speaker 1

And so I think the biggest fear we have, and we do bank a lot of nonprofits, albeit more on the deposit than the credit side, is fear over funding levels.

Speaker 6

Okay.

Speaker 7

Maybe on the other side, like, I mean, you guys are obviously very conservative and take a very conservative approach, disciplined approach to credit as your reputation and historical asset quality speaks for itself. But just given the uncertainty in trade wars, have you changed any or adjusted any underwriting criteria or anything like that? Or has your approach to credit management or risk ratings changed at all? Just kinda curious what's your thinking.

Speaker 1

No. It hasn't. And I would say this just like when we talk about commercial real estate in San Francisco, you know, for the last couple of years. We're not a really very policy driven credit underwriter. We're a very traditional underwriter, sources of repayment, risks to mitigants, who the borrower is, the loan purpose.

Speaker 1

And so we're always going to ask those questions. So when you have times of uncertainty, again, it's a decline in leasing activity in San Francisco and rental rates or potential revenue streams from a company that might be impacted by tariffs and or trade wars, that's all going to be part of the discussion. But what it doesn't fundamentally change is how are we going to look at debt service coverage or leverage appetite on C and I borrowers. So it's really more of an approach, and that approach is easily adaptable to changes in the market. Does that answer your Yes.

Speaker 7

That makes sense. And then and maybe just last one for me. Given the strong core deposit growth you've seen, the slower loan growth, we've seen liquidity build a bit this quarter. I know it's not burning a hole in your pocket, but I'm curious your plans to deploy that. Is there any interest in securities purchases?

Speaker 7

Or you'd rather just wait to support loan growth or even just let it sit in cash here and take the interest rates on that?

Speaker 2

So we accelerated some securities purchases late in Q1, and that's continued into Q2. But maybe more big picture, we had, as you noted, strong deposit growth. We had an accelerating loan pipeline as well. And then we also typically have, like many banks, we have tax related outflows in April. So we monitoring all those things before pulling the trigger on some securities purchases, which we ultimately did late in March, and then that's also continued in April.

Speaker 2

And so relative to the yield on cash today, those securities purchases have been 40 to 50 basis points above that in March and April to give you a sense of how we're deploying that at higher rates.

Speaker 6

Our

Speaker 3

next question comes from Timothy Coffey at Janney Montgomery Scott. Please unmute yourself using the mute on the bottom tab of the Zoom screen.

Speaker 1

We will

Speaker 3

move on to the next question, which is coming from Adam Butler at Piper Sandler.

Speaker 8

Hey, everyone. This is Adam on for Matthew Clark. Good morning, Adam. Good morning. Just to get a better idea of some of the potential NIM expansion we could be seeing going forward.

Speaker 8

On the asset side, I appreciated the commentary in the release that loans are coming on higher than the portfolio yield, and you guys have a decent proportion of loans that are fixed and repricing upward. I'm just curious, in a flat rate environment, how you see loan yields trending up? And if we got a 25 bps cut, how you'd expect to see loan yields move as well in a quarter. And do you guys have a spot rate on loans in March?

Speaker 2

Give me a moment on that and come back to you. Let me answer the question, then I can give you that level. But so the statistic we've tended to share is the year over year monthly change in loan yields. So that delta is not much different this quarter compared to last quarter, which is to say, in March 2026, we expect the monthly loan yield to be 25 or 30 basis points higher than where it was in March 2025. That's just natural repricing in the loan book for the reasons you cited.

Speaker 2

There's obviously some noise that can impact that on quarterly basis. And that assumption, of course, includes a flat balance sheet, reinvesting everything back into the same product and so things like that. Of course, got to get the prepayment speeds correct and positive and negative impacts and non accruals can affect that as well. So it comes with a fair number of caveats, but that's the that gives you a flavor for how things could progress over the next year. Only about 7% of our loans are floating and freely floating.

Speaker 2

So the short answer is there's not a huge impact to NIM from that perspective. I mean it's noticeable. I think this quarter was worth a couple of basis points. So that gives you a sense of the potential impact there. In this quarter, we had a 30 basis point average decline in the Fed funds rate.

Speaker 2

So that's a little more than your 25 question, but that's a

Speaker 4

good number to work off of.

Speaker 8

Okay. That's helpful. And then most of my other questions have been asked and answered. But I guess, the credit side of things, I know that you guys historically have a very low loss rate. This quarter was kind of a one off situation.

Speaker 8

But I'm just curious on your go forward outlook. Are there any loans that or any credits that you're watching more closely? Do you think charge offs should trend much lower? I'm just curious how you're thinking about future charge offs going forward.

Speaker 1

So if you put it in different buckets, if you look at some of the CRE loans that we've talked about that are in on nonaccrual, we didn't have any change this quarter. No worsening, but no flat in terms of our expectations. So no change there. As I mentioned earlier, the two we downgraded, unrelated and both expect to be profitable this year. If you look at our credit portfolio overall, loans we consider graded, so watch or worse, That total bucket is the lowest it's been since the third quarter of twenty twenty three.

Speaker 1

So we're always gonna have things move in and out when two loans outside move into substandard. It's reportable. You're gonna see those numbers, but we really aren't seeing any deterioration in the overall portfolio. And actually, behind all this noise, continue to have quite a few upgrades. So I think that's I would leave it there.

Speaker 2

Adam, I'll just say the March monthly loan yield, very close to the quarterly average. The number I have may not have all the tax adjustments. I'm reluctant to give you a specific number, but it's pretty much right on top of where we work for the loans where we work for the quarter, excuse me. And that's a monthly rate that wouldn't include the impact of fundings that happened late in March. So it's not a spot rate.

Speaker 3

Our next question comes from Timothy Coffey at Janney Montgomery Scott. Please go ahead.

Speaker 9

Good morning, gentlemen. Thanks for the opportunity to ask a question.

Speaker 1

Hello, Mr. Coffey.

Speaker 9

I'm good. Apologies for the last

Speaker 1

bit on the Q and A.

Speaker 9

The somebody hit the fire alarm in my office. I decided not to unmute while

Speaker 1

I going So

Speaker 9

Tim, I heard you earlier talking about lack of exposure to ag and that's mostly true, right? But you do have exposure to wine, maybe wine adjacent businesses. Are you can you tell us kinda what you're hearing from those clients and any concerns you might have about that industry?

Speaker 1

Yeah. Sure. I'll I'll defer on the wine specifically to Massocca, Tim. She's also an expert as a credit administrator in that area. So

Speaker 10

So, yes, we do have wine clients in the portfolio, but it's really, I want to say, about 3% or less of our total in terms of exposure. And while, you know, we do have loans to some of their vineyards and tasting room manufacturing facilities, we really underwrite to the cash flow of the winery business. And so we're not, you know, we're not underwriting to harvest and we don't have crop lines and we don't lend to growers directly. Having said that, as I'm sure you've seen and read, that industry is facing some challenges. And so we are staying really close to our borrowers.

Speaker 10

Majority of it is secured, you know, with low loan to values. And yes, and we don't have in terms of any exposure to exporters, you know, I think majority of our wineries, if any, have very little kind of export markets that they sell to. So we continue to stay very close to those clients, stay on top of what's going on. And for the most part, we are not seeing major issues in that portfolio.

Speaker 9

Okay, great. Thank you. That's fantastic color. I appreciate that. And Tim, in terms of business development, it seems like maybe a couple of quarters ago, we started to see some meaningful outflows of clients away from the acquired banks in 2023 to some of the more local banks like yourselves.

Speaker 9

Is that I mean, given the commentary you made about a third of the new deposits coming from new clients, Is that trend continuing where we're starting to see clients move out of the bigger institutions into the small service oriented institutions?

Speaker 1

Yes. I do think that's an overall trend. I do think it's somewhat episodic. I think there were some people, and this is just my color, and so, you know, just answering your question, to the best of my ability. I think there was some outflow earlier on where you have people just say, I don't wanna be part of, you know, a much larger organization coming out of, you know, some of the ones that failed.

Speaker 1

Then you had a group that said, well, let's just see what this is going to be like. And maybe in that is the inertia group. Nothing changes. And then after they have that experience at a, you know, money center institution, maybe that's not the, the care and the level of attention that that I grew accustomed to. But if they're dealing with the same people, you know, good bankers can can help smooth that over for their clients.

Speaker 1

So then you had people start to leave, and then you kinda have this and I think that's where we're at is the people we've continued to bring over, although it's been, you know, more one offs than maybe some of our peers that took big teams. Now we're seeing the benefit of them talking to those clients and saying, I have a lovely home for you, as you said, a smaller community oriented institution. So there's no question that's playing into the demand, but it's really hard to predict kind of the cyclicality, if you will, of that. Does that answer your question?

Speaker 9

Yes, it does. It absolutely does. I appreciate that. And then a final question for Dave. As we started looking at the investment portfolio and as a percentage of average assets, clearly, it's come down year over year, right?

Speaker 9

But is it getting to I think it's about a third now of average assets. Is that the right level you think for the current environment? Or do you think you can even get smaller and perhaps build up some more cash?

Speaker 2

We saw the portfolio to be lower with the idea, of course, trying to allocate more of that

Speaker 6

part of the

Speaker 2

balance sheet to loans. So that's the name of the game. But if you're asking about the trade off between cash and securities, you know, setting aside any loan growth, I think we have the right amount of both these days. So I don't see any need to stockpile cash. I think we're pretty on top of looking ahead with forecasting tools where we think we're going to be, where the needs are, when the growth is going come in loans and deposits from a seasonal perspective and trying to match cash to that and having any excess go into securities at some premium yield wise relative to what we're making in cash.

Speaker 2

Does that answer your question?

Speaker 9

It does. Sounds like you've got the right amount of liquidity for what you see in front of you.

Speaker 2

Absolutely. We lots of cash flow coming off the securities portfolio. I think the remainder of the year, we have $150,000,000 That rolls off at 3.5%. So you're seeing cash today, you're picking up 90 basis points there. And we have, I think, a little over $200,000,000 coming next year.

Speaker 2

So the securities portfolio can definitely fund the loan growth we're expecting. And again, any excesses will be dropped back into securities.

Speaker 1

Thanks, Tim.

Speaker 3

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

Speaker 1

Thank you again, everybody, for the questions, for listening in. And, as always, if you need further information, Dave and I are both available to you. Look forward to talking to next quarter.

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Earnings Conference Call
Bank of Marin Bancorp Q1 2025
00:00 / 00:00