Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Q1 ended March 31, 2021. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen only mode. After the call, we will conduct a question and answer session. This conference call is being recorded on April 19, 2021.
Joining us on the call today are Russ Colombo, President and CEO Tani Guertin, Executive Vice President, Chief Financial Officer Tim Myers, Executive Vice President, Chief Operating Officer and Beth Reisman, Executive Vice President, Chief Credit Officer. Our earnings press release, along with the merger announcement press release and investor presentation, which we issued this morning, can be found on our Investor Relations page atbankofmorin.com, where this call is also being webcast. Before we get started, I want to emphasize that the discussion on call is based on information we know as of today, Monday, April 19, 2021, 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 disclosures in our earnings press release and merger announcement presentation as well as our SEC filings.
Following our prepared remarks, Russ, Tani, Tim and Beth will be available to answer your questions. And now, I'd like to turn the call over to Russ Colombo.
Thank you, Andrea. Good morning. I'd like to begin the call by addressing the exciting news we announced in a press release this morning that Bank of Marin is acquiring American Riverbank. This combination will be a great fit for us in many ways. It brings together 2 exceptional institutions that share complementary values and disciplined fundamentals, which allows us to expand our franchise by delivering the same legendary service on a regional scale.
After I discuss first quarter results, Tim, Tanya and I will walk through the details of the deal for Bank of America opened 2021 on solid footing, generating 1st quarter results that included strong credit quality and net income that exceeded results from the prior quarter and the Q1 of 2020. Net income was $8,900,000 with diluted earnings per share of $0.66 Given improved economic forecast, our model indicated that we were over reserved. So during the quarter, we made the decision to reverse provisions for credit losses on loans and unfunded loan commitments. We reversed $2,900,000 from the allowance for credit losses on loans and $590,000 of allowance for credit losses on unfunded loan commitments. As I noted, our credit quality remains strong.
Non accrual loans totaled $9,200,000 or 0.43 percent of the loan portfolio. And classified loans increased slightly from the previous quarter to $26,400,000 While we continue to accommodate payment relief requests, The portion of our loan portfolio requiring assistance has declined to 11 relationships comprised of 17 loans, totaling $59,000,000 as of April 15. We grew our loan portfolio modestly from the prior quarter and 15% from a year ago to a total of $2,100,000,000 at March 31. This growth reflected our ongoing focus on new loan origination as well as our continued participation in the SBA's Paycheck Protection Program. During the quarter, We funded $25,000,000 in non CCP loans, primarily in the Marin and Napa markets.
In addition, we have accepted over 1200 applications for new PPP loans totaling 139,000,000 with $127,000,000 funded as of April 15. The forgiveness portion of the program is accelerating. Of the $177,000,000 in loan forgiveness requests by our original PPP borrowers, 81% of those applications totaling 130,000,000 have been submitted to the SBA with 91,000,000 forgiven and no applications denied. Total deposits grew $152,000,000 to $2,700,000,000 with non interest bearing deposits comprising 54 total deposits and the average cost of deposits at just 7 basis points. Our total risk based capital ratio of 15.7% at March 31 was well above well capitalized regulatory requirements.
Our balance sheet is strong and stands to benefit from any increases in interest rates. During the quarter, we took advantage of market opportunities to invest excess cash and reduce high cost debt. As advised on our last earnings call, We redeemed a $2,800,000 subordinated debenture on March 15, 2021, which resulted in accelerated discount accretion of $1,300,000 This redemption reduced taxic equivalent net interest margin by 18 basis points for the quarter. It was also the primary driver of our increased efficiency ratio, which would have otherwise been 58.92%. Finally, due to our continued profitability, Our Board of Directors declared a cash dividend of $0.23 per share on April 16, 2021.
This represents the 64th Consecutive quarterly dividend paid by Bank of Maroon Bancorp. You will find more detail on our Q1 performance in our earnings press release. In summary, our strong credit quality, the strength of our relationship banking business model and the resiliency of our customer base position the bank for success as the economic outlook improves for the markets we serve. Now let's talk about the deal. With this merger, Bank of Marin becomes a $4,000,000,000 bank well positioned to emerge the preeminent business bank serving Northern California.
The combined company will be one of the largest Northern California based community banks by market capitalization. Growing in size and scale across the Greater Bay Area and Sacramento region will allow us to increase efficiency, Managed costs and helped offset the challenges brought on by a low interest rate environment across 2 highly attractive markets. Bank of Marin and American Riverbank have very similar disciplined credit and risk management culture as well as loan and deposit strategy, which allows for a seamless integration of business models. These two organizations share a commitment to Exceptional customer service and dedication to our local communities that can be amplified on a regional scale. In the merger, each share of American River Bancshares will be exchanged from 0.575 of one share of Bank of Marin Bancorp.
The deal generates 14% accretion to 2022 earnings on a fully phased in basis and over 15% internal rate of return. The earn back period On 4% tangible book value dilution is 3.5 years. Tangible common equity at closing is projected to be 10.8 All regulatory capital ratios, including total risk based capital of 17.3 percent We'll be well above well capitalized level. Bank of Marin Bancorp will invite 2 American River Directors to join both its Board both its bank and holding company Board. Now let me turn it over to Tim to give you a snapshot of American River Bank and the Greater Sacramento Markets.
Thank you, Russ. Slide 4 gives an overview of American River Bank. Founded in 1983 and headquartered in Rancho Cordova, California, they have 10 full service branches providing business banking services in Sacramento, Amador, Sonoma and Placer Counties. Like Bank of Marin, American River is focused on building relationships and maintaining strong credit discipline. In addition to deep expertise in commercial real estate, they also lend to small businesses, wholesalers and manufacturers, professionals and property managers.
Their loan portfolio is an excellent complement to our own. Importantly, also like Bank of America, American River's credit quality and capital ratios are strong. Their like minded focus on disciplined management, relationship banking and community commitment was very appealing to us. Slide 5 gives you some regional highlights. Projected population and household income growth expectations by 2026 are exceeding national estimates, providing long term economic benefits to the Greater Sacramento region.
In the last year, the region has been ranked the top migration destination people looking to relocate, driven in part by newly remote workers seeking a more affordable lifestyle while still accessible to everything Northern California has to offer. There is ample existing office space throughout the region as well as new development activity in Sacramento's downtown and midtown areas. There has been more than $6,000,000,000 invested in new projects since the opening of the Golden One Center, the home of the Sacramento Kings in 2016. Finally, with universities such as UC Davis, Sacramento State and University of the Pacific nearby, The region is an increasingly attractive market for companies seeking educated young professionals. Slide 6 profiles the combined bank's branch network, markets of operations and most recent financial highlights.
I will now turn the call over to Toni to share the financial aspects of the transaction in greater detail.
Thank you, Jim, and good morning. In modeling Bank of Marin and American Riverbank future earnings, we use Conventis analyst for the remainder of 2021 2022 and applied a growth rate of 5% thereafter. Savings on American River expenses are expected to be 35% or roughly $6,100,000 phased in over a 6 month period. Estimated transaction expenses amount to $9,500,000 after tax or about 7.1 percent of aggregate deal value. And we value the core deposit intangibles at 50 basis points.
Slide 7 provides details of fair market value adjustments, which I will summarize by saying that we believe American River's allowance for credit losses on loans is a good indicator of both the credit component of the market valuation and the effective allowances for credit losses under the CECL framework. In addition, we applied a positive interest rate mark of $5,200,000 on loans, a $1,500,000 reduction to accumulated other comprehensive income and a $1,300,000 write up on the owned property in Healdsburg. These marks are amortized, accreted and depreciated through earnings going forward. Turning to Slide 8, you can see the fixed exchange ratio of 0.575 shares of BMRC stock issued for each AMRD common share outstanding, which results in pro form a ownership of approximately 20% for American River shareholders. Assuming 100 percent stock consideration with vested options to be cashed out at closing, This translates to a transaction value of $134,500,000 as of April 16, when BMRC shares closed at $39.06 that represents $22.46 per share of AMRB stock.
Key pricing multiples are 1.75 times tangible book value, 17 times consensus 2022 earnings and a core deposit premium of 7.9%. Prior to signing the merger agreement, we completed due diligence, including an extensive review of American River's loan portfolio and We anticipate a closing date in the Q3 of this year. We very much look forward to merging our 2 companies, not only because the combination presents such attractive returns at 14% earnings accretion and internal rate of return over 15%, but also because our institutions are so well aligned. This partnership will allow us to build on the excellent that American River has established in the Greater Sacramento and Amador market. And now to wrap up our prepared remarks, I'll turn the call back over to Russ.
Thank you, Tani. I'd again like to reiterate how excited we are to team up with American Riverbank. It's a great strategic fit for all of us for the reasons that we have discussed today. And we want to welcome American River Bank clients and employees to Bank of Merihan. Strategic acquisition has always been part of our growth plan.
The bank now has an opportunity to grow assets, acquire talent, expand our footprint and build infrastructure across a diversified geography. Greater scale will increase efficiencies and spread our costs over a larger base. As you know, Bank of Marin is experienced in acquisition. We have successfully integrated multiple banks and we will draw on that experience and expertise to execute a seamless integration process with the American River team. Now in our 31st year, we have built one of the industry's best banking franchises and established a culture of consistency.
We remain dedicated to delivering exceptional customer service and creating shareholder value. I am proud of the disciplined approach that has propelled Bank of Marin to continued growth and new opportunities. We are certainly looking forward to more success in the year ahead. The future is bright. Thank you for your time this morning.
And now we will open it up Your question. Thank
Our first question comes from Jeff Rulis with D. A. Davidson, you may proceed with your question.
Thanks. Good morning and congrats on the deal.
Thank you. Good morning, Jeff.
I had a couple of questions on the margin. One is just the legacy. So, Toni, do you have a core margin? I appreciate the impact on the sub debt, but I guess also exclusive of PPP, do you have a number sequential on the core margin linked quarter?
So as it turns out, the Q1 Margin was only affected by 1 basis point from PPP because we had Some significant amount of forgiveness in the Q1. So by accelerating The some of the outstanding fees on the PPP that brought the PPP Contribution in line with what we were getting from the other interest earning assets.
Got it. Okay. So it's and I don't know what the net impact was in Q4. I guess I could go back and check, but was that material?
Q4
was impacted by 13 basis points from PPP and That's because we didn't have the forgiveness that we had this quarter.
30 basis point A drag, so far so. Okay. With those, all right, we can back into the course. I appreciate that. And I guess as it relates to margin and the deal, I just wanted to American River carrying a slightly higher margin.
Just your Thought on as you is there any sort of what you do with the funding side of that bank that may On net, would you just assume a positive contribution to the margin or how should we think about as you put the 2 together? And maybe, sorry, with the sub debt impact going forward, any kind of Ballpark of where you think core kind of sells in? Thanks.
Yeah, I hesitate to give a number, but I think you hit the 2 drivers on the head that the margin is going to improve because of the sub debt Redemption, but we do have some tailwinds from the yields on the AMRV portfolio.
We looked at the portfolio quite extensively. And Interestingly enough, it mirrors our portfolio quite significantly. I'd say, in many cases, actually, their yields are a little higher than ours. And so that's going to have a positive impact as we go forward. I think on the funding side, the loan to deposit ratio It's a bit lower than ours, so a lot of excess liquidity and that's an opportunity maybe for Total reduction in their costs in terms of the deposit side, because they're a little bit higher than us, not tremendously, but a little bit higher than us.
As I look forward, I say, well, it's going to improve our margins a little bit and we can bring down the funding costs a bit. So all positive.
Okay. Thank you. And my other question was on the 35% cost saves is a considerable number and maybe speaks to the, As you said, the similarities are culturally similar companies, so there's a comfort there. And I guess The majority of those cost saves, is that you guys I didn't hear a branch consolidation Expectation or is the bulk of that coming from senior management? Where do you expect the expenses to come out of?
We do well, Jeff, we do have 2 overlaps. We have they have a branch in Santa Rosa, as do we, and we have a branch in Healdsburg, as do we. So there's going to be cost savings from that because of that because of those 2 offices. And The 35%, we worked those numbers pretty hard and we really took a hard look at all employees and about job responsibilities and people and We're very confident about that number. Let's just put it that way, very confident.
Okay. So it'll be Some branch the branch savings and then this back office cleanup, but again. Okay. All right. I'll stay back.
Thank you. On the administrative side, there's always going to be cost
Our next question comes from David Feaster with Raymond James. You may proceed with your question.
Hey, good morning everybody. Congrats on the deal.
Good morning,
David. I just wanted to start on the growth front. Could you just talk about how the pipeline It's trending as we're heading into the 2nd quarter. Kind of how your conversations with clients are going And just whether you're still expecting a resurgence in growth in the back half of the year as we start hopefully getting some drawdowns on C and I and Just any commentary on the growth front? And then whether there's anything in American River that you're expecting maybe that you need to run off or Just any color there would be helpful.
I'm going to turn this over to Tim, but I will start by just saying that We don't really look at anything for runoff on their portfolio. We like I said, we look at 80% of it And like what we saw, so I'm not anticipating trying to drive any business out of the bank. It's all good from our perspective. So And with that, I'll let Tim talk about pipelines and about growth expectations as we go forward. Sure.
Thanks, Russ. The pipeline is definitely improving and we're seeing an Improvement in attitude or outlook for the year, but I would say that's also very muted by reality, meaning I think We sense the optimism, but the loan demand is still relatively weak. And so we're out calling to the extent we can Virtually where necessary and we're seeing more requests, but quarter over quarter just like commitments are still down about $8,000,000 on utilization. That was a contributing factor to our non PPP loan declines in the quarter. And we still get a fair good amount of payoffs due to people applying cash and we still see a deleveraging attitude going on.
So While we're getting more optimistic conversations, the pipeline is getting bigger. The time that it takes to do that is still pretty protracted. So We are more optimistic, but I couldn't tell you the time within the year of when that's all going to come together.
Yes. And then maybe just could you talk on the Sonoma market? The deal really accelerates your growth there. You guys were explaining that expanding there yourself. Just curious your plans for that market, trends you're seeing there and just overall thoughts on Sonoma.
Yes, I'll jump in. This is Tim. I think we know their lending team up there. They're well respected. We had Transitioned a new manager into that group on our side last year with a heavy emphasis on the wine industry And we're excited about the traction they're getting.
So we're very excited to combine their group there with ours. Those folks have been in the market a long time. We can benefit from their expertise and contacts and we're pretty optimistic now with this combination on how we can grow in Santa Rosa, Sonoma County overall, but Particularly at Northern Sonoma County market. And then again with the overlap in Healdsburg, with Healdsburg our branch being there to support that wine industry focus, I think that we expect all that to come together and lead to
good growth results for us down the road.
I would just add, in discussions with Dave Ritchie, American River's CEO, he was really excited about the growth opportunities that they're seeing in Sonoma County. He talked about that as much as he did Sacramento. I mean, it was he had they're seeing a really Strong pipeline. So that's all good from our perspective. So not only Sacramento, but seeing phenomenal growth out of this deal too.
Yes, I agree. I think that's pretty exciting. And then just maybe a bit higher level, I guess, as you become a larger bank, Both of your fee income contributions are in that mid to high single digits, around 7%. Just curious your thoughts on Additional fee income opportunities. I know you guys you talked about bringing on some of the waived fees, but are there any other fee income lines or cross So opportunities to maybe get that fee income contribution a bit higher as you become a larger institution?
Yes. First of all, we waived we Basically, we have fee waivers that started back in April of 2020 and we just took them off In the last month or so. And so you're going to see a resurgence of fees, which you hadn't Seen during the last year, overdraft fees, ATMGs, things like that, early CD withdrawal penalties. So we didn't we waived every one of those fees during the last year. So that had a pretty negative impact in terms of our fee income.
That will improve. I think as you become a regional bank, we will have opportunities too from the standpoint of Other fee income, whether it be entities potentially expanding our wealth management offerings into Sacramento, There is you just the scale brings opportunities and being in that market. And I what I'm excited about in that market is that There has been over the last year, maybe the pandemic has accelerated, there's been a surge of growth in the market, which has come from the Bay Area. It's much more affordable. For those of you who aren't necessarily familiar with the geography, It's kind of halfway between the Bay Area and Lake Tahoe.
And so the opportunities for recreation are abundant and At a lower cost and for housing and business growth is picking up. So I think it's a great place to be because we just look at it from the standpoint of younger adults Moving to that market, which gives you all kinds of opportunities in the future to grow your not only the bank, but fee income and lots of different opportunities. So we're excited about that.
Terrific. Thank you.
Our next question comes from Bob Shone from Piper Sandler. You may proceed with your question.
Good morning. How are you doing? Good morning. How are you? Good.
Maybe if we could start on Potential for obviously, to start off, the integration is forefront right here. But knowing that strategic M and A is part of the company's growth strategy. What's kind of the bank's willingness to consider M and A once the integration is complete? And if so, is further Penetration of the Sacramento market where you want to be? Or is there kind of other markets that you would consider?
It certainly opens up
the valley to us. Sacramento, If there are other opportunities, certainly we're going to be open to them, whether it's in Sacramento or slightly north or south of that. Once you get into the market, you want to grow and find opportunities to grow the bank. And so we're certainly open to Additional opportunities, we haven't quite integrated this one yet. It's exciting to be there because it's certainly in the past, we've been focused strictly on the Bay Area and There are lots of opportunities in Sacramento Valley, San Joaquin Valley that will open themselves up to us since we're there.
Okay. Awesome. And then maybe turning to the legacy bank. In terms of the reserve, Given the improvement in economic forecast, if we get kind of towards pre pandemic levels, you kind of have an estimation on how much lower the reserve percentage can go excluding PPP, Considering if credit metrics remain stable?
So let me ask our Chief Credit Officer who is sitting here, Beth Reisman, To answer that question for you.
Good morning. We adopted Good morning. Which is based on our forecast, primarily we are affected by the California unemployment rate. So as The economy continued to improve, we would assume that our reserve would also diminish. However, I can't really give an estimate.
I don't think that would be appropriate at this point in time.
Okay. And then maybe last one for me. Looking at expenses, outside of the reversal front funding commitments, Was there anything more one time in nature in that number this quarter? I'm just trying to get a sense of kind of a good run rate going forward.
Yes, not too much. I mean, we have the seasonal sort of the normal seasonal stuff associated with the 401 matching that gets bumped up in the Q1 because of the payment of bonuses And then also the acceleration of stock vesting when people get closer to their retirement eligibility. And then a few items in the Q1 that were delayed from 2020 because of the pandemic, a few audits and that sort of thing, but not significant.
Our next question comes
Just wanted to start off with a strategy question, Russ. This deal makes perfect sense in terms of the expansion, especially with what's going on with the Bay Area. I don't it's just the movement of some people from there to Sacramento. I know that's been highly written about in models and newspapers. Just wondering, number 1, if this deal is something that you would have considered, call it a year and a half ago, before we had a lot of trends change with the pandemic?
And number 2, how, If at all, it's just the overall strategy when you think about Banco Marin and just growth in operations and everything else?
First one, a year and a half ago, we had always stated that we were most interested in opportunities in the Bay Area. And so that was our focus. And as those opportunities started to diminish, Certainly, Sacramento was always on our mind, but something that's in market is probably More front and center. This became it became clear to us that Sacramento was a place that we should consider because of Exactly what you just said. The growth opportunities, the kind of migration from the Bay Area up there to Sacramento.
And it's not we're not talking a long way. I mean, it's literally an hour and a half drive from our offices to Sacramento. So this is really from a strategic standpoint, makes All the sense in the world and really gives us that now that open up as a previous question was it really opens up the valley to us Because we're there, we'll have we acquire people who know the market. And that's really important because It's one thing to go and open an office in the Sacramento Valley without the expertise, but buying a bank that Has really good people and I will tell you that, I've been very, very impressed With the people we meet, but not only the people we meet as we've read, as we've gone through the due diligence and sat down and I was one of those people looking at the write ups. They were very strong.
People did a very good job. So we're Impressive the underwriting, impressive the knowledge of the market and that makes a huge difference. So it was an exciting opportunity and so that's why we're there.
Okay. And it sounds like just based on conversations on the call and one of your comments too that This can be a good growth move once I know there's still a lot of moving parts right now and demand is a little bit On the weaker side, just given the environment, but it sounds like all else equal, the growth outlook is probably improved from this transaction when we're looking in 2022. Is that fair?
I think that's fair. I think that's fair. Clearly, when we make an acquisition, We want to not only just acquire that bank, but we also want to then, once we integrate it, grow it. And we're into a new market, which we haven't been. This bank and when you add this bank to ours, The capacity to lend in Sacramento grows dramatically.
And so I think there will be opportunities even With the existing customer base to grow those relationships and if we talk to them about size and certainly the size of transaction that we're willing to do And what they're willing to do, we're different. We're a bit smaller because of capital requirements and things of that nature. So This will be a great opportunity for us to not only to build new relationships, but grow existing ones.
Okay, Great. And then just in terms of the buyback, you had some activity in the quarter. How are you thinking about that in light of the Deal announcement over the next couple of quarters? Well, we still have plenty of capital and as you see The capital after the acquisition is still we have an abundance of it. And So we haven't made any pronouncements or decisions about changing our share repurchase program at this point.
Okay. Thanks, Toni. And just one last one for me. In terms of the security yield In the quarter, I have in my notes that last quarter you benefited a bit from some prepayment penalties. And I'm just wondering if that was a contributor To the quarter's compression or if that was pretty muted last quarter and not a big impact?
No, that actually did contribute to the compression. Do you have a ballpark for about how much? I do, but not at my fingertips. So I'll come back to you on that. Okay.
I just yes, that's fine. All right.
Our next question comes from Tim Coffey with Janney Montgomery Scott. You may proceed with your question.
Thank you. Good morning, everybody.
Good morning, Tim. Good morning, Tim.
I had a question on your results for the quarter to start with. And looking at the PPP loans that you originated during the quarter, you have a percentage of those loans that came from existing clients?
I don't have that in front of me, but it's almost the entirety of that. Okay, great. We've done pretty low volume in both rounds of non customers. Okay. We've simply tied to It was always a decision that we would take care of our clients first.
It's really important that we didn't I mean, We did bring in some in the first round. I think there was 250 something like that of non customers of the bank, But they only were done after we took care of the existing clients because we thought that was really important to do that first, but then we opened it up to others. And Ron, I don't know what the percentages were, but probably similar.
It's actually higher towards our cost per Okay. No, that's fine. And then a couple of questions on the deal. So Russ, Improving the combined loan to deposit ratio, is that going to be a quick fix or do you think that's going to take time?
It will certainly take time Because I think we're running close to 80% there, they're much lower than in the 60s. And so That will certainly take time to fix and that is a loan to van as I think as we come out of this pandemic, That will start to pick up and I think that will help. And also, I think as I was talking to you previously, The fact that we can go to existing clients now of American River and expand relationships, there are things that they did which they had to out participate, Which frankly, we would have done the whole transaction ourselves. We like the deal. They didn't they only did it because of their size.
And so, size in this respect will be Really important for them to be able and us as a combined organization to grow existing relationships. So that will be part of the fix, so to speak. And The other part will be just continuing to drive our commercial banking off.
Okay. And then what tax rate are you using on the merger accounting? Is it your own?
29%.
Great. Thank you very much. And then Russ, not to get too into the weeds on this question, but Do you feel like you're going to need to rebrand the company? Because I can see reasons why you wouldn't, but I can also see reasons why you might consider it. What are your thoughts?
I would say there are reasons why we wouldn't and that there are reasons why we could. Certainly, We're getting a bit far afield from Marin. That was a discussion with the people at American River early on. And while there will be a period of time where we their brand is still as American River Bank, a division not a division of, but a Part of the Bank of Marin, part of Bank of Marin. But there wasn't a tremendous pushback about the name And felt that it would play just fine in Sacramento.
Interestingly enough, they have They have branches in Sonoma County. In America, I'm not great on geography, but I don't think American River runs through Sonoma County. So I think we it remains to be seen long term, but right now our thought is to keep it as During the integration as American River Bank is part of Bank of Marin, but ultimately, you don't get the efficiencies unless you're one name. We've been working really hard to build the brand, the franchise and thoughts are probably that we will keep Thanks for the name of the
organization. Okay, great. Those are my questions. Thank you very much.
Thank you.
It appears we have no more phone questions at this time.
Well, I just want to thank everyone for joining us on the call today. We're very excited about this Acquisition merger between ourselves and American River Bank, we think it's going to open up Many new opportunities for the organization for growth and success. Thank you for your time and we look forward to talking to you again next quarter. Thank you.