Andrea Henderson - Director of Marketing Russ Colombo - President and Chief Executive Officer Tani Girton - Executive Vice President and Chief Financial Officer.

Jeffrey Rulis - D.A. Davidson & Co. Jackie Bohlen - Keefe, Bruyette & Woods, Inc. Timothy O'Brien - Sandler O'Neill + Partners, L.P..

Good morning, and thank you for joining Bank of Marin Bancorp’s Earnings Call for the Third Quarter Ended September 30, 2018. I’m Andrea Henderson, Director of Marketing. During the presentation, all participants will be in a listen-only mode. After the prepared remarks, we will conduct a question-and-answer session. [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 earning 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 a 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..

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 gain [ph] 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 were $52.6 million, up $10.3 million over the third quarter 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 $697,000 increase in net interest income compared to last quarter. Non-interest bearing account represented 50.2% of deposits, which totaled $2.2 billion at the end of the quarter.

The average cost of deposit was up 2 basis points to 10 basis points. We continue to execute on our capital management strategy, including three 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 had – has declared a cash dividend of $0.35 per share, a $0.03 per share increase in 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..

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 were 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 non-interest 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 intend 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 non-interest 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 points. Credit quality remained strong.

There were no provisions for loan losses or off-balance sheet commitments in the quarter. Non-interest 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 pre-tax income contributed $0.48 to diluted earnings per share. This is more than half of the $0.86 improvement we saw from the first three 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 asset and a 11% return on equity for the quarter reflect the power of our core values and business model. Finally, on October 5, we redeemed subordinated debenture due October 7, 2033, which was assumed in the 2013 NorCal Community Bancorp acquisition.

The coupon 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 the call back over to Russ for some closing comments..

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 everyday 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 rising 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 the 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 a 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 this Santa Rosa market. Dave brings close to 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 relationships with local commercial businesses. The decision by our Board to approve a 2:1 stock split is also a statement of great optimism and confident. 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..

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

Good morning..

Good morning, David. Yes..

Good morning, David..

A question on the margin, maybe, Tani. I guess, first, this is sort of that 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?.

So there are a lot of moving parts going to be affecting the margin going forward. We did raise some of our deposit rates towards the end of this quarter. So that’s not fully baked in. We will get some decrease from subordinated debentures, but it’s only half of that line that we’re redeeming..

Okay..

So the interest expense for the quarter on the sub-debt, which is – includes both the coupon and the accretion of the discount with 125,000. So you might roughly cut that in half and you can see what the decline will be associated with that line..

Okay, that’s helpful.

And then maybe just some housekeeping there that – were there – there were zero merger costs in this quarter relative to last quarter?.

I wouldn’t say zero, but immaterial, very smaller..

Okay.

And what was that figure last quarter?.

It was roughly 300,000. Hang on, I’ll get that. Yes, it was roughly 300,000. I can get you the exact number. I’ll come back to that..

And then, Tani, the tax rate year-to-date now at 24.5%.

Is that a good proxy for Q4 and then maybe even 2019?.

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..

Okay. And maybe one last one for Russ. Just the buyback that you got in place and 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?.

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, we’ve been buying at $78, $79 a share way better than $85.

But we – 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, we’re not too concerned about trying the market time prices, because we can’t. We’re in a – the way this plan is going. We just are continuing to be in market for the existing market price.

And obviously, if you had a tremendous ran up in the stock price, if you look at it, but we haven’t seen any point that we would not buy stock at this point. Yes..

Okay. Thank you..

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

Okay, great. Thank you..

Okay..

The next question is from the line of Jackie Bohlen with – from KBW. Please go ahead..

Hi, good morning, everyone..

Good morning..

Good morning, Jackie..

Still on the repurchase line questioning.

Is the third quarter’s level indicative of what you would expect on a quarterly basis?.

In terms of the repurchase dollar amount?.

The – either the fair amount or the dollar amount?.

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 – that’s just a general trend based on the way the program is step up.

But as Russ said, we – there has not been a price that’s been here yet that we wouldn’t purchase the stock at..

Okay, that’s very helpful. Thank you. All right.

And then looking to loan growth in the quarter, did loan utilization, it sounded like that’s played a nice impact in the quarter’s increases?.

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..

Okay..

More loans, slightly lower percentage of utilization, but dollar-wise increase..

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

Well, we have a – yes, there’s a number of new commitments, including both on commercial banking side and even on retail side with the home equity lines and we have – actually have a larger dollar number of home equity line, the utilization, home equity line is actually down..

Okay. And…..

And again, 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..

Okay.

And then in terms of 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?.

I think, it’s kind of interesting, because I think there’s more volume of HELOC, but 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 in 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 the case. There is going to be more people who have less utilization on their home equity lines. They just – I think, what you would see is people, if they have it on their home equity line, then they refinance into a larger traditional mortgage. And they still have….

Okay..

… home equity line, but not use it too much..

Okay. All right.

So in light of utilization and trends and everything else is going on, how are you thinking of loan growth, both through the end of the year and then heading into 2019?.

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 mean, I’ve been pretty consistent through the year..

Okay..

And I would say, there’s no reason to believe that’s going to change..

Okay.

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

Yes, it certainly will be additive. Our East Bay office has done really, really well. And now we’re – because of that we look at the Diablo Valley market. And when we hired Wim-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 is 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 in the – to be – ultimately to be over in Walnut Creek..

Okay, great. Thanks for all the color, Russ. I appreciate it..

You’re welcome..

[Operator Instructions] And the next question is from the line of Tim O’Brien from Sandler O’Neill. Please go ahead..

Thanks.

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?.

That’s correct..

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?.

I don’t have the exact – something to hit me. On average, I can tell you, it was up. I don’t have that at my finger tips, Tim, unfortunately. I could probably get that, but….

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

I would say, it’s up – it looks like about – now I’m looking at the numbers, it’s looking like it’s up about – from portfolio and new volume is probably up about 50 basis points. So we don’t…..

50 or 15?.

No, 0.5%, 50..

50..

Relative to total – relative to the total portfolio. You already [Multiple Speakers].

Fantastic..

…yes, from our new loan volume..

Good to know..

Yes, [Multiple Speakers].

Great.

And then were there – sorry, Russ?.

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

Got it.

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

No, I don’t – nothing to speak of. If they were, they were insignificant..

Immaterial, okay. That’s it. Thanks for answering my questions..

Thank you, Tim..

There’s no other question queued up..

That’s it. With 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..

Thank you..