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Edited Transcript of BMRC earnings conference call or presentation 22-Oct-18 3:30pm GMT

Q3 2018 Bank of Marin Bancorp Earnings Call

Novato Oct 23, 2018 (Thomson StreetEvents) -- Edited Transcript of Bank of Marin Bancorp earnings conference call or presentation Monday, October 22, 2018 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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* 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

* 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 third quarter ended September 30, 2018. I am Andrea Henderson, Director of Marketing. (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, October 22, 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 discussion of these risks and uncertainties, please review the forward-looking statements disclosure on 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 our call. Bank of Marin's third quarter earnings demonstrates our team's continued strong execution with strategy based on long-term performance. The foundation of that strategy is consistent credit and expense management, adherence to our relationship banking model and commitment to the communities that we serve. These disciplined fundamentals lead to quality organic loan and deposit growth, [first lien] credit quality and the ability to leverage acquisitions into greater market share.

Let me share some notable highlights from the third quarter of 2018. Net income was $8.7 million, up more than 10% from our previous quarter. Diluted earnings per share were $1.23. Loan originations of $52.6 million, up $10.3 million over the third quarter of 2017, reflecting strong growth across our markets. Higher yields on loans and investments contributed to a 4-basis point increase in our net interest margin and a $697,000 increase in net interest income compared to last quarter.

Noninterest-bearing account represented 50.2% of deposit, which totaled $2.2 billion at the end of the quarter. The average cost of deposit was up 2 basis point to 10 basis point. We continue to execute on our capital management strategy, including 3 actions, of note, this quarter. First, under our share repurchase program launched in May, we have acquired 17,943 shares for a total of $1.5 million at quarter-end.

Second, the Board of Directors has declared a cash dividend of $0.35 per share, a $0.03 per share increase from the prior quarter. This represents a 54th consecutive quarterly dividend paid to our shareholders.

And third, given the strong outlook for Bank of Marin's future and in an effort to enhance liquidity in BMRC stock, the Board of Directors has announced a 2:1 stock split effective after the dividend is paid.

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. We delivered another excellent performance in the third quarter, thanks to our talented team and the strength of our growing client base. We grew loans $11.3 million in the third quarter and $49.9 million year-to-date and made continued strong demand from both existing and new customers. We remained focused on efficiency and consistent credit discipline to ensure high-quality organic growth. We pursued loan yields with attractive risk-adjusted returns, and we do not compromise credit terms to drive loan volume. Year-to-date, total deposits are up $64.2 million. Quarterly fluctuations in deposit balances reflect the unique nature of our customer base. We have several large deposit clients, who maintain high liquidity to meet the cash flows of their thriving businesses, resulting in noninterest-bearing deposits of more than 50%.

As a result, when general market interest rates rise, Bank of Marin's cost of deposits increases more slowly than most of other banks. While we do not attempt to offer the highest rates in the marketplace, fair and competitive deposit pricing is part of Bank of Marin's relationship banking model. Higher average balances of both loans and noninterest-bearing deposits, combined with higher yields across asset classes, produce net interest income of $23.5 million in the third quarter and lifted the net interest margin to 3.91%. The tax-equivalent margin of 3.97% was up 5 basis point.

Credit quality remained strong. There were no provisions for loan losses or off-balance sheet commitments in the quarter. Noninterest income was virtually flat quarter-over-quarter between increases in deposit network fees and losses on sales and securities. Our efficiency ratio of 54.2% was down from 57.9% last quarter and 62.5% a year ago. This quarter, there were no large unusual expenses. As we attract new lenders to fill vacant positions, salary and benefits will increase.

The growth in pretax income contributed $0.48 to diluted earnings per share. This is more than half of the $0.86 improvement we saw from the first 3 quarters of 2017. The remaining $0.38 is attributable to the reduction in the federal statutory income tax rate to 21%. The year-to-date effective tax rate was 24.5%.

Bank of Marin is in an excellent position for the future. Our liquidity and capital positions are robust, and our 1.38% return on assets and 11% return on equity for the quarter reflect the power of our core values and business model.

Finally, on October 5, we redeemed subordinated debentures due October 7, 2033, which was assumed in the 2013 NorCal Community Bancorp acquisition. The group run rate on this debt rose to 5.3% in the third quarter. The early redemption will eliminate future interest expense composed of both the coupon rate and the accretion of the purchased discount. The remaining unaccreted discount of $914,000 will flow through interest expense in the fourth quarter.

Now I will turn 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. It was a great quarter on all fronts. The record results we saw are a testament to the discipline of our retail and commercial bankers, who work hard every day to exceed our customers' expectations. We were able to deliver such a strong performance because we stay true to our relationship banking model, consistent underwriting and disciplined portfolio management.

In this driving-rate environment, Bank of Marin's cost of deposit continues to be best-in-class among community banks nationwide. We balanced the interest of both our customers and our shareholders in the management of our deposit rate strategy.

We have a leading position in one of the most attractive banking markets in the country. Business activity in San Francisco Bay Area is robust. New business and job creation is strong. Unemployment, however, is near historic low levels, and population growth is steady. The outlook is bright, and our vibrant footprint continues to prove a key driver of value for the bank and our shareholders. As part of our organic growth strategy, we continue to develop our teams and optimize our position in each unique market. Our third quarter results reflect the outstanding value of our franchise, which in turn, gives us the ability to attract and grow top talent.

In September, we continued expanding our presence in the East Bay as we named Wim-Kees van Hout, Regional Manager in Walnut Creek. He will focus on establishing our local team of commercial bankers in the Diablo Valley to build on the success we've had in the region. Wim-Kees brings more than 30 years of banking experience to this role, the last 15 of which was spent at a California-based community bank, where he helped to launch their East Bay office.

As part of our ongoing commitment to serving Sonoma County, David Casassa was recently named Regional Manager for the Santa Rosa market. Dave brings with 20 years of banking experience to his new role, most recently as a Commercial Banking Manager for Bank of Marin in Novato. Prior to that, he was a successful commercial banker in the North Bay. He and his team will focus on growing our customer base in the area by building relationship with local commercial businesses.

The decision by our board to approve a 2:1 stock split is also a statement of great optimism and confidence. As we head into Q4, we are focused on finishing the year strong and laying the groundwork for a successful 2019.

I want to 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) And our first question is from the line of Jeff Rulis with 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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A question on the margin may be, Tani. I guess, first, this is sort of the anticipated impact on the margin with the sub-debt redemption at least in the near term? And then just kind of broad thoughts, not guidance on margin, but your general thought on how margin thereafter -- expectations there?

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

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So there are a lot of moving parts going to be affecting the margin going forward. We did raise some of our deposit rates and towards the end of this quarter, so that not fully baked in. We will get some decrease from subordinated debentures. But it's only half of that line that we're redeeming. So the interest expense for the quarter on the sub debt, which is -- includes both the coupon and the accretion of the discount was $125,000. So might roughly cut that in half and you can see what the decline will be associated with that line.

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

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Okay, that's helpful. And then maybe just some housekeeping there that were there -- there were 0-merger cost in this quarter relative to last quarter?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [5]

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I wouldn't say 0, but immaterial, very smaller.

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

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And what was that figure last quarter?

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

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I think it was roughly $300,000, hang on, I'll get that. That we have, it was roughly $300,000. I can get you the exact number, I'll come back to that.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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And then Tani, that the tax rate year-to-date now at 24.5%, is that a good proxy for Q4, and then maybe even 2019?

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

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Yes, it's a decent proxy. But what happens is that as the income goes up and down, the permanent differences don't change. So if income is higher, then the effective tax rate goes up, and when income goes down, the effective tax rate goes down. So it's those permanent differences that, kind of, make that move around.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

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Okay. And maybe one last one for Russ. Just the buyback that you got in place given the pullback in October, any thoughts on -- if you get -- you've got a greater appetite today than when we entered the month, I suppose.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [11]

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We -- our buyback is continuing regardless of the -- we're very bullish on the future of the bank, and you can't really market time these things too much. We try to just stay in the market and continue to buy. And so obviously, to buying at $78, $79 a share is way better than $85. But we're confident about the future of the bank and we -- the program just continues every week. We buy stock all the time, and frankly, not too concerned about trying the market time prices, because we can't. We're in a -- the way this plan is going, we are continuing to be in the market for the existing market price. And obviously, if you had a tremendous run-up in the stock price, if you look at it, we haven't seen any point that we would not buy stock at this point.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [12]

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Jeff, back to your earlier question, so the acquisition expense in Q2 was $250,000.

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Operator [13]

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The next question is from the line of Jackie Bohlen with -- from KBW.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [14]

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Still on the repurchase line of questioning. Is the third quarter's level indicative of what you would expect on a quarterly basis?

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [15]

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In terms of the repurchase dollar?

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [16]

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The -- either the share amount or the dollar amount.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [17]

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Yes, so we set up a program that has set parameters about what can be purchased at various levels, and so -- and then we don't touch it and we don't really -- we have no impact on the actual purchase activity because it's a 10b5-1 program. So it's hard to tell. But what I can say is that it's likely, if the price goes down, we end up purchasing more shares, and when the price goes up, we end up purchasing fewer shares. But that's just a general trend based on way the program is set up. But as Russ said, we -- there's not been a price that's been here yet that we wouldn't purchase the stock at.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [18]

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Okay, that's very helpful. All right. And then looking to loan growth in the quarter, did loan utilization -- it sounded like that played a nice impact in the quarter's increases?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [19]

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Yes. It's interesting. The utilization was actually in terms of the percentage was slightly down, but the -- it was -- but the actual dollars were up, because we did -- there's more loans that we -- were outstanding. So it's kind of -- I look at that as good news, good news. More loan -- slightly lower percentage of utilization, but dollar-wise increase.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [20]

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And so was that just a lot of nice new commitments slipped in the quarter?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [21]

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We have a -- yes, there's a number of new commitments, including both on commercial banks and even on retail side with the home equity line, and we have -- actually have a larger dollar number of home equity line, the utilization, home equity line is actually down.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [22]

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Okay. And do you think...

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [23]

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And our construction -- Jackie, also our construction portfolio. Obviously, you book these transactions and then as they build out the project, utilization goes up. And we have a number of new transactions that we're working on.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [24]

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Okay. And then in terms of the HELOC, just in your opinion, what your lenders have been hearing, the generation that you're seeing there, is that driven by rising interest rate? Is that becoming a more attractive product for borrowers?

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

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I think it's kind of interesting because I think there's more volume of HELOC and utilization is less. And I read that as the, "You can't deduct that interest really any more on your taxes." So people, I think, will use it more as speaking ad or to do home-remodel project and pay it off. I think that -- as we look forward, that's going to be more of the case and less of the case. There was going to be more people who have less utilization on the home equity line. They just -- I think you -- what you see is people, if they have it on the home equity line and they refinance into a larger traditional mortgage. And they still have home equity line but not use it too much.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [26]

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Okay. And so in light of utilization and trends and everything else that's going on, how are you thinking of loan growth both through the end of the year and then heading into 2019?

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

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Well as you know, we don't give guidance on that. Our pipeline continues to be very strong and robust, particularly in a couple of different markets. So we're confident that we will finish the year as we have throughout the year. I think, I've been pretty consistent through the year, and I would say, there's no reason to believe that's going to change.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [28]

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Okay. And I would guess that the work that you're doing in the Diablo Valley and other areas, which will be additive to that?

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

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Yes, it certainly will be additive. Our East Bay office has done really, really well, and now we're -- because of that, we're looking at the Diablo Valley market, and we hired van Kees -- van Hout, that's a great add. He will bring -- we're still in the process now of looking for space over there, but Wim-Kees working out of our Oakland office for the time being until we anymore hires bankers to fill out that team. We're pretty excited about being -- to be -- ultimately to be over in Walnut Creek.

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Operator [30]

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(Operator Instructions) And the next question is from the line of Tim O'Brien from Sandler O'Neill.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [31]

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So Jackie just declared the -- that 900 -- approximately $900,000 in remaining purchased discount hits net interest expense this quarter -- or in the fourth quarter, excuse me?

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

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That's correct.

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

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Okay. And then what was the weighted average yield on new loans compared to overall loans in the quarter? Is that something you've calculated? Or, it's okay, if you didn't, I've recalled past quarters, it was a little fuzzy that number, bounced around a little.

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

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We don't have the exact -- something...

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [35]

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[I think it's]...

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

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On average, I can tell you, it was up. I don't have that at my fingertips, Tim, unfortunately, I can probably get that.

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

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Is it, I guess, just overall qualitatively, Russ, yields holding up relative to the existing yield in the book?

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

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I would say, it's up -- looks like about -- now I'm looking at the numbers, it's looking like it's up about -- from portfolio and new volume, it's probably up about 50 basis point. The new loan volume...

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

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5-0 or 15?

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

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0.5%, 5-0 relative total -- relative to the total portfolio. You already...

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

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That's fantastic.

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

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Yes, from our new loan volume.

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

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Good to know, great. And then were there, Sorry, Russ?

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

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And those are the rates on the third quarter loan volume versus where it was at the end of the second quarter.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [45]

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Got it. And then were there any prepayment fees collected that benefited net interest income this quarter or interest income this quarter?

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [46]

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No, I don't -- there's nothing to speak of. If there were, they were insignificant.

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Operator [47]

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There is no other question queued up.

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Russell A. Colombo, Bank of Marin Bancorp - President, CEO & Director [48]

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That's it. If no other questions, I want to thank you all for joining us this morning, and we look forward to talking to you again at the end of next quarter. Thanks so much.

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Tani Girton, Bank of Marin Bancorp - Executive VP & CFO [49]

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Thank you.