Good morning, and thank you for joining Bancorp Marine Bancorp's Earnings Call for the Q3 Ended September 30, 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 October 25, 2021.
Participating on today's call are Russ Colombo, CEO Tim Myers, President and Chief Operating Officer and Tony Guertin, Executive Vice President, Chief Financial Officer. We have also invited Masako Stewart, Executive Vice President and Chief Credit Officer, to join us. Our earnings press release, which will be issued this morning, can be found on our Investor Relations page at bankofmorren.com, where this call is also being webcast. Before we get started, I want to note that we will be discussing some non GAAP financial measures on the call. Please refer to the reconciliation table on Page 3 of the press release for both GAAP and non GAAP measures.
Additionally, the discussion on this call is based on information we know as of Friday, October 22, 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 disclosure in our earnings press release as well as our SEC filings. Following our prepared remarks, Russ, Tim, Connie and Masako will be available to answer your questions. And now, I'd like to turn the call over to Russ Kostel.
Good morning, everyone. Thank you for joining us today on our first earnings call since the completion of our acquisition of American River Bancshares on August 6. Bank of Marin is now an organization with over $4,000,000,000 in assets, along with 31 branches and 8 commercial banking offices across 10 Northern California counties. The integration is progressing smoothly. With the American River team on board, we are positioning the bank for long term growth across a much larger and more diverse footprint.
It is important to note that the Q3 marked the early stages of the integration process and we did take on a substantial portion of the one time merger costs in the quarter, impacting earnings and returns. We reported net income of $5,300,000 and return on average assets of 0 point by 6%. The decreases from 9,300,000 net income and 1.2% ROA in the 2nd quarter largely reflected the absorption of American River operations. Merger related costs reduced 3rd quarter net income by 3,900,000. In addition, a 1,800,000 provision was primarily related to purchased ARB loans without credit deterioration.
In addition to the factors above, return on average equity of 4.99 percent for the 3rd quarter was impacted by approximately 124,000,000 for shares issued in conjunction with the merger. We have provided a reconciliation of GAAP to non GAAP financial measures in the earnings release that illustrates the impact of the merger related one time and conversion period costs on various performance ratios. Excluding those expenses, Year to date ROA and ROE would have been 1.13% and 9.87%, respectively, compared to 1.03 percent and 8.47 percent for the same period in 2020. Despite headwinds associated with the merger and a low interest rate environment, these adjusted results demonstrate the earnings power of the combined company. They also reflect our expanded ability to generate attractive returns for our shareholders.
We continue to maintain one of the best deposit bases in the country. Now, with an expanded team to deliver on our long standing commitment to prudent underwriting and exceptional customer service, we are confident we will continue driving strong returns. Here are additional key highlights. Total loans increased to $2,300,000,000 including just over $410,000,000 in loans acquired in the 3rd quarter. Credit quality remained solid.
Non accrual loans in the Q3 were just $8,400,000 or just 0.36 percent of total loans. Total deposits grew by $1,000,000,000 during the quarter to $3,700,000,000 The increase included nearly 808,000,000 of acquired deposits. Non interest bearing deposits increased by 378,000,000 in the Q3 and comprised 49% of total deposits. The average cost of deposits was just 6 basis points in the Q3, reflecting the low rate environment and the enduring strength of our relationship banking model. Thanks to our consistent profitability, the Board of Directors declared a cash dividend of $0.24 per share.
This is the 66th consecutive quarterly dividend paid by Bank of Marin Bancorp. On October 22, the Board of Directors also approved an amendment to the $25,000,000 Share repurchase program approved on July 16 to increase its size by 32,000,000 to a total of 57,000,000. Finally, as announced on September 24, I will retire as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp on October 31. I couldn't be more delighted that the board has appointed Tim Myers to succeed me. I'm confident that Tim is more than ready to take the helm and deliver continued growth and positive results.
Bank of Marin is in excellent strategic position and on solid ground financially. Our core results for the Q3 affirm this. I'm very proud of the bank we have built over the past 2 decades and the talented team that drives our success. Now, let me hand it over to Tim to give an update of our expanded loan portfolio and the Paycheck Protection Program. Thank you, Russ.
I want to thank Russ for his leadership and support over the years. We have worked very closely in recent months to ensure leadership continuity and a seamless transition.
I wish you all the best in retirement. Now taking a look at our loan portfolio. Excluding PPP loan payoffs and loans acquired from American River, Legacy Bank of Marin's loan portfolio was relatively stable in the Q3. We continue to identify attractive opportunities and actively engaged customers throughout our expanded footprint from the Bay Area to Greater Sacramento. New loan originations in the Q3 totaled nearly $33,000,000 We are confident our combined resources will enable us to drive further growth across 2 of the most attractive metropolitan markets in the State of California.
Elevated competition and loan payoffs continue to impact portfolio growth. Not including PPP, payoffs totaled $50,000,000 in the 3rd quarter compared to $41,000,000 in the year earlier quarter. These payoffs consisted largely of commercial borrower cash pay downs, real estate asset sales and third party refinancing and prices and structures outside of Bank of America's lending appetite. We are taking a disciplined approach, meeting our existing clients' needs and developing new relationships. Over time, we fully expect the power of our larger platform, New markets and added scale to drive increased origination.
Our merger with American River brought together I look forward to leading the combined team as we roll up our sleeves and work hard to ensure a seamless integration. By committing significant resources to this process, we are building a strong foundation to grow our franchise on a regional scale. On the PPP front, Bank of Wren and American River originated a combined total of over 3,500 loans, amounting to more than $550,000,000 in 2 rounds of financing. As of September 30, we had 8.71 loans outstanding, totaling almost $165,000,000 net of $4,200,000 in unrecognized fees and costs. Of the 2,876 PPP loans funded by Bank of Marin, the SBA has forgiven and paid off 2,036 loans for a total of almost $285,000,000 The bank's PPP activity is winding down and we expect to enter 2022 with this program essentially completed.
Our pandemic related payment program is also winding down. As of September 30, we had 2 borrowing relationships with a total of 5 loans totaling approximately $24,000,000 remaining. We monitor the financial situation of these clients closely and expect them to resume payments as the economy continues to gain momentum. With that, I'd like to welcome to the call Misako Stewart, who was promoted to Chief Credit Officer on September 30. She will discuss our key credit metrics.
Thank you, Tim. It's great to join all of you today and best wishes to you, Russ. Credit quality remains strong, as Russ noted, with non accrual loans representing 0.36% of total loans as of September 30, compared to 0.46 percent at June 30 and 0.07 percent a year ago. Classified loans of 19 dollars 12,000,000 from the previous quarter's $30,800,000 despite an overall increase in our portfolio attributable to the American River acquisition and compares to $11,000,000 at September 30, 2020. The allowance for credit losses increased by more than $3,000,000 and was comprised of a $1,800,000 provision primarily related to purchased American River loans without credit deterioration and a $1,500,000 acquisition date allowance established for purchase credit deteriorated loans, which is recorded on our balance sheet.
Other factors contributing to the allowance were portfolio growth from acquired loans, partially offset by an improvement in the underlying economic forecast. For comparison, the Q2 of 2021 included a $920,000 reversal calculated under CECL and the Q3 of 2020 included a $1,300,000 provision for loan losses as determined under the incurred loss methodology due primarily to qualitative factors impacted by the pandemic. There was no provision for credit losses on unfunded commitments in the 3rd quarter compared to a $612,000 reversal in the prior quarter and a $248,000 provision in the Q3 of 2020. Importantly, our credit quality has held firm throughout the year, both before and after the merger and it is solid as we move into late 2021 and prepare for next year. I will now turn the call over to Tani to dig deeper into our financial results.
Thank you, Miss Sacco. First, let me also wish Russ farewell. Your steady leadership has successfully guided Bank of Marin through several acquisitions and multiple business cycles, including the recent challenges imposed by the pandemic. Thank you, Russ. As Russ noted, we reported net income of $5,300,000 in the Q3 of 2021.
Diluted earnings per share of $0.35 compares to $0.71 in the prior quarter and $0.55 in the Q3 of 2020. Net interest income totaled $27,800,000 in the 3rd quarter compared to $24,500,000 in the prior quarter and $24,600,000 a year ago. The $3,200,000 increase from the prior quarter was primarily attributable to the American River position and the increase from a year ago resulted from the acquisition as well as higher PPP fee recognition. We recognized $2,300,000 in PPCC net of costs in the Q3 of 2021 compared to $2,600,000 in the prior quarter and $1,700,000 in the Q3 of 2020. American River contributed higher average loan yields, lower yields on securities, a lower loan to deposit ratio and a lower percentage of non interest bearing deposits to the combined balance sheet, resulting in a tax equivalent net interest margin of 3.15 percent in the 3rd quarter compared to 3.37% in the 2nd quarter.
The decline in year to date tax equivalent net interest margin from 3.61% in 2020 to 3.23 percent in 2021 was primarily due to the prolonged low interest rate environment. Non interest income totaled 3,600,000 in the Q3 of 2021 compared to 2,000,000 the prior quarter and 1,800,000 in the Q3 a year ago. The 1,500,000 increase from the prior quarter and 1,800,000 From the Q3 of 2020 were mostly attributed to the collection of 1,200,000 in benefits on bank owned life insurance policies and increases in fee income from deposit accounts and debit card interchange activity. 3rd quarter non interest expense increased by 7,700,000 to 22,700,000 from 15,000,000 in the Q3 of 2020, primarily due to one time and conversion period costs as well as increased staffing related to the acquisition. Russ shared earlier some of our ratios excluding merger related expenses.
I also like to look at the Efficiency ratio is a good indicator of operating earnings trends because it does not include the impact of the provision for credit losses, which was primarily related to the acquisition this quarter. The reported efficiency ratios were 72.4% for the 3rd quarter, 58.6% for the 2nd quarter and 56.9% for the 3rd quarter last year. Excluding merger related expenses, the efficiency ratio would have been 56% for the 3rd quarter, an improvement from 57.8 percent in the 2nd quarter and 56.9 percent a year ago. All capital ratios were above well capitalized regulatory requirements. The total Risk based capital ratios for Bancorp and Bancomarin were 15% 14.4%, respectively.
Bancorp tangible common equity to tangible assets was 9.1% as September 30, 2021 compared to 10.4% for the prior quarter and 11% a year ago, reflecting the success of our capital management efforts. Under the latest share repurchase program approved on July 16, we repurchased 445,735 shares totaling $15,900,000 in the 3rd quarter, bringing the cumulative total to 967,683 shares $35,200,000 in the 1st 9 months of 2021. As Russ mentioned earlier, the Board of Directors has approved an amendment to increase for current program size by $32,000,000 In summary, we generated strong core net income while closing the largest acquisition and in our history. The integration is underway and early indicators point to a successful realization of the synergies of this combination. With the addition of our American River teammates and new opportunities in the Sacramento market, we are well positioned for success across Northern California's key growth markets.
And now I'd like to turn it back to Russ for closing comments before we open the call for Q and A. Thank you, Johnny. I want
to thank everyone on this call and all of our investors for your interest and support over the years. It's been an honor, to say the least, to lead Bank of Marin and a pleasure to work with all of you. The bank is in great hands with Tim and our strong leadership team. I look forward to staying connected to the bank through my participation on the Board. We appreciate your time this morning and now we will open it up to your questions.
Thank Questions can also be submitted via the webcast Our first question is coming from the line of Jeff Rulis with D. A. Davidson. Please go ahead.
Thanks. Good morning and congrats Russ. It's been a pleasure for the last decade plus getting to know you and all the best in retirement.
Thank you very much, Jeff. Appreciate it.
In terms of to the release, You talk about pricing and structure on some of the maybe some unease on some of the competition of refinancings. I guess, If you could capture where that competition is coming from and second, has that pressure increased Leak quarter, has that been pretty sustained?
Yes, I'll ask Tim Myers to go ahead and answer that question.
Good morning, Jeff. The pressure has been relatively consistent and it's been if you look at year to date particularly Both bank and non bank lenders, I am not going to get into specifics about their terms, but longer term interest only structures, Sub 3% loans and certainly one could argue that a loan at almost any rate is better than cash. But That's a transactional banking approach from a relationship banking approach. We have a lot of other things to consider in that process. But I have not seen that necessarily increase.
There was just a couple of large ones in the last quarter that really made it look more dramatic in terms of a trend line. It's been pretty consistent.
Okay. Got you. Interested in maybe this is for Tani. Just in the Expense run rate, we could clearly pull out the merger cost, but Get a sense for where that would sit with American River on in the 4th quarter for a full quarter, Sort of pre conversion and post conversion, any thoughts about the levels that's a good run rate? Yes,
what I maybe what I would do is remove the acquisition expenses and then compare Q3 to Q2. And remember that there were only 25 days of combined expenses in the Q3. And those expenses would include both the conversion period So the expenses that you would be removing would include the conversion period expenses, which are accrued and spread over the quarter, so a couple more quarters for those expenses, and then also the higher ongoing salary and benefits from the retained personnel. So hopefully that will help. Does that answer your question, Jim?
Yes. Understanding that sort of a guide there is not What you typically provide, so helpful to get some pieces there. Maybe I just last one is On the buyback side, that shows some pretty big commitment, not only the activity in the quarter, but the step up in authorization. We don't want to read too much into that, but I think you guys are pretty focused on integrating American River and making sure that's The focus, but the buyback on the sideline or on the side, I should say, seems like you're pretty committed to that and Does that indicate anything about you'd like to be off the M and A game for at least a short while?
Thanks. Yes, Jeff, it's Russ. No, that does not indicate that we were While on the sidelines on the M and A side, that's kind of a separate deal and frankly speaking, every deal that's getting done these days, I shouldn't say every, but majority is mostly stock, not cash. So, we just feel like we have an excess amount Shares are undervalued and purchasing Bank of Marin stock right now is a good value for us and accretive to earnings for our shareholders. And if an opportunity presented itself, certainly, we would reevaluate the repurchase program.
But Right now, we are interested in continuing to look at M and A opportunities as well as buyback stock.
And if I could add, so really we want to just make sure also that we have runway in that program for when we go into blackout periods, etcetera, so that we don't end up having a pause when we would prefer to be continuing to repurchase under our 10b18 plan. And if I can also correct what I said earlier, it was in the quarter, there were 55 days of ongoing conversion period and retained personnel expenses 25 days in August 30 days in September. Apologies for that.
No. I got you there, Connie. So thanks for the comments. I'll step back.
Thanks, Jeff.
Our next question is coming from the line of David Feaster with Raymond James. Please go ahead.
Hey, good morning. Congrats again Russ on the retirement and Excited to see what's in store under your leadership, Tim.
Thank you, David.
I did just want to start off on maybe some thoughts on growth. Appreciative of the commentary on the competitive landscape and you guys sticking to your standards. But just curious what you're seeing on the horizon, Maybe how demand is trending, what the combined pipeline stands at today and how you think about production and perhaps net growth on a combined basis Now that the deal is closed.
Yes. Thank you, David. It's a good question. I would say, if you look at the trends of how production has progressed over the course of the year. The bigger decline for us has been on the consumer side on a dollar basis.
That was twice the decline in the commercial on a year to date year over year comparison. So we've got some demand issues we're dealing with on the tenant common loan side in San Francisco. But really our focus Is and has always been mainly on the commercial banking side. We are starting to see, I know Russ has mentioned many times, I have said it too, The relationship banking model was a little bit stalled during the pandemic, getting people back out there, getting that engine started Has a little bit a little more delayed than we'd like, but we are seeing good activity, particularly in some of our new markets, which is very encouraging. Our biggest contributor in the last quarter was from our new partners in Sacramento on a regional basis.
So The pipeline is increasing. We never give numbers as you know, but it is increasing. The activity in some of our new offices that were open to rent are just Prior to the pandemic is increasing and so those are all signs that we look to that now that we are back out there, that activity will be get deals, which will be get the production to drive the numbers. So we feel good about where we're at. We're going to continue to invest in ways to further that growth prospect.
Okay. That's great color. Thank you.
And then just wanted to get
a sense maybe on the hiring There has been some disruption in your footprint and just given the strong culture, your relationship focus as well as the larger scale, Whether that's begun resonating and you've seen some more opportunities to hire new talent?
It goes both ways. I mean, People look at disruptions in the market. We certainly, we get targeted when an acquisition gets announced, right, and every Recruiter is looking to talk to the people there telling a different side of the story, but there's no question with some of the hires that we've made Nikki Sloane in her role as Head of Commercial Banking coming from other institutions. We've seen some really nice activity in hiring opportunities and some actual hires and Some ones we are looking forward to making in the near future. So the answer to your question is, yes, I think all those things will play in our favor.
It is a very competitive hiring environment just like it is for loans For the exact same reason, but we feel optimistic right now that the pipeline to hire to get the growth we're looking for are trending in the right direction.
Okay.
That's great. And then maybe just touching briefly on the wine portfolio, just wanted to get a sense of what you're seeing there? How is demand? And maybe a demand perspective in both Napa and Sonoma and then whether there's been any impacts From the drought at all on credit quality or growth or any just what you're hearing from your clients on that?
And we have now so I'll start in reverse order. We have not seen a real credit impact driven by the drought. That industry, obviously, there is some cyclicality there in terms of certain types, Whether there's a glut in the market of supply selling through old inventory, so there's been a lot of factors there beyond just the pandemic. Certainly, people did their fair share of drinking wine and that drove demand and it really helped our customers that were tasting room oriented to shift to a direct consumer model and sell lots of wine online. And so they really battle through that really well.
We are looking at several new opportunities now, but I wouldn't say there is anything notable Trend wise one way or the other in that portfolio right now.
David, I just make an additional comment. In the last 24, 48 hours. We got 8 inches of rain.
There you go. That helps.
I'm not sure, but I was looking outside and the Rain was pouring for the last few days and lost power and everything, I thought, we're in a drought, really? Well, that's great. Let's hope that we are heading out of that Drought situation. Yeah. And one other comment about hiring and it's The pandemic for a relationship bank like ours is very significant because having people at home, when in fact we want them out with their clients, is it it's kind of tough and something that We couldn't wouldn't choose and didn't choose, but people are back to the office now, back seeing clients.
And I think that The last year and a half, we have a fair amount of catching up to do just to make sure we're out there and seeing that. But as Tim said, We're seeing a pickup in the pipeline and that's no coincidence, because people are out there and Getting in front of their clients and taking a look at new opportunities. So I personally am Pretty optimistic and I'm excited about where what the numbers will look like over the next 6 to 12 months. It's I think this is when we're in front of our clients is when our banks shine.
That's great. Thanks everybody. Sure.
And our last question in queue is coming from the line of Timothy Coffey with Janney. Please go ahead.
Great. Thank you. Hey Russ, congratulations on your retirement and glad to see you are still going to be involved with the bank going forward.
Thank you. Thank you Jim. I am excited. I will still be on the board. So I will certainly be around.
Great. Tim, I want to start with you. I want to circle back to one of the questions you had about kind of the activity of your client base. I certainly Your clients are being more active just in the fee income line items, which is good to see. Wondering specifically about kind of your client base that invest in real estate.
Have you seen them become a little bit more active since the summer?
Not to the extent I've heard in the news and maybe some other parts The market we have actually some of that deleveraging that we referenced, which was really double payoffs of loans, which mostly were investor real estate loans was double this year year to date than last year. So I think the activity, the pace of conversations Tim is picking up, The level of interest seems more has more of a sense of urgency, but we haven't really seen out of our client base a big going out and actually executing on transactions. But the goal, as Russ just said, is to be out there talking to them. So when they do, We are in a position to do that deal, but we actually have seen that continued pace of deleveraging by selling properties in the inverse unfortunately. But Again, the pace of interest is picking up, the pipeline is picking up and we expect that to transition at some point in the near future.
Okay, great. And then historically, the company has operated with much less liquidity than you have right now. What's the appetite to become a little more aggressive in allocating that excess liquidity right now?
So Tim, we were pretty active in the Q3 in terms of deploying some of that cash into the investment portfolio. We also We received a significant cash balance from American River in the course of the acquisition. We are still active in early October purchasing securities. So we definitely are working hard to bring those cash balances down. The duration of our investment portfolio continues to be we are also aware that The upward trend in deposit growth may not continue, although we haven't seen it check itself yet, but we are prepared for that if it occurs as well.
Okay, great. Thanks, Donnie. Those are my questions. Thank you very much.
Thanks Tim. Thank you Tim.
We have no further questions over the phone lines at this time.
Okay. Well, my name is Russ Colombo and I just want to thank everyone for your For your time this morning as well as over the last 15 years that I've been CEO, I'd like to say We look forward to talking to you next quarter, but I won't. You'll be talking to the team, but that's me. It's been a pleasure and I really appreciate the support and interest in the bank over the years. So, thank you very much.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.