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Edited Transcript of BMRC earnings conference call or presentation 22-Jul-19 3:30pm GMT

Q2 2019 Bank of Marin Bancorp Earnings Call

Novato Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Bank of Marin Bancorp earnings conference call or presentation Monday, July 22, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrea Henderson

Bank of Marin Bancorp - Director of Marketing

* Russell A. Colombo

Bank of Marin Bancorp - President, CEO & Director

* Tani Girton

Bank of Marin Bancorp - Executive VP & CFO

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Conference Call Participants

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* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Luke Simeon Wooten

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Andrea Henderson, Bank of Marin Bancorp - Director of Marketing [1]

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Good morning, and thank you for joining Bank of Marin Bancorp's Earnings Call for the Second Quarter Ended June 30, 2019. I am Andrea Henderson, Director of Marketing for Bank of Marin. (Operator Instructions) As a reminder, this conference is being recorded on July 22, 2019.

Joining us on the call today are Russ Colombo, President and CEO; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that the discussion on this call is based on information we know as of today, July 22, 2019, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ

(technical difficulty)

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 and Tani will be available to answer your questions.

And now I'd like to turn the call over to Russ Colombo.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [2]

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Thank you, Andrea. Good morning, and welcome to the call.

Our strong results this quarter once again demonstrate the power of combining consistent credit and expense management with a focus on relationship banking.

The Bay Area economy remained solid with robust levels of new business investment, hiring and overall activity. This is fueling steady loan demand throughout our market. Bank of Marin's commitment to disciplined underwriting enables us to meet that demand while maintaining our pristine credit quality. Now let me walk you through some of the financial highlights for the second quarter. We reported net income of $8.2 million, up from $7.5 million in the first quarter and $7.9 million in the second quarter of 2018.

Diluted earnings per share was $0.60 in the second quarter of 2019 compared to $0.54 last quarter and $0.56 in the same quarter a year ago.

Loans increased to $1.76 billion at June 30, 2019, from $1.72 billion at June 30, 2018. While balances decreased slightly from $1.77 billion as of March 31, 2019, we are seeing a lot of loan activity across our market and the timing of new loans is hard to predict. Additionally, balances were impacted by the successful completion of a large construction project.

We remain disciplined in our deposit strategy, serving our customers' need and providing them a fair return.

Noninterest-bearing deposits totaled 50% of total deposits at June 30 representing one of the strongest deposit franchise -- franchises among our peers.

The cost of deposits increased to 20 basis points in the second quarter of 2019 compared to 18 basis points in the first quarter.

Total deposits were down $76.6 million in the second quarter to $2.1 billion primarily due to normal cash fluctuations of our large business customers. Additionally, we sold $16.1 million to deposit networks, which enables the bank to provide our customers with higher-yielding deposit offering.

Strong credit quality remains one of the cornerstones of our consistent performance. Nonaccrual loans represented only 0.03% of the bank's loan portfolio at June 30, 2019, and there were no provisions for loan losses in the quarter. Recognizing the bank's continued solid performance, our Board of Directors declared a $0.02 increase in the cash dividend to $0.21 per share payable on August 9, 2019. This represents a 10% increase and a 35% payout ratio. In addition, the Board approves the extension of our $25 million share repurchase program through February 2020.

The bank is also executing on 2 significant initiatives to align with technology trends impacting the financial services industry. First, on June 17, we began the transition to a new digital banking platform that offers enhanced features and functionality. Our local teams are working closely with our customers to make this transition as smooth as possible; second, after evaluating customer need, market size and reduced foot traffic, we have decided to close our Petaluma Downtown Branch in August. The majority of Downtown customers have already moved much of their business to our remaining -- 2 remaining Petaluma branches.

Now let me turn it over to Tani for additional insights on our financial results.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [3]

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Thank you, Russ. Good morning. As Russ said, we delivered another quarter of strong performance with earnings of $8.2 million. Earnings increased $756,000 over the first quarter, which included the typical seasonality of higher personnel cost as well as the underwriting cost of new bank-owned life insurance policies, or BOLI.

Second quarter and year-to-date earnings reflect steady growth over 2018 as a result of loan growth, higher interest rates and expense control.

Net interest income of $23.8 million was virtually flat versus the first quarter and the tax-equivalent net interest margin increased 2 basis points to 4.04%, thanks to a higher percentage of loans in the earning asset mix.

Comparing to 2018, net interest income increased $947,000 over the second quarter and $2.9 million over the first half as earning asset balances and yields increased with smaller increases in the cost of funding. The 2019 tax-equivalent net interest margin increased 12 and 14 basis points from the respective quarterly and semiannual periods in 2018 for the same reason.

Noninterest income of $2.3 million in the second quarter of 2019 compared to $1.8 million in the prior quarter and $2.2 million in the same quarter a year ago. The increase of $503,000 from the prior quarter was primarily due to $283,000 in BOLI underwriting cost expense in the first quarter and gains on the sales of investment securities in the second quarter. The BOLI costs and lower deposit network income in 2019 drove $435,000 decline in year-to-date noninterest income versus 2018.

Noninterest expense of $14.9 million in the second quarter decreased $612,000 from the first quarter as salary and benefit costs from -- fell from higher levels typical in the first part of the year. Additionally, the first quarter included a $129,000 provision for losses on off-balance sheet commitments.

The increase in noninterest expense from the second quarter of 2018 was primarily related to annual merit increases and additional personnel, partially offset by $268,000 less in professional fees mostly attributable to our core processing contract renegotiation in 2018.

Year-to-date, total noninterest expense was down slightly from 2018 as higher salaries and benefits were more than offset by the absence of conversion costs from the Bank of Napa acquisition and core processor contract renegotiation fees.

In second quarter, the bank delivered an efficiency ratio of 57.23%, a return on assets of 1.32% and a return on equity of 10.26%. Our investment in the future starts with our people. The bank's consistent performance is a testament to their ability to serve our customers and execute on strategic priority while delivering solid results for shareholders.

Now Russ would like to share some closing comments.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [4]

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Thank you, Tani. We have successfully executed on our organic growth strategy as reflected by our performance in the second quarter. Our strong results led the Board to declare a $0.02 increase in the cash dividend, our 57th consecutive quarterly dividend, to deliver additional value to our shareholders. With noninterest-bearing at or near -- deposits at or near 50% for the sixth straight quarter, the bank is a leader in the industry.

Looking ahead, with our focus on investing in key -- in talent in key markets like San Francisco, Santa Rosa and Walnut Creek and our ongoing work to develop future leaders through our commercial banking academy, we are confident we have the right people in place to respond to the steady loan demand we are seeing and meet our customers' needs.

Overall, we remain optimistic about operating conditions. Our experience through multiple credit cycles reminds us that it is always prudent to be prepared for potential shifts in the economy that could affect our client. But we do not see any notable signs of weakness in our market and we believe the bank is well positioned for a strong second half of 2019.

Thank you for your time this morning. And now, we will open it up to answer any of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Luke Wooten of KBW.

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Luke Simeon Wooten, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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Just wanted to start on loan growth. I saw that you guys had the construction payoff this quarter. How do you guys feel about that market going forward for the rest of 2019?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [3]

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The construction market?

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Luke Simeon Wooten, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4]

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Yes, just the construction loan. Do you feel a softening in construction loan market? Or do you feel that, that was kind of a onetime in nature types or portfolio or so?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [5]

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No. We -- that was paid off because they completed the project and they got long-term insurance company financing. So we continue to see a lot of activity in the construction market, and we have some real good projects that we're looking at but it's kind of the problem. But construction activity, you have a buildup in balances over time and then, 18 to 24 months after, they typically get refinanced out in some kind of longer-term financing and get paid off. And so that was just 1 project. A pretty large project for us that completed -- was completed and they refinanced out, and so we got paid off, which is fine. That's actually the way it is supposed to work.

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Luke Simeon Wooten, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [6]

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Yes. It's a good problem to have. And just kind of switching over to the expense side for a second. Just on the new digital platform, just kind of wanted to see how that's kind of trending. And how we should look at expenses for that going forward for the rest of the year.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [7]

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Yes. So we expect a reduction of approximately $295,000 per quarter beginning in Q3 as we're no longer running the 2 digital platforms in parallel. The new platform replaces 6 different solutions with a single solution supporting both consumers and businesses and that's providing more intuitive interface for the customers. And also in the future, will allow us quicker time to market on new functionality in the future.

So hopefully, you'll see a decline starting this quarter and we're moving forward on the digital platform. And I guess that's -- does that answer your question?

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Luke Simeon Wooten, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [8]

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Yes. No, that's perfect. That's super helpful. And just kind of offsetting that -- well, actually just on the Petaluma branch closing. We should see the full benefit of that in 4Q, correct, because it's closing in August?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [9]

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Well, we'll see the benefit of reduced staffing needs. However, the lease isn't up until early next year, February. So we still have lease payments that we make during that time.

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Operator [10]

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Our next question comes from Jeff Rulis of D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Russ, you've talked about the outlook for the second half of the year and the payoffs occur. I guess as you assess your growth potential and sometimes you can't really control the payoff portion. But kind of looking at loan growth for the year, you're flat year-to-date on balances. How do you think that shapes up in terms of a net growth perspective? Or maybe offer some insight if maybe not specific to that but just kind of the puts and takes of the back half of the year.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [12]

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The -- interestingly enough, Jeff, our pipeline right now is more than twice than it was at this time last year. We see really good opportunities in a number of markets, including the East Bay and up in Santa Rosa and San Francisco, so I mean -- and Napa. And we've completed our -- for the most part, we've completed most of the hiring for those offices, including we've added a couple of people over Walnut Creek [and Oakland] office that we opened there. So the benefit of that, it definitely takes time to bring on new people, but we've definitely seen a much more robust pipeline than we had a year ago.

So how does that translate into numbers? I can't tell you that because sometimes these things take longer to get booked than others. But I'm feeling pretty good about the loan portfolio and the opportunities for growth for the next 6 months.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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Right. So pipeline is 2x year-over-year, and you feel like the staffing is in place to capture any additional growth. So sounds like a positive message, I suppose.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [14]

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It's definitely positive. I feel very good about our commercial banking offices. They're all really -- the addition of some new people as well as the ones that have been here, we're starting to see -- we're seeing a lot of great activity.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [15]

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Great. And then maybe one for Tani. Just on the margin, I think the bank's still asset-sensitive. And I look at this quarter and if you strip out kind of the non-PCI accretion, actually suggested a stronger core margin. How do you see that kind of trending, particularly if we were to see a rate cut or 2 the balance of the year?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [16]

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So about half of our loan portfolio is fixed and half adjustable, but only about 13% is floating based on the primary. So what -- if rates change roughly about 20% of the portfolio, we'll reprice within a 12-month period. But one thing that I think will serve us well in light of the expectations that the Fed might lower rates at the end of this month is that over the past year, we've extended the durations on both the loan and investment portfolios moderately and that should help our margin to hold in well in a falling rate environment.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [17]

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Got you. So it sounds like that you're protecting that margin despite the, I guess, the gap sensitivity. You think it's a pretty stable outlook, all things being equal?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [18]

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Well, of course, it's really tough to know. There is some debate as to whether the Fed's going to go 25 or 50 basis points. And depending on how fast they move, there is a little bit of room on the deposit side. But the key to all of this is what happens to the longer end of the yield curve. And it -- if the yield curve steepens when the Fed cuts rate then that could have a positive impact on new loans coming onto the balance sheet.

As of right now, the new loans that are coming onto the balance sheet continue to come on average rates higher than the existing portfolio of rates.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [19]

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Great. And just one last question on that branch closure. We talked about potential cost savings, but is there any exit disposals, kind of upfront cost on the closure of that, that you've anticipated?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [20]

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So there is some small numbers in terms of the accelerated depreciation in lease expense that we booked in the second quarter and a little more in the third quarter but they're really not material.

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Operator [21]

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Our next question comes from Tim O'Brien, Sandler O'Neill + Partners.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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All right, Tani. I'm going to ask you these again because I didn't catch the numbers. You said the percentage of loans that reprice 12-month window was the floating rate that repriced. What was that percentage you gave?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [23]

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So floating rate is 13%. There's also some adjustable rates, so when you add the total of maturities, adjustable rates and floaters, it's about 20% within 12 months.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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20% in 12 months. Great. And then you also gave a deposit number for deposits that moved off-balance sheet to like CDARS or other networks. What was the dollar amount of that you gave?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [25]

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$16 million increase from last quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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$16 million increase. Okay. Great. And then regarding the sizable payoff on the construction loan, was that a TIC loan construction project?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [27]

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No, no, no. That was actually over the East Bay. It was a multifamily project in the East Bay that built out. It's built beautifully.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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Got it. So what's sizable for you? What was the payoff on that, Russ?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [29]

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Yes. It was $11 million.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [30]

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And do you have any other projects that are pending completion here in the second half that are on track and on schedule to complete the scheduled payoffs that should hit payoffs?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [31]

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We have that -- yes, we have it -- we have projects coming through all the time. Nothing that big. So while things may payoff, they're not -- that was kind of a large one that, relatively from the portfolio perspective, was a large one which paid off at an impact. But I don't see anything having that kind of an effect on the payoffs in the second half.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [32]

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And then last question, CECL thoughts, plans in light of the FASB ruling this week for you guys.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [33]

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Yes. We're -- well, that ruling won't impact us. We're in great shape on our CECL preparations. So our system is in place. We've been collecting data for several years now and we're running parallel now and will be through the end of the year.

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Operator [34]

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(Operator Instructions) Our next question comes from Matthew Clark, Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [35]

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On expenses, Tani, you quantified the relief you expect on the systems -- from running to old systems. Can you help us also with the savings you expect from the branch closure when that lease is up next year?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [36]

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I don't have those numbers exactly. I can come back to all of you after the call with that.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [37]

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Okay. And then just thinking through what rates have done here in short order, can you give us a sense for the asset side of things and what you're seeing in terms of new securities? What you might be buying in the rates at which you're getting? And then same thing on new business within the loan portfolio, I know you said it was above the current portfolio but just wanted to get a better sense for the rate.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [38]

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So we've actually been selling securities out of the securities portfolio to bolster our cash position as some of our deposits went off-balance sheet to the deposit networks and also just to accommodate the large fluctuation in cash balances that come from some of our large customers' cash flows.

So we haven't been purchasing a lot recently. We've been more selling, but earlier in the year and when rates were higher, we were actually -- as I said, we did some lengthening. We purchased some agency securities that had a little bit longer duration tied to commercial projects. And so those have yield maintenance provisions that help to keep the rates high on the investment portfolio for a longer period of time.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [39]

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Okay. And then just on the lending side of things, you're slightly above the portfolio. Is that through the fence now or...

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [40]

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Oh, the -- so yes, there's no real change in our loan pricing trends. But as I said before, the new loans that we're actually seeing coming into the portfolio on average are at a higher rate than the existing portfolio rate.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [41]

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Okay. And then just on capital, Russ, you guys have been pretty proactive with the dividend and share repurchase. Can you update us on M&A prospects these days, what you're seeing if anything?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [42]

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There's -- in the Bay Area, we've been pretty clear about our desires to be around the Bay Area. There is some activity that you've seen. We all know that Heritage is buying Presidio. Other than that, it's been pretty quiet in the market. We're still very interested in acquiring banks. But if that doesn't happen, we remain focused on growing [organic rate]. You can't -- you can never time or plan for an acquisition. It's just they happen when they happen and banks are sold. They are not bought. So we continue to keep our feelings out there. But right now, there's nothing going on for us. We're focused on filling out our offices, growing through organic growth like Walnut Creek and looking at new potential situations ultimately in terms of organic growth.

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Operator [43]

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We have no further questions via the phone lines. I'll turn the call back over to our speakers.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [44]

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Okay. I want to thank you all for attending -- for being on the call this morning. And we all look forward to talking to you again next quarter. If you have any questions ever, you can certainly call either Tani or myself. Thank you so much.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [45]

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Thank you.

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Operator [46]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you, and have a good day.