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Edited Transcript of BMRC earnings conference call or presentation 23-Jul-18 3:30pm GMT

Q2 2018 Bank of Marin Bancorp Earnings Call

Novato Jul 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Bank of Marin Bancorp earnings conference call or presentation Monday, July 23, 2018 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nancy Rinaldi Boatright

Bank of Marin Bancorp - Senior VP & Corporate Secretary, Bank of Marin

* 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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* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

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

* 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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Nancy Rinaldi Boatright, Bank of Marin Bancorp - Senior VP & Corporate Secretary, Bank of Marin [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, 2018. I'm Nancy Boatright, Senior Vice President and Corporate Secretary. (Operator Instructions) As a reminder, this conference is being recorded.

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 23, 2018, 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 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, Nancy. Good morning, and welcome to our call. We delivered excellent results in the second quarter of 2018 that I'm pleased to share with you now. Our net income was $7.9 million with diluted earnings per share of $1.12. Loan originations of $75.8 million were up $20 million over the second quarter of 2017. Activity was well dispersed between commercial banking market, and to a lesser extent, consumer banking as we executed on our organic growth strategy while staying true to our disciplined underwriting standards. Higher yields on loans and investments contributed to an 8 basis point expansion of our net interest margin and a $1 million increase in our net interest income versus last quarter.

Net interest-bearing deposit -- or noninterest-bearing deposits represented 49.5% of deposits, which totaled $2.1 billion at the end of the quarter. The cost of total deposits was 8 basis points for the quarter and is among the lowest in our peer group. Strong credit quality continues to be a hallmark for the bank, with no provision for loan losses or off-balance sheet commitment recorded in the second quarter. Nonaccrual loans again represented just 0.02% of the portfolio at quarter end.

We launched our share repurchase program, which was approved by our Board of Directors in April, and we are once again raising the quarterly cash dividend by $0.01 to $0.32 per share. This represents the 53rd consecutive quarterly dividend paid to our shareholders.

Now let me turn it over to Tani for additional insight 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, and good morning. Our second quarter results clearly reflect the successful execution of our strategy and the strength of our balance sheet. Strong loan growth, low deposit cost, higher net interest income and lower noninterest expenses all point to the potential earnings power of the bank.

Loan balances grew $45.9 million for the second quarter. Originations of $75.8 million exceeded payoffs of $37.3 million, and first and second quarter originations exceeded loans in the first 2 quarters of 2017. Likewise, payoffs in the first 2 quarters of 2018 were lower than what we saw in 2017. Payoffs continue to be concentrated in the sale of assets underlying loans, including the successful completion of a construction project.

Higher average balances of loans, investments and noninterest-bearing deposits, all combined with higher yields across asset classes to produce net interest income of $22.8 million. Reported net interest margin of 3.87% was up 8 basis points from the first quarter and the tax-equivalent margin of 3.92% was up 7 basis points.

Total deposits declined $48.9 million from March 31, primarily due to normal business-related cash fluctuations on the part of several large deposit clients. Additionally, some customers moved their excess liquidity into deposit network time accounts to obtain higher interest rates while maintaining their relationship with the bank. A small number of account holders that were focused solely on obtaining the highest rates in the marketplace moved to other institutions.

Our efficiency ratio of 57.9% was down from 66.6% last quarter and 61.9% a year ago. These ratios reflect noninterest expenses of $14.5 million, $16.1 million and $12.6 million for those respective periods.

We completed our core processing contract renegotiation and expect to see savings over the life of the 5-year agreement. Contract negotiation fees declined from $750,000 in Q1 to $300,000 in the second quarter and we don't anticipate any further charges this year. Salary and benefits expense was down from the first quarter as employees met retirement eligibility requirements for stock-based compensation in the first quarter. Additionally, higher loan originations in the second quarter led to higher deferred loan origination costs.

Bank of Napa acquisition-related expenses declined from $615,000 in the first quarter to $250,000 in the second quarter, and we expect minimal expenses through the remainder of the year. As noted in our earnings release, 2018 second quarter noninterest expense was up $1.9 million from 2017 due to the Bank of Napa acquisition, the opening of our Healdsburg branch, core processor contract renegotiation fees and a reversal of provisions for off-balance sheet commitments in 2017.

The effective tax rate for the first half of 2018 was 23.3%. Reduction in the federal statutory income tax rate to 21% contributed $0.25 or just over half of our $0.45 improvement in diluted earnings per share versus the first half of 2017.

Bank of Marin is in an excellent position for the future. Our liquidity and capital positions are robust, and our 1.28% return on assets and 10.54% return on equity for the quarter reflect the power of our core values and business model.

Now I will turn the call back over to Russ for 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 are a consistently high-performing bank because of our commitment to both community and commercial banking. Our strong financial results for the second quarter are a testament to the continued execution of our proven strategic plan and reflect the significant investments we made in our organic growth platform last year.

As the $45.9 million increase in loans in the second quarter reflects, we are delivering on our promise of loan growth in the East Bay and Napa as well as business banking in Marin and Petaluma. We are in very attractive markets and have maintained our disciplined underwriting standards.

We have built our deposit franchise on legendary service and deep relationships, and we remain dedicated to that vision. In the current rising interest rate environment, our low-cost deposit franchise and high-quality asset portfolio have paved the way for net interest margin expansion where we have a healthy 80.3% loan-to-deposit ratio.

By closely managing expenses and maintaining our historically outstanding loan quality, we have been able to achieve strong organic growth while also investing in staff and infrastructure. Our experienced and committed team of bankers is delivering great results and we continue to attract successful and qualified people to enhance our staff.

Looking ahead, we are ready to expand and grow our franchise. And as always, the best interest of our customers, shareholders and employees remain our primary focus.

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

Manny?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a few questions over the phone. The first question comes from the line of Jeff Rulis from D.A. Davidson.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Just a follow-up on the loan payoff discussion. So you're reading into the lower payoffs anecdotally. Has anything changed on the customer base that is somewhat different than it has been in the recent past?

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

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Not really. I mean, I think we continue to get good loan volume and most of the payoff -- as we said, most of the payoffs have been because of the sale of properties or construction projects that have been completed. So you have normal pay downs in that respect. Throughout this, even though we had higher loan -- higher payoffs, not a big -- one of the big percentage, which were refinances elsewhere, there's always a little bit of that but there hasn't -- this quarter was the same, and we just had really good volume and just bringing the payoff number down a little bit has translated into really good volume -- I mean, loan growth.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Have you had significant seasonality by quarter on the payoffs? I mean, if is it tied to construction, are there certain quarters that you say, look, we've been seeing heavier payoffs in such and such quarter?

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

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Not really, not really. The construction projects just when they get completed, they get sold and they get paid off. And there's really -- there's really no seasonal -- yes, I suppose the wintertime when you're doing the construction, you're going to have a slower construction process just because of the weather. But the Bay Area's weather is pretty predictable. So it hasn't really had that much impact. And so we really haven't seen much seasonality at all in the past.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Got it. And then maybe one for Tani just on the expenses. I guess, a few moving pieces with the merger cost and the conversion cost, I suppose. Any sort of color on going forward? I think you alluded to maybe some cost saves trickling through if you could talk about the expense base? And kind of what is artificial and what do you think is core?

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

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Yes. So on -- as I said, on Napa and the core processor contract renegotiation, those were pretty much done with. We will see a decline in data processing costs going forward. We can't quantify that right now, but that will start to become more apparent in the next quarter as we'll have a full quarter of the new contract in effect at that time. Additionally, we do have some vacancies out there. We're running kind of our standard vacancy rate that could be extended when we fill some of those vacancies in employee positions that could put some pressure. But I think the guidance that we gave you last quarter and where we're standing today are pretty good indicators if you keep those 2 things in mind.

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Operator [8]

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Our next question comes from the line of Jackie Bohlen from KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [9]

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Russ, you had some good growth in other residential this quarter. Maybe if you could just speak to what kind of competition if much at all you're seeing in that portfolio and how it's impacting the overall yield?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [10]

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That's the TIC portfolio and it's primarily San Francisco. And it's an interesting market because there're not many competitors but there's a couple. But it's -- as we -- we've adjusted our pricing a little bit and adjusted our models a little bit in terms of what we offered and we saw -- we've seen tremendous volume pickup. And it's really driven by where you want to be in terms of rate in the term, and we made a few adjustments in the last couple of quarters and we've seen really good volume there. So that's where that growth is coming from.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [11]

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Okay. So still not a lot of competition because you're one of the few banks that specialize in this?

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

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No, there's not -- there's not many banks that are in that business. And I will tell you that in the -- I think it's around 14 years we've been doing, we've been making loans and -- TIC loans, we had 1 default in the 14 years and that was resolved and restructured and that's it. Not another problem. And so while it's a unique product, not that many banks are in it, we've had good success with it.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [13]

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Would you say that with the adjustments and the growth that you saw in the quarter, are we nearing a ramp period where you could continue to see growth each quarter? Because I know it's relative -- with the exception of 2Q '17, relatively flattish last year.

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

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So probably. I think we continue to get volume. San Francisco, it's a limited market, so there's only so much you can do because the TIC, it's really -- it's primarily -- not primarily, almost all of it is in San Francisco. And it's such a limited market of housing in the city, there's not that much turnover in these units. So when they do turnover, we get an opportunity and sometimes we have a refinance opportunity but that really is kind of gone now too. So I'm not highly confident it's going to grow dramatically as we go, but it's a nice steady income producer.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [15]

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Okay. That's such a really helpful update. I know we don't talk about that portfolio all that much. And just one last one for me. Tani, I know you've touched on expenses a bit, but just a different type of question. In terms of the cost savings from the Bank of Napa, were most of those realized in the quarter or do you still have a few more to come out?

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

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On the cost savings, I think we pretty much have all of those embedded now. This quarter, I think this quarter is pretty clean because most of the conversion costs were in the first quarter but we did do the final conversion in April. So next quarter's going to be a better indicator. So sorry, about that, I'm not that clear. But what I will say is I think on the Napa deal, when we look at our transaction cost, the onetime cost, those were slightly at -- all-in, those ended up being slightly below what we projected but pretty much on target. And the cost savings look like we're pretty much on target there as well. So I think the accretion is looking very, very good compared to what we model.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [17]

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And Jackie, I'll just add one thing on the people side. We achieved the number of reductions that we had planned. But the good news there was that we also were able to take some of the people who frankly weren't in the model and placed them in positions, open positions in Novato, in our headquarters, in our operations area. And so we actually kept more people than we have projected. But we kept the number we projected in our original plan, but we still have open positions with some of the other people. It's worked out exceptionally well and I'm very, very happy with the staffing that we received in this acquisition, the Napa people have been great.

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Operator [18]

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

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [19]

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You might have already given this color, but do you happen to have the commercial line utilization number at quarter-end relative, and also the first quarter end-of-quarter number?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [20]

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If you hang on a second, we can find it. Do you have another question, I'll come back to that one?

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [21]

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Sure, you bet. And then the other question that I had was, and you give some color on this. So looking at the P&L, professional costs were down -- professional service costs were down pretty considerably this quarter and you said that that included -- did that include $300,000 for the contract negotiation?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [22]

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Did the professional service -- did you hear that? Professional services costs were down and does that include the $300,000 for the contract...

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

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Yes, that is included in that line item. Sorry. And the second?

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

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Yes, go ahead, Russ.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [25]

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I said 41.98% was the utilization of the loan.

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

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And how did that compare to last quarter?

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

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42% -- 42.41% last quarter. So slightly down.

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

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Inconsequential. Still decent utilization.

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

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Yes.

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

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As far as utilization is concerned, Russ, just kind of overarching qualitatively. Do you envision that the market can bear or that your clients would, in a good environment, increase their utilization? I mean, obviously, it would be nice to see, but above 40%, are you happy with that, I guess, relatively speaking?

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

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Yes. Above 40's good. There's just so many different elements in that number that go up and down. And there's construction. In construction, it starts low and then if you put a new construction loan on, it's 0 initially, and then as they build the project, it grows and utilization goes higher. Lines of credit fluctuate all over the place because it's kind of the working and there's some seasonality to that as customers utilize the line of credit. Like in the wine business that certainly has a lot of seasonality. And then you have home equity line, which are in that number. And same thing, it kind of is all over the park. It currently is running about 40%, just like the rest in total. But if you're above 40 these days, it's pretty solid, I think.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [32]

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Sorry, Tim, the other thing is just when you have a lot of loan growth, sometimes it takes a little time for those borrowers to actually utilize their lines. So because we have significant growth this time, there's probably some lag in the utilization.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [33]

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And that raises an interesting point. Did you provide unfunded commitments, growth in unfunded commitments this quarter for C&I, I guess, or overall? Or do you track that number?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [34]

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We didn't. We didn't provide it but...

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [35]

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Do you want to in this public forum?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [36]

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Well, I have no problem with that. It grew -- the unfunded line of credit commitment was about $8 million, that was the growth quarter after quarter. The utilization, pretty solid. A little bit up in the line of credit, around -- a little over 40%. The only one that really is completely different is construction and the utilization there is in the 60% range because they build out the project. But our lines of credit have pretty much hung around 40%, both from lines of credit, home equity lines, revolving, personal lines of credit, those kinds of things, they're all kind of hanging around 40%.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [37]

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And then one last question, Russ. You talk about -- it seems like it's a recurring theme to the -- when you see -- the key driver to prepayments or payoffs of loans is client transactions, sales -- business sales sometimes but also property sales. Are you seeing any -- can you give any color on what's going on in the market as far as that's concerned? Is it -- are transaction volumes steady here? Or with pricing, is it starting to get a little -- slow down a little bit? Or what's your perspective there that we might be able to take away and look at long-term what's going to happen?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [38]

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It's an interesting question, Tim. We just actually made a presentation to our board about the real estate prices of the area. And if you look at the way they have gone historically, they are -- they're at kind of an all-time high. That being said, there're these fluctuations that happen depending upon the market and technology, which drives it so much. There's a very interesting correlation between prices in the Bay Area, particularly in San Francisco, let's use that as an example. The fundings of VC and lease rates, and then ultimately, real estate sale prices. And we are continuing to grow to a very high level in all of those, all 3 of those, and they correlate almost perfectly. And if you look back in time, back to 2002 and through the recession, VC funding's come way down, price has come way down. And San Francisco lease rates are right around $80 a foot these days. And if you go back into the recession, it was about $35. So it brings up a point that this is a really good time to sell. This is a really good time because you're getting -- you're at high levels but it also brings up the point of, from the standpoint of a lender -- or lenders, that we want to be very careful about lending into these very, very high prices because you don't want to have a very high loan-to-value against the property today -- today's rate, if you see a recession coming because sure enough that will have a great impact on the prices of real estate in the Bay Area, particularly San Francisco but certainly, Peninsula, East Bay, even Marin. So it's an interesting thing to follow, and we are watching it very closely all the time.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [39]

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So I guess the takeaway is that nothing's changed as far as -- with pricing where it is, your clients are probably -- some of them are going to continue to look at selling and it makes for a tougher environment to lend into given where prices are.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [40]

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I wouldn't -- it's tough from the standpoint that you have to be careful. I don't think it's necessarily tough if you understand that you can't think that everything that goes up won't come down. Eventually, you're going get some -- you've got -- that market's going to restrict a bit so you just have to be very careful, and our lenders have been really good about that. And that's why we require guarantees, that's why we require liquidity from our borrowers. It's just -- we just have to stay cautious in terms of our loan-to-value and make sure our borrowers have the capacity to step in if there's a problem. And that certainly served us exceptionally well during the recession when we didn't have any problems at all. And I'll remind you that over our loans that we've underwritten, total net losses in commercial real estate is around $220,000, $240,000 over 28 years.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [41]

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I guess, just one last quick question. All the loan production you booked this quarter was all -- or loan growth you booked was all in-house production, correct?

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

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Yes. We don't buy -- are you talking about whether we bought property or bought loans?

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [43]

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No loans bought?

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

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No, we don't do that.

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Operator [45]

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

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [46]

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I wanted to hone in on deposit pricing. You guys have among the best in the cost of deposits, transaction accounts though were down this quarter. Wanted to get a sense for whether or not you might start to feel a little pressure on the deposit pricing front here or not. I mean, I know you guys have an 80% loan-to-deposit ratio, so it may not.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [47]

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So yes, the ending balance is down, but I think it's important to note that the average balance was still higher than the last quarter. And so that is very indicative of the idea that we've got large customers with businesses that have significant cash fluctuation in and out of their account. So that's really what drives our deposit base. And if you look at the percentage of noninterest-bearing accounts in our book, it's actually up. So done is our customer deposit base. So we have gotten selective calls. We're not getting inundated by any means with calls about rates because our customer base is really relationship-oriented and business-oriented. So as we said in the comments, we did have some customers that have some excess liquidity, and so those funds may have been redeployed into deposit network time accounts, so out of liquid account and into some time deposits. And then just a handful of customers who really all they had with the bank was a deposit balance that was focused on getting the highest rate. And we don't typically chase pricing on those types of accounts, we let them go. So there were a handful of those over the quarter.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [48]

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Okay. And then what was your weighted average rate on new production? I'm trying to get a sense for incremental spreads and where the margin could go.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [49]

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We don't publish that -- those rates. The market remains competitive. We're still seeing, even though short-term rates have risen -- there's such fly yield curve that we're seeing longer term, 5 to 7-year loans, that are -- there hasn't been a huge growth in the spread in that number.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [50]

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What we can say though is that across all categories, the rates that the new loans are coming in at are higher than the portfolio rate. So that may go without saying, but that is what's pushing the margin up but at the same time, maintaining a low cost to deposit.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [51]

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Great. And then can you remind us how much of your loan portfolio is truly variable and how much might reprice within the next year?

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

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Yes. So about 45% of the portfolio is adjustable and 55% is fixed. And if you look at how much is repricing in the next 12 months, it's about 25% of the portfolio.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [53]

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Okay, great. And then any guidance on the tax rate going forward? I think we talked about 22% last quarter, I'm not sure if that's still a good rate going forward.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [54]

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Yes. So there are a couple of items that can cause the tax rate to move around. Primarily, last quarter, we saw that a couple of employees' net eligibility criteria on stock-based compensations, and so those expenses went up but also the tax deductions associated with those expenses went up. So that's why the rate was lower last quarter. We had less activity in that realm this quarter. So in general, I think where we're sitting is pretty indicative of the future. Each time we run the taxes, we look at our best understanding of what the rate is going to be for the full year and that's what we use. But some of those discrete items will cause it to fluctuate.

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Operator [55]

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(Operator Instructions) Our next question comes from the line of Don Worthington with Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [56]

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In terms of provisioning, would you expect to have to resume provisions if loan growth continues?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [57]

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Good question. Of course, as we get more loan volume, we will have to provision at some point. Our credit quality has been so good and we have so few, even special mention credits now that it becomes a challenge in terms of what is acceptable from the standpoint of our -- the auditors, our external auditors that if -- provisioning, you have to justify any provisioning that's done, and we haven't had any credit problems to speak off. So as we grow the portfolio then, of course, we will have to provision to support that portfolio. But it's so clean right now, it's pretty tough. We have an excess provision that we have to utilize before we can provision.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [58]

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Yes. And Don, we'd have -- the growth from this quarter did point to the need for an increased provision but at the same time, we had a couple of loans that were upgraded that had a significant impact in the opposite direction. So those 2 things sort of were the 2 main drivers resulting in the no provision.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [59]

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Okay. All right. And then in terms of just your loan growth, the strongest markets, Russ, if I remember your comment, it sounds like it's East Bay and Napa, is that the case?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [60]

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Correct. And also our, what we call business banking, which is -- we're in Petaluma, kind of a smaller credit, have done exceptionally well. But Napa and I'll make a comment -- first of all, I'll talk about East Bay. East Bay has been terrific and has generated some significant opportunities and is growing quite nicely. Napa, Napa has grown not just because of that is a Napa portfolio, but the combination of that plus people that we've added and we're getting some really nice opportunities we see. And you talk about when you buy a smaller bank that there's opportunity potentially to up tier relationships. And sometimes that happens, sometimes it doesn't. It seems to be happening in this environment, and our team up in Napa is doing a great job with that. So pretty excited about what's going on in Napa as well as East Bay and business banking. And in Napa, we have this combination of people from the Napa team, but also our existing team. We added not too long ago a fellow by the name of Scott McAdams, who has a lot of commercial banking experience from many years at Mechanics Bank. And this team is gelling very nicely. So pretty happy with what's going on up there.

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Operator [61]

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(Operator Instructions) And there're no further questions on the phone right now.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [62]

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Okay. Well, with that, I want to thank everyone for joining us this morning, and we will look forward to talking to you again next quarter. Thank you.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [63]

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Thank you.