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Edited Transcript of BMRC earnings conference call or presentation 23-Jan-17 4:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Bank of Marin Bancorp Earnings Call

Novato Sep 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Bank of Marin Bancorp earnings conference call or presentation Monday, January 23, 2017 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jarrod Gerhardt

Bank of Marin Bancorp - SVP and Director of Marketing

* Russ Colombo

Bank of Marin Bancorp - President and CEO

* Tani Girton

Bank of Marin Bancorp - CFO

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Conference Call Participants

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* Jeff Rulis

D.A. Davidson & Co. - Analyst

* Jackie Boland

Keefe, Bruyette & Woods, Inc. - Analyst

* Tim Coffey

FIG Partners, LLC - Analyst

* Matthew Clark

Piper Jaffray - Analyst

* Tim O'Brien

Sandler O'Neill & Partners - Analyst

* Don Worthington

Raymond James & Associates, Inc. - Analyst

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Presentation

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Jarrod Gerhardt, Bank of Marin Bancorp - SVP and Director of Marketing [1]

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Good morning, and thank you for joining us for Bank of Marin Bancorp's earnings call for fourth quarter and year-end at December 31, 2016. My name is Jarrod Gerhardt, I'm Senior Vice President and Director of Marketing for Bank of Marin.

(Caller Instructions)

As a reminder, this conference is being recorded on January 23, 2017. Presenting this morning will be Russ Colombo, President and CEO, and Tani Girton, Chief Financial Officer. You may access the information discussed from this press release which went over the wire at 5:00 AM Pacific Time this morning, and on our website at BankOfMarin.com, where this call is also being webcast.

Before I get started, I want to emphasize that the discussion you hear on this call is based on information we know as of today, January 23, 2017, and may contain forward-looking statements that involve risks and uncertainty. 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 the earnings press release we issued earlier this morning, as well as Bank of Marin Bancorp's SEC filings. Following the prepared remarks our team will be available for questions, and now I'd like to turn the call over to Russ Colombo.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [2]

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Thank you, Jarrod. Good morning, welcome to the call. I'd like to welcome Piper Jaffray, who has initiated coverage of the Bank last week, and I'd also like to mention that today, January 23, is the 27th anniversary of the beginning of Bank of Marin.

We're pleased to review our highlights with you for the fourth quarter, and for the year. Let's start with some highlights. The Bank generated record earnings of $23.1 million for 2016. That's an increase of 25% from last year's $18.4 million.

2016 benefited from higher earning assets, a large loan recovery, and higher gains on pay offs of purchased credit impaired loans. The Bank earned $5.7 million in the fourth quarter of 2016, compared to $7 million in the third quarter, when the large loan recovery occurred. Quarterly earnings were up 15% over the fourth quarter of 2015.

Gross loans increased $35 million, and totaled $1.487 billion at year-end. Loan originations increased steadily each quarter, finishing the year with $62 million in originations in the fourth quarter, and $192 million for the year. Loan pay outs of $158 million for the year were down $11 million from 2015, and primarily were the result of property sales, cash repayments, and successful completion of projects.

Total deposits grew 2.6% year-over-year to $1.773 billion, from $1.728 billion the previous year. Non-interest bearing deposits grew by $47 million, and make up 46% of total deposits. Our success in deposit gathering has kept the Bank's cost of funds best in class.

Over the course of the year, we continued to build our team, including a number of strategic client-facing hires. They are already contributing to Bank of Marin's bottom line and positioning us for future growth.

Our credit culture has always been a huge part of our success. Not only were non-accruals still extremely low at 0.01% of the loan portfolio at year-end, but we also resolved several problem loans this year, which positively impacted the loan portfolio, and earnings.

Diluted earnings per share were $0.93 in the fourth quarter of 2016, compared to $1.14 in the prior quarter, and $0.81 in the same quarter a year ago. Diluted earnings per share were $3.78 for 2016, compared to $3.04 in 2015.

Our Board of Directors has declared a quarterly cash dividend of $0.27 per share. This is the 47th consecutive dividend paid by the Bank.

When you combine that with a significant increase in stock price, 2016 turned out to be a tremendous year for our shareholders. Now let me turn it over to Tani for additional insights about our financial results.

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

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Thank you, Russ, and good morning, everyone. I'm happy to be reporting on another earnings record for Bank of Marin. Again, I think that it's important to acknowledge the team effort and discipline reflected in this latest success.

Fourth-quarter net interest income was $18 million compared to $19.4 million in the prior quarter, and $17.2 million in the same quarter of 2015. For the year, net interest income totaled $73.2 million, compared to $67.2 million in 2015. The higher earning assets, large loan recovery, and gains on pay offs of PCI loans that Russ mentioned earlier are all reflected in these numbers.

The same factors affected net interest margin, with lower cash balances partially offsetting the decline from 4.05% in the third quarter to 3.78% in the fourth quarter. Lower average rates on loans and investment securities tempered the year-over-year improvement from 3.83% in 2015, to 3.91% in 2016. The Bank recorded a $300,000 reversal of loan loss provision in the fourth quarter, and $1.85 million for the year. The $1.55 million reversal in the third quarter was largely related to the loan recovery.

The loan loss reserve at year end was 1.04% of total loans, which is deemed appropriate, given our excellent credit metrics. Non-interest income of $2.5 million increased over the prior quarter, primarily due to a $347,000 special dividend from the Federal Home Loan Bank. For the year, non-interest income of $9.2 million was on par with last year.

We continue to maintain our expense discipline. Noninterest expense of $47.7 million for the year was up 1.6% from 2015, owing mostly to annual merit increases and additional staff.

Key metrics such as our 57.9% efficiency ratio, 1.15% return on assets, and 10.23% return on equity are at superior levels, in spite of current interest rate, competitive, and regulatory environment. This places us as a leader among our peers.

Our loan to deposit ratio was 83.9% at December 31, 2016, and we have plenty of liquidity and capital to support more growth in the coming years. Now back to you, Russ, for some closing comments on 2016, and a look at where the Bank is headed in 2017.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [4]

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Thank you, Tani. 2016 was a record year. We talked about the earnings as an obvious highlight. Clearly, that was a successful Bank-wide effort.

We've also mentioned new hires, especially in commercial banking, as another win for us this year. The hiring market in the Bay Area is always competitive, but we picked up a number of high quality commercial bankers in key markets, including Sonoma and Alameda County. In addition, we've added a number of marquee clients in 2016. These successes energize our staff, and keep us focused on new client acquisitions. It also shows the market that the Bank is well situated for growth.

As we look ahead to 2017, there are many uncertainties in the market, from interest rates and corporate taxes to general economic growth. Despite these conditions, we believe we are well-positioned for whatever might arise. This stems from our diligent risk management, which enables us to focus our attention on strategic issues. This may include acquisitions, as we actively look for opportunities.

We remain committed to organic growth, to fuel the Bank's success. Growth opportunities will also likely include opening new branches and commercial banking offices in 2017. Success in this business is a function of constantly looking for opportunities. Thank you for your time this morning, and now we would like to 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 the line of Jeff Rulis from D.A. Davidson.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [2]

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Looks like the originations on loans continued to be pretty strong, and that net number obviously impacted by the pay off activity. And you had -- pay-offs were down 5% to 10% year over year. Any sense that trend will continue, as in payoff activity will continue to slow in the coming year? Ideas on how that may trend?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [3]

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Jeff, it's a good question. When we do our planning for the year, we plan for about 10% of our portfolio to turn over, so that means originations have to be 10% plus in order to grow, and there's a lot of reasons why things get paid off. The good news, is most of it, the vast majority, over 80%, around 80% of the payoffs are because of completion of construction projects, or sale of properties, or things like that. Not because they are refinancing to go elsewhere, but they just continue to have -- or cash repayments.

So from a planning standpoint, we always look to the next year as in order to grow the Bank's portfolio, we need 10% to stay even, and an additional 5% or 6% or 7%, whatever the planning number is, of growth. And it's continued that level for a number of years. If interest rates rise, I think that may slow somewhat, but we continue to plan for that number.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [4]

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Got it. Okay, and a similar question on maybe visibility on potential future recoveries. You have brought in -- have had net recoveries for a while now, and just wanted to see about -- is that balance shrinking and maybe outlook for 2017?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [5]

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I don't think there's anything left to recover. The non performing are so low that we look forward to the next year, there's not any big recoveries that we anticipate. This one that happened this year, we have been working on for a long time, and we knew eventually we would collect it. It just was a matter of time, and it happened in the third quarter. But I don't, there's not a lot of non performing assets, they are a very small number.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [6]

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Got it, okay. And then maybe one last one for Tani. Just on the FDIC insurance line, and you mentioned the lower assumptions on that level. I wanted to see if Q4 was there a true-up, and then when we get into the run rate in Q1, maybe lower than previous quarters, but greater than Q4's level? Any color on that?

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

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Yes, I think you hit the nail on the head. And that assessment, as you know, is based on the size of the balance sheet and the new rules that they adopted for institutions under $10 billion went into effect, when the FDIC reserve ratio reached 1.15% on June 30, so that's exactly correct, Jeff.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [8]

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Okay, so in Q1 we can see -- expect to see that go back up versus Q4, but lower than perhaps it had been the bulk of 2016?

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Tani Girton, Bank of Marin Bancorp - CFO [9]

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Correct.

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Jeff Rulis, D.A. Davidson & Co. - Analyst [10]

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Okay, great. Thank you.

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Operator [11]

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Our next question comes from the line of Jackie Boland with KBW.

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Jackie Boland, Keefe, Bruyette & Woods, Inc. - Analyst [12]

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Just sticking to expenses. Just as you think about some of the new branches and loan offices you might open next year, and some of the hirings you anticipate doing, how do you see that playing out, and how much of your infrastructure can already, is already ready for that growth, in terms of expenses?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [13]

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Well in terms of the infrastructure, in terms of additional regional-type people or anything, we don't have to add anyone for that. It's adding to the existing infrastructure. If we talk about the retail side, if we added branches in Sonoma County, let's say, those would get folded under our existing regional manager And we are looking at specific locations in Sonoma that we would like to be, and we haven't been able to penetrate so far. So we would potentially open branches.

But it won't change the infrastructure at all. It's just a matter of finding locations, releases, and the TIs that we have to do in the space, and then the people for those branches.

On the commercial banking side, if we open a commercial banking office, it would just, it's just a matter of lease space, it's not necessarily when we open it, it wouldn't be a full branch, it would be a loan production office, and it's about hiring the team, and so those are the costs.

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Jackie Boland, Keefe, Bruyette & Woods, Inc. - Analyst [14]

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Okay, and are you currently in any ongoing discussions with teams? Just generally, if you can comment.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [15]

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Generally speaking, we're always out looking for new talent, and we've talked to a number of potential people that we could hire.

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Jackie Boland, Keefe, Bruyette & Woods, Inc. - Analyst [16]

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Okay. And then touching base on M&A, you mentioned that you were acquisitive. Just given valuation increases that we've seen over the last couple of months, has that impacted any of your conversations, or changed the pace of them?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [17]

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I would say it certainly puts us in a better position, because our stock price, haven't checked it today, but it's up between 35%, 40%, depending upon when you looked at it. And when you're talking about that high of an increase in value, obviously that's going to make our currency more valuable in any discussion with another bank. So it makes our ability to make an acquisition, puts us in a better position.

Now, there's a lot of banks that have had that same run up. Maybe our run up has been a little bit higher, but the potential acquirers have all seen a nice run up in stock prices.

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

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If I could just add a little bit to that, I think the recent run up too is a move from a level where there hadn't been change in quite a while, and I think the fact that there is movement now is a good thing. And I think when you have the right combination at the right price, there is room for even further improvement of the stock, as economies of scale and synergies come into play. And those are all benefits we anticipate the shareholders of a selling Company would take into consideration.

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Jackie Boland, Keefe, Bruyette & Woods, Inc. - Analyst [19]

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So would you say, and understanding we're coming off the holidays, that the pace of discussions you've been having has increased at all, since this has come to be?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [20]

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We're always out there talking to potential acquisition targets. There is not, and we've defined it very well. It's basically the Bay Area. So we always talk to the banks in the Bay Area, to see if there's interest.

And as you know, banks aren't bought, they are sold. So while we continue to talk to banks and talk about opportunities, they have to make a fundamental decision that they want to sell the Bank. And so those discussions are continuing, they are ongoing. We talk to a lot of people, but nothing new to report.

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Jackie Boland, Keefe, Bruyette & Woods, Inc. - Analyst [21]

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Okay, well thank you for the update. I'll step back now.

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Operator [22]

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Our next question comes from the line of Tim Coffey with FIG Partners.

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Tim Coffey, FIG Partners, LLC - Analyst [23]

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Russ, getting back to the outlook for higher interest rates, and the impact on the business, now you've talked about the pay off activity, and what you would think from that, but what about the loan origination side? Do you think higher rates might make it a little bit harder?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [24]

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I don't think so, because we are not talking about huge interest rate increases. We've modeled in our models another couple of increases this year. And that benefits us because we're asset sensitive.

So and I don't, the business activity in the Bay Area is pretty strong, and despite, even if we have interest rate increases, I don't think that's going to put a damper on the business activity in this area, so we're still pretty bullish about loan opportunities. That being said there have been a lot of pay-offs, and most of the pay-offs are because people don't, and historically haven't been looking at any great other opportunities, other investment opportunities.

So with rates going up, I think that we won't see as much pay-offs from just cash, and I don't think we'll see the pressure of refinancing from elsewhere. I'm pretty confident that this year will be another strong year for loan acquisition. In other words, the real driver of that is having good people, and I'm pretty excited about the fact that we've added a lot of really good people in different key markets. So as I look forward to this year, I'm confident that we're going to still continue to see good loan generation.

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Tim Coffey, FIG Partners, LLC - Analyst [25]

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Okay, and looking at deposit costs, given the quality of your deposits and the loan deposit ratio, would you expect your deposit costs to have a lag from higher rates?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [26]

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Yes, I would expect that. Historically, in a rising interest rate environment, we've been able to widen our net interest margin, and our deposit costs have not risen as rapidly as our net interest income. So yes, the answer is yes, I would expect they would lag.

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Tim Coffey, FIG Partners, LLC - Analyst [27]

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Okay. And then on the pace of provisioning going forward, are you satisfied with where the reserves are right now, or would you be looking to reserve more on new loan production?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [28]

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No, we don't, we are pretty satisfied with where we are. Remember that when you're provisioning, the big challenge is you have to -- you are provisioning based on historical results. The good news for us is that we haven't had many loan losses.

The difficult thing is to justify loan provisioning, when you haven't had loan losses. So we're very satisfied where we are.

We're very comfortable that's adequate, more than adequate, especially given our historical -- and you could look back many years. And I think our biggest loss year ever was around $5.5 million of loan losses back in the 2009 time frame. So I'm pretty confident our loan portfolio is adequately reserved, with our loan loss provisions.

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Tim Coffey, FIG Partners, LLC - Analyst [29]

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Okay, and just one final question on non-interest bearing deposits in the quarter. Was that a seasonal decline?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [30]

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Yes, it does bounce around between 40%, mid to high 40%s. We've got a number of very large depositors that had some seasonal swings, and it's pretty hard to predict. There's nothing to be read into the fact that it went from 48% to 46%, other than a couple of the large depositors, who keep many millions of dollars in the Bank were on a down cycle, but that does recover over time.

There's probably a half a dozen accounts that have fairly large swings in their deposits, some of which are, as an example contractors who do a lot of municipal work, and you'll have a big project. A lot of money will come in from the municipalities that they are doing the work for, they start doing the work, and the deposits decline. So it's hard to predict, but it's nothing to be read negative into that.

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Tim Coffey, FIG Partners, LLC - Analyst [31]

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Okay, great. Thank you. Those were my questions.

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Operator [32]

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Our next question comes from the line of Matthew Clark with Piper Jaffrey.

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Matthew Clark, Piper Jaffray - Analyst [33]

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Maybe just first, honing in on the margin. Curious where you're putting new production on, in the quarter. I'm sure things may have changed in the second half of the quarter, but just trying to put your core loan yield, of what I estimate to be about 437, excluding purchase accounting, trying to put that into context relative to the new production.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [34]

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I'm not sure I understand the question frankly, sorry, Matthew.

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Matthew Clark, Piper Jaffray - Analyst [35]

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I'm just wondering what's the weighted average rate on new production in the quarter? On new loans and new production.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [36]

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Hang on a second, let me see if I can find that number. Yes, it's pretty consistent. If you look back quarter to quarter, the yield on new loan production mirrors the previous quarter; the low 4s.

And it's slightly down from last year, but very little. That's the thing we are seeing, that our loan margins have stabilized. They were not seeing much erosion, and hopefully with interest rates increasing, potentially more this year, we'll start to see a widening of that margin.

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Matthew Clark, Piper Jaffray - Analyst [37]

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Okay, so I guess maybe there's an area, 20 to 30 basis points of pressure there, but like you said, higher rates and obviously higher reinvestment rates in the securities portfolio should call for a relatively stable margin going forward?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [38]

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Yes, margin hasn't expanded it's pretty straight, pretty solid in 2016. 2015 was slightly higher, but 2016 was pretty solid. There wasn't much decline in that.

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Tani Girton, Bank of Marin Bancorp - CFO [39]

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Yes, I think Matthew, just as a point of reference, if you look at the net interest margin year-over-year, the change in the average margin that was attributable to rates on loans, not accounting for accretion and PCI payoff and so on, was about 6 basis points. So as Russ said, not a lot of change.

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Matthew Clark, Piper Jaffray - Analyst [40]

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Got it. And then just on the noninterest expense run rate, if you look back to last year, I think there was a seasonal uptick. Should we expect something similar this year in the first quarter?

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Tani Girton, Bank of Marin Bancorp - CFO [41]

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Yes, seasonal uptick in the first quarter on noninterest expense is something you can expect, because that's when we start putting merit increases into effect, and that thing. We also -- the tax rates start to refresh at the beginning of the year.

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Matthew Clark, Piper Jaffray - Analyst [42]

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Okay, and then just on the C&I portfolio, balance was down a little bit linked quarter, bouncing around. Same level. Could you just talk to line utilization, and whether or not we can expect net growth in C&I lending this year?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [43]

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Yes, utilization has been pretty consistent on the C&I portfolio of around 44% to 45%, and you could have a year-end, slight decline just in utilization, but that's pretty consistent. We've seen a pretty solid number over both the last couple of years in the mid 40%s, 43%, 44%, 45%, in that range. That hasn't changed recently. Now if you go back a few years, it ran closer to 50%, but it's running in that number right now.

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Matthew Clark, Piper Jaffray - Analyst [44]

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Okay, and can you talk to maybe just your customer base in general, and whether or not you're hearing them all of a sudden maybe more optimistic? More willing to expand, just given the change in administration here?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [45]

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Well change in administration, it's hard to gauge that yet, but our customer base, we operate in a pretty strong economy. Here in Marin, unemployment is under 3%. So I think that people have taken a wait and see about how the economy will respond to the new administration.

It's really too early to make any guesses about how that's going to affect our customer base. But I don't see anyone panicking certainly, or thinking this is going to be a terrible time. It's just wait and see. We'll see what happens, and we'll see what the new administration does, and see how the effective business lines go.

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Matthew Clark, Piper Jaffray - Analyst [46]

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Okay. Great. And then maybe just one last one, if I may. M&A, just can you remind me, you said the Bay Area, but can you remind us what your M&A criteria is in terms of the size of targets, and the earn back of tangible book dilution, earnings accretion, et cetera?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [47]

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Well, first of all the target, if we were to do M&A, it would be somewhere in the Bay Area, right? And we aren't planning to jump markets to the Valley or to Southern California, or to another state. That's just not where we want to go, so that's number one.

The tangible book earn back, I think everyone looks at five years as the outside limit, but I'm not sure that's as important these days as internal rate of return, and we always, we like to have a target of 15%, who knows if that's exactly where we are, but 15% is the initial target. You want accretion, certainly you don't want to do deals that aren't accretive. So in your first full year, you'd love to see accretion for your shareholders, and whatever that number is, it depends on the size of the deal I suppose, and the size.

We're a $2 billion bank and so it's highly unlikely we'll acquire another $2 billion bank, but I think anything up into the $1 billion or slightly over $1 billion is certainly in the ballpark for us, and we think that we have a very good story to tell historically, and going forward, and we think we would be a great partner for a lot of banks in the Bay Area, because I think when you -- definitely when you add our Bank with a number of others that you can pick out, it's one plus one equals three. Because I really do believe that because we've established the discipline and the consistency that we have, if you take another bank and integrate it into our organization, it would really be -- there would be a very successful merger of those two organizations.

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Matthew Clark, Piper Jaffray - Analyst [48]

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Great, thank you.

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Operator [49]

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The next question comes from the line of Tim O'Brien with Sandler O'Neill.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [50]

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Just a couple of follow-up questions. One question, so with the December rate hike, Russ, was there any benefit, did any of your loans reset higher with the December rate hike?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [51]

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Those that are tied to prime certainly do, but you really are not going to see the benefit. It's just been too soon. Over time, you will. We have a lot of floating rate loans, but they are fixed for a period of time, and then they reset when they get to the end of that fixed period.

So it takes time for us to see the real benefit of rate increases. So I think if we see one or two more rate hikes this year, you will see some impact. We'll definitely benefit from higher interest rates at this organization, as you know, because we're asset sensitive. But I think that it's too early to see the real benefit of that in the numbers now.

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Tani Girton, Bank of Marin Bancorp - CFO [52]

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I think the good news on how the curve has responded is that the long rates actually did pop as well, which people were not sure was going to happen. So to the extent that the long end of the yield curve responds when short rates go up, that's going to be a positive for the Bank.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [53]

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Any chance you have that the dollar amount of loans, total loans that actually were impacted by -- that did see a reset from the December rate hike, is it like $40 million, $50 million, $100 million, whatever?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [54]

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I don't know the number for that, Tim.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [55]

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Just thought I'd try. That's okay, and then another question. We talked a little bit about potential for opening another branch or two, particularly in Sonoma County. What's the ideal size, or that you'd like to, square footage wise, that you'd like to see these days, in the new world order perhaps, relative to the size of branch that you've opened in the past, or acquired?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [56]

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I think the ideal is around 2,000 square feet. Pretty small. There's really no need to have -- the old branches used to be massive, and as we have leases come up in existing facilities, we have either tried to give back some space, or even move.

And we've got a lot of examples of that, into locations that are smaller. We did that in Sausalito a couple years ago, where we moved out of our space, which was 3,500 feet, and we went to a space that was under 2,000 feet. And from an efficiency standpoint, that's terrific. You just don't need that much space anymore for branches.

New locations, we're still convinced that locations are important, but traffic isn't obviously isn't as great as it used to be. So you don't have to have a big old branch with 20 people in it, you probably need three people in a branch, or four. And interestingly enough, one of -- our largest branch in our system for deposits is Corte Madera, and it's 2,200 square feet, and that branch is over $220 million in deposits.

So anyway, we have to -- we use that as a model. It's not about how big it is. It's about how good a job we do in that market.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [57]

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You bet, and you mentioned a couple of counties, Sonoma or Alameda County would be of interest. Are there any around the Bay Area counties, say Solano or San Mateo, maybe, or San Francisco, where convenience would make sense to open another small branch?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [58]

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Yes, we're interested certainly in Sonoma County, we're interested in Napa County, Alameda. San Francisco is more of a personal banking market. We aren't looking to open branches there.

Ultimately we would like to be in the South Bay, certainly in the peninsula too. But I would say we're focused more on building out our market in the North Bay, in terms of the retail side and retail branches.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [59]

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Great. And then one last question, as far as payoffs were concerned, it seems like what's hit you the hardest the past few quarters has been more something along the lines of a client that's either had a property, maybe an investor-owned property, or a business that they've sold, so that's been a big factor in the payoffs, as opposed to refis. But we've never really dug in on differentiating how much in payoffs has been attributed to refis, versus those business sales.

So it would seem to me that if most of this is connected with somebody going to cash from a property that's appreciated really nicely in the Bay Area, we wouldn't see much of an impact on refis. That would probably continue as long as the economy stays strong and real estate prices stays strong. But can you give a little bit more color on that, Russ, or will refi volumes slow down, and will we see a slowdown in 2017 due to that?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [60]

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You're always going to get a portion refinanced. We have 22% of our payoffs were related to refinances last year. And some of that might have been, we just decided -- in fact most of it is, we decided not to compete because rates or terms were not acceptable for us, here at Bank of Marin.

That being said, we had $60 million paid off, because of assets being sold. That's a big number, so you have to replace it. It's not a bad thing.

Customer has a property or they have a business, whatever it is and they sell it, and they pay us off. Okay? And hopefully we have a good client so we continue to do business with them.

Then we have a lot of construction activity, and you want those projects to pay off, because --and we had probably 10% of the portfolio in payoffs was construction projects that were completed and sold, and we got paid off. So there is going to be that activity.

And again, all these things, you can't necessarily plan for any one of them. But when you add them all up, it always seems to come out about 10% of the loan portfolio, and so we plan for that, and we just use that as our number going forward, and we have to replace 10% to stay even, and we have to grow on top of that. And I don't think 2017 will be any different, could be surprised, but we still plan exactly the same way.

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Tim O'Brien, Sandler O'Neill & Partners - Analyst [61]

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Thanks a lot.

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Operator [62]

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Our next question comes from the line of Don Worthington from Raymond James.

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Don Worthington, Raymond James & Associates, Inc. - Analyst [63]

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Just one question that maybe hasn't been touched on. Looking at non-interest income, both service charges on deposits and wealth management fees were down around 10% year over year What's your outlook there for those components of noninterest income?

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Russ Colombo, Bank of Marin Bancorp - President and CEO [64]

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Well, I'll talk about wealth management first. Wealth management we do have a lot of trust business, and in 2015, we had a really good year for the fee revenue side. And the reality of that was when one of our customers passes away, we have to, we finalize the trust, and we distribute funds. And frankly, what happened was, we had a couple of very large estates that we had to settle, that we settled in 2015.

From a fee standpoint, that was good for us. From an ongoing business standpoint, not so good. And so we had a decline in fees on wealth management because we settled a couple of estates in 2015. So now you are doing catch up to replace those, because those were two of our biggest accounts, individual accounts that -- we had a couple of deaths that we had to finalize the estate.

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Don Worthington, Raymond James & Associates, Inc. - Analyst [65]

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Okay.

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Tani Girton, Bank of Marin Bancorp - CFO [66]

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Don, on the service charges, service charges aren't intended to be a major component of our revenue stream, and many of our customers who have annualized accounts, where the balances in their accounts offset any of the fees that are incurred, their balances tended to go up in 2016, so there was a greater offset of the fees that they incurred.

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Don Worthington, Raymond James & Associates, Inc. - Analyst [67]

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Okay, great. Thank you.

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Operator [68]

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There are no other questions on the phone at this time.

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Russ Colombo, Bank of Marin Bancorp - President and CEO [69]

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Okay, I would like to thank everyone for joining us this morning, and we will look forward to talking to you again at the end of next quarter. Thank you.

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Tani Girton, Bank of Marin Bancorp - CFO [70]

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Thank you.