Fabia Butler - VP, Community and Public Relations Manager Russ Colombo - President and CEO Tani Girton - EVP and CFO.

Jeff Rulis - D.A. Davidson Jacque Chimera - KBW Tim O'Brien - Sandler O'Neill & Partners Don Worthington - Raymond James.

Good morning. And thank you for joining us for Bank of Marin Bancorp Earnings Call for the Quarter Ended June 30, 2015. My name is Fabia Butler; I am Vice President, Community and Public Relations Manager for Bank of Marin. During the presentation, all participants will be in listen-only mode.

After the call, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on July 20, 2015. Presenting this morning will be Russ Colombo, President and CEO; and Tani Girton, Chief Financial Officer.

You may access the information discussed from your press release, which went over the wire at 5 AM Pacific Time this morning and on our Web site at bankofmarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that this call is based on information that we know as of today, July 20, 2015, 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 today, as well as Bank of Marin Bancorp's SEC filing. Following the prepared remarks, our team will be available for questions. And now, I'd like to turn the call over to Russ Colombo..

Thank you, Fabia. Good morning, and welcome to the call. We are pleased to share our results for the second quarter. These results reflect our commitment to doing the right thing to grow our business in what continues to be a very active market in the Bay area. Before we get into the detail, let's start with some key highlights for the quarter.

New loan originations were strong at approximately $52 million, nearly double the prior quarter, making this one of the best quarter’s to-date for loan origination.

Several positive events led the pay off of $55 million for the quarter, such as the successful completion of a number of large construction projects, the profitable sale of two customer businesses, and the resolution of a problem credit.

Our construction and loan pipeline was strong with substantial unfunded commitment that will replace construction pay off to-date. The commercial real estate market in the Bay area is very hot, which is driving sales of commercial property.

We conduct significant business with commercial real estate investors and we’re seeing results with this dynamic market. Our relationship banking model allows us to work with all of these clients on an ongoing best basis, and we expect to finance their future opportunities.

We experienced strong loan growth in Napa from several new wine industry customers, aligning with our long-term strategy to diversify and grow that area of our business. Our commitment to this market is paying off after two years of significant investment.

Overall, our loan and deposit pipelines are robust and should yield strong results for the second half of the year. Deposits totaled $1.6 billion at quarter-end, growing $45 million for the quarter and non-interest bearing deposits represent 46% of the total.

As for detailed results on the quarter, earnings were $4.3 million compared to 4.5 million last quarter. The combination of low interest rate, significantly compressed margins, and demand in regulatory environment continues to effect earning.

Keeping these factors in perspective, we remain committed to disciplined credit practices in relationship banking. We continue to perform at a high level with strong capital and excellent credit quality but non-accrual loans represent only 0.53% of total loans at quarter-end, down from 0.7% at March 31 and 0.76% a year ago.

The decrease in non-accrual loans primarily relates to the second quarter's sales of a residential tract development loan made in 2008, resulting in an $839,000 charge off that was absorbed by our existing loan loss reserve. At quarter end, our Texas ratios stood at 3.54%, improving from 4.71% last quarter and 5.43% a year ago.

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

Thank you, Russ and Good morning everyone. As Russ indicated, we are performing at a high level and are well-positioned for a strong second half of the year. We continued to produce solid earnings without compromising credit quality or aggressively pricing loans.

Earnings per share for the quarter were $0.71 compared to $0.74 in the first quarter and $0.86 a year ago. Let me begin with the quality of our balance sheet. Our loan to deposit ratio is a healthy 82%.

While we continue to experience deposit fluctuations related to seasonal activity and the new business ventures of some of our larger customers, average and period-end balances are on an upward trend. Our liquidity position is solid and will support substantial growth, as well as the effects of potential changes in interest rates.

Turning to the income statement, the tax-equivalent net interest margin of 3.86% represents a 14 basis point decline from last quarter, primarily due to a higher concentration of cash on the balance sheet and to a lesser extent lower rates on securities and loans.

Net interest income totaled 16.5 million in the second quarter of 2015 compared to 16.6 million in the prior quarter and 17.9 million in the same quarter last year.

The decrease in net interest income relative to a year ago is primarily due to a lower level of income recognition on acquired loans, as well as lower interest rates on loans and securities. There were some one-time events in the quarter that increased both non-interest income and non-interest expense.

Non-interest income included a 305,000 special dividend from the Federal Home Loan Bank and 147,000 bankruptcy claim payment related to a Bank of Alameda loan that had been written off prior to the acquisition. Non-interest expense included $337,000 in accounting adjustments for leases.

Overall key metrics such as our efficiency ratio, return on assets, and return on equity are at levels that are reflective of this continued low interest rate environment. With that, I'd like to turn it back over to you Russ for some additional comments about the outlook for the remainder of the year..

Thank you, Tani. The quality of our portfolio is excellent. We also expect significant loan originations and positive growth through year-end. Our credit quality remains strong with no loan loss provision in this quarter. We are relentless about adhering to consistent credit practices that benefits the long-term growth and viability of the business.

Non-interest bearing deposits, the value of our franchise are at a very healthy level of 46% of total deposits. Our deposit pipeline looks strong across all of our markets. We are declaring a dividend of $0.22 per share this quarter, marking the 41st consecutive quarter we've paid cash dividend.

Overall given our financial condition, high levels of capital, and excellent credit quality, we are well-poised and fully-staffed to handle additional growth. We are ready to take advantage of new opportunities as they arise.

Before we break for questions, we also wanted to let you know the Bank of Marin will be ringing the closing bell at NASDAQ on July 30th, Thursday in recognition of our 25th anniversary. We will be in New York for the KBW Conference and look forward to participating in the NASDAQ event as well.

I would like to thank you all for your time this margin and now we will open it to answer your questions..

[Operator Instructions] And our first question comes from the line of Jeff Rulis with D.A. Davidson. Please proceed..

You talked about -- well on the pay downs I guess is there any seasonality typically within the loan book, I know that sort of pay downs can come sort of at any point, but looking at timing of the portfolio, is there anything to suggest that they could be lumpy in certain quarters?.

Not really, we have -- in that group of $55 million, we had some pretty significant sales.

We have one project that we had financed on construction side, which is -- you always like to see the projects go through to conclusion itself and the condo development and they sold a few of the condos for frankly a lot higher than they had anticipated and paid off the project early, which was great for them, and we are encouraged and we will hopefully do more business with, it’s a long-term plan that we expect we will.

And there are two businesses, two businesses that were sold during the quarter, and we got paid off, and there is not a [indiscernible] significant premiums and they collected and paid us off. So I don't really see anything that Steve’s [ph] enrolled on any of the pay offs..

Okay, but maybe just timing wise, does it feel like that was a higher than average quarter in terms of payoff -- I don't know how the payoff number has been running sequentially but this was on the high side?.

So, that is definitely on the high side and certainly when you have two businesses that our big customers sell, and you are having one of the largest construction projects in our portfolio payoff, that is hopefully going to be bigger than most, I mean you wouldn’t expect that two of your big clients gets sold in the same quarter, so we -- I don't expect the payoffs to be that large but the problem – the thing that is difficult to predict in our portfolio is that we do finance a lot of commercial real estate investors, and investors buy and sell commercial real estate and sometimes they buy and in markets like this where it’s the valuations are so strong in the Bay area these days that there is a lot of -- there is a fair amount of profit-taking going on, selling properties at these high valuations and taking the money off the table, but that's bad news I suppose from our perspective, but the good news is these are long-term clients that we fully expect to finance other opportunities for them in the future.

So it's really -- maybe it’s timing, maybe it’s seasonal, but we'd really expect that we won’t have that number of sales next quarter and we'll have new opportunities too..

And Russ did those high valuations, do those concern you or is it a point where you look at the market and think it's a little overheated, or where do you stand on the market valuations?.

Certainly, you have to be a little bit concerned about these valuations it's driven -- it is interesting in the Bay area, it is driven primarily by technology even those that are not technology-related businesses or property, but technology companies on the peninsula and now in San Francisco to a great degree, there's spillover to Marin and to the East Bay, and so the values are pretty high because they're looking for space in San Francisco and it is at a tremendous premium.

So, yes, it’s conservative a little bit but we don't see any signs of things cooling off in the tech business, but you know how it is, there is definitely a cyclicality there..

Right, okay maybe one last one on the deposit with growth pretty strong, any promotions driving that, and I guess not only what you put up in Q2, but your discussion that the pipeline looks solid as well, is there anything kind of driving that growth in promotions?.

No, we are not giving promotions, we don't really chase those kinds of dollars. Our deposit gatherers are branches, primarily in Marin County, are doing a tremendous job of really building pipeline of new deposit opportunities.

We have brought on a couple of nice new relationships, the 46% of the demand deposits is really driven by relationships, and it's not hard money, it's all building new relationships and expanding and getting new business from existing clients.

So, that's really a real bright spot for the quarter that deposits grow and not only total deposits but more importantly the demand deposits..

Our next question comes from the line of Jacque Chimera with KBW. Please proceed..

I have a question on the occupancy accrual, I understand, it was a one-time item in the quarter, will that have any future impact on how you accrue for occupancy and litigation?.

So, it wasn’t really an accrual and they were a couple of items that happened, we had three branches that had not been converted to straight line amortization on our leases that was the past adjustment that we finally decided just to go ahead and true that up, so small reduction in rents going forward for them, but not meaningful.

The other piece was final true up related to the closure of the old Sausalito branch and the lease associated with that one and again that was a one-time deal, and won't affect future, well it just will reduce, because we brought forward all of the future lease payments on that one..

Okay, very-very small and sort of positive impact?.

Yes..

Okay.

I remember looking at those securities kind of participants in the quarter, I was wondering generally did you purchase and what was the timing of those purchases?.

Yes. So, we've purchased pretty phenomenal securities, short duration agency MBS and that reduced some longer term municipal purchases and the purchases were focused towards the latter half of the quarter because rates were higher at that level and so we got a little a bit more active at that point.

So, hopefully we'll see the benefit of those purchases bring the full impact in the next quarter..

So okay if there wasn't the purchases and what -- just looking at the average -- what drove the majority of that in quarter decline and in that security yield?.

So the declined in the security yield?.

Well understand the tax and cash and the impact of that that had, but I'm wondering the securities yield dropped from to 47 last quarters to 31 this quarter..

Right, so a lot of the securities that -- we've done a lot of turnover in the portfolio this year and a lot of those securities were longer term municipals with call provisions in them and when we redeploy those they're going into securities at current rate, so a turnover in them..

So, it is kind of the decline impact from prior quarters?.

Yes..

Okay. That's helpful and then and just one last quick one.

The new wine customer that you mentioned in the press release, what is deposit impact from those, if there is one?.

And honestly I can't answer that right now, both of them we just built the long relationship, we obviously gained all of their operating accounts too, right you had to borrow a fair amount of money.

So the deposit is not, deposits are going to be significant because they have more operating lines that we're going to be paying down line, they pay down lines with excess cash and then we borrow. So it was not going to be substantial accounts there, it's going be a fair impact on the loan side..

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

So a question for you Russ on the two business that were sold to-date.

With the proceeds from those sales to-date do they leave those proceeds with you guys in account?.

Some of and to explain one of the businesses, well I can't go into specifics because of the privacy here but….

Yes..

We are the foreign business, we're the foreign buyer and so most of the deposits from the business we have proceeds. The personal account however, some of the personal account money stays with the bank and actually some of it went into our wealth management area.

So that was a real good relationship with this particular organization, so yes to a certain extent, not to the same levels that the business had.

On the other one, most of the money went away, although there are some deposits, personal deposits with that particular business too and still, and actually the owner of that business still remains engaged with the bank and is still on one of our advisory boards..

Though sufficed to say that the strong deposit growth this quarter, those sales didn’t temporarily spike deposits in any way or?.

So actually probably, they actually have the opposite impact they because in one case one of the two business that was sold carries, so while they had borrowings for facilities, they also carry substantial deposits, and most of the deposits went away because of the buyer.

So those really didn’t have a positive impact on our deposit but the deposit side was really impacted by across the board if you looked at every one of our branches we had nice deposit or some bigger than others but nice deposit growth, almost across every branch. It was really a good quarter from that perspective..

Thanks Russ, and then a question for you Tani.

And you kind of referred to this when you were answering Jacque’s question about securities on the muni, the called muni securities not this quarter but in previous quarters perhaps last quarter, were they called at, did you collect any call benefit that benefited interest beyond what would normally have impacted you just because of how the bonds were called from a timing standpoint, were they called at a premium?.

Yes, it really depends on the individual bond. I don’t think you could make a broad statement on those in general. But I would say the longer term funds that are getting called were just issued at higher rates.

When they get called, they come back, the principal comes back at par and I would say on average because a large part of our portfolio was purchased near the end of 2012, they were purchased at higher interest rates than we have today so on balance probably premium, some premiums on those bonds..

Okay. Great, and then I noticed that depreciation and amortization costs were up. Was that what you were referring to? They were 650,000 this quarter relative to kind of prior run rate considerably lower.

Is that a new norm or is that, was that related to?.

Yes, that, that 200,000 difference in occupancy in the depreciation and amortization is related to the final true-up on the Sausalito lease..

Got it, one-time, so a normalized it is around 400 or a little above probably?.

Yes..

Great, and then just one more question about the wine loans you are putting on, those are predominately then, are they tied to real property holdings are you' financing buildings, construction, those sorts of things? I am sure you are not financing vineyard, is that right Russ?.

For the most part that's right. We will occasionally finance vineyards for state properties for wine lease if they have vineyards that they own we will occasionally finance those. But for the most part we are not financing people who are just growing grapes and selling them to someone else.

In most of this the two that we brought on were primarily related to facility, working capital lines or inventory and receivables that type of things, that's the typical thing we do.

Working capital as well as the winery facility and occasionally it is a little bit in this one we are doing some financing for vineyard but their state properties towards the winery stuff..

Okay.

And then last question Russ is there any special consideration for you guys in underwriting loans to that sector given the draught situation?.

No, that we would give us these borrowers..

I don’t know maybe it just effects how you kind of look at the credit, evaluate the credit you just profile those loans with water issues?.

Right that's pretty hard now we've done report financing a winery itself. And not the vineyard side the risk and that's where the risks really go to the on the vineyard financings that's why we are doing it for the most part because vineyards when you are just growing grapes, those are the guys that really get impacted dramatically by water issues.

The wineries themselves they are contracting with for the most part they are contracting others who grow grapes to delivery those grapes and that's going to effect the price certainly because production costs are higher when you have a fact that the water issues but we obviously look at it and every time we are financing winery and what they are access to water is but it hasn’t been huge issue so far..

[Operator Instructions] Our next question comes from the line of Don Worthington with Raymond James. Please proceed..

Just want to go back to the deposit growth a bit was there any say large deposit that was included in that linked-quarter growth?.

Not really where would I -- for the most part where I we have had nice growth across our different branches, so while we brought on a couple of new accounts frankly the continuous the two biggest new accounts that we brought on haven’t even really funded all their deposit get go probably fund in the third quarter and so really other than on a negative from a negative perspective like I said there is two business that was sold and all the deposits for the most part disappeared with the some exceptions it's been pretty consistent across most of our branches..

That said Don we do we have spoken about on how the deposit fluctuate the deposit levels fluctuate because we do have some large businesses that have large inflows and outflows of their account but is normal activity for those businesses.

So, that does impact the balances sometimes between the average and the ending balances but it doesn't mean that deposits are necessarily leaving the bank it's just normal activity..

Okay, got it..

The positives leave the bank..

Okay.

Yes and then how much the Canadian common market in San Francisco are you getting some good growth there?.

We are getting some there is only a couple of the right thing about that is that there is not a lot of banks that are involved in the business we’re getting some growth and that continues to be a great asset class there has been no defaults in our portfolio in the 11 plus years that we did in the business so -- but I don’t think we had a huge amount of volume but we've had some growth in that so..

Okay.

And then I guess lastly any update on the M&A market discussions there and maybe regions where you might be looking?.

Yes.

The market we’re sensing that there is going to be a little pick up in this market that there are opportunities out there potentially we are very active in talking to everybody all but we keep close contacts with all the investment banks then we are -- I am out there talking to banks all the time and should have something to report there is nothing to report but I think you will see more consolidation primarily with smaller I think smaller banks 500 million it's pretty tough for those banks for that price in this market as we see with our numbers we see margin compression and the expenses going up relative to from the compliance side regulatory oversight so if I know we've been saying this for a while but I'm confident that you will see an uptick in M&A over the next six to 12 months..

[Operator Instructions] And Mr. Colombo, there are no further questions at this time. I will turn the call back to you..

Okay, well, I want to thank everyone for joining the call this morning. And we look forward to talking to everyone again next quarter. Thank you very much..