Good morning, and thank you for joining us for Bank of Marin Bancorp's Earnings Call for the First Quarter Ended March, 31, 2017. My name is Jarrod Gerhardt. I'm the Senior Vice President and Director of Marketing for Bank of Marin. During the presentation all participants will be listen-only mode. After the call we will conduct a question-and-answer session. [Operator Instruction] As a reminder, this conference is being recorded on April 24, 2017. Presenting this morning will be Russ Colombo, President and CEO, and Tani Girton, Chief Financial Officer. You may access the information discussed from the press release which went over the wire 5:00 A.M. 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 the discussion you hear on this call is based on information we know as of today, April 24, 2017, 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 the earnings press release we issued earlier this morning, 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, Jarrod. We're pleased to review our results with you for the first quarter of 2017. Let's start with some highlights. First quarter deposits grew by $6.6 million. If you include balances sold to deposit network for short-term investment, total growth was $55 million. Non-interest bearing deposits continue to be the strength of the bank, making up 49.4% of the on-balance sheet deposit and 48.1% of the combined on and off-balance sheet deposits. The total cost of deposits dropped one basis point to 0.07% from both prior quarter and the first quarter of 2016. There are substantial commercial lending opportunities in the Bay Area, and our pipeline is considerably larger than it was at this time last year. Based on these factors, we expect to see stronger levels of loan originations in the coming quarters. Gross loans actually decreased by $9 million and totaled $1.478 billion at the end of the quarter. First quarter loan originations were $24 million. The loan payoffs was $33 million for the quarter and continue to be primarily the result of property sales and the successful completion and sale of construction projects. Our credit quality continues to be outstanding. We recalculate our loan loss reserve each quarter, and we believe the current 1.03% of total loans is appropriate given the quality and size of our portfolio. As a result, there was no provision for loan losses taken in the first quarter. We monitored the portfolio carefully, and acknowledge any potential borrower issues and address them proactively. Diluted earnings per share totaled $0.74 in the first quarter of 2017, and our Board of Directors has declared a quarterly cash dividend of $0.27 per share. This is our 48th consecutive dividend paid by the bank. Now, let me turn it over to Tani for additional insights on our financial results.

Thank you, Russ, and good morning everyone. First quarter net income was $4.5 million compared to $5.7 million last quarter and $5.6 million in the first quarter of 2016. In spite of the decline, there are some positive underlying trends, such as margin stabilization. Let's break down the numbers. Net interest income of $17.6 million this quarter was $355,000 lower than last quarter, and $1,017,000 lower than first quarter 2016 largely due to the absence of gains on payoffs of purchase credit impaired loans and fewer days in the quarter. The improving investment portfolio yield helped to offset the decline. The tax equivalent net interest margin was 3.79% in the quarter, compared to 3.78% in the prior quarter, and 4.04% in the same quarter a year ago. Removing the impact of acquired loans, the yield on the loan portfolio was unchanged from the prior quarter, and the yield on investments was up over both earlier quarters. A well-secured $1.1 million commercial real estate loan was placed on non-accrual during the first quarter. This loan and another $9.6 million relationship were both downgraded to substandard; increasing classified loans to $30.1 million at March 31. Non-interest income of $2.1 million was down from $2.5 million in the fourth quarter of 2016 primarily due to the $347,000 special dividend paid by the Federal Home Loan Bank in Q4. Non-interest expense was $13 million for the quarter, increasing $1.3 million from the prior quarter and $1 million from Q1 2016. Salaries and benefits increased as we filled a number of open positions related to meeting our organic growth goals. The bank increased its 401(k) match to 70% with a higher per-employee cap. At the same time, beginning-of-the-year balance is reset to zero. The combined effect of those was a $288,000 increase in expense over Q4 2016. Deferred loan origination costs declined from the level associated with large new loan volume in the fourth quarter, resulting in a $275,000 additional expense. The bank paid $147,000 in recruiting fees over the quarter as part of building the commercial banking team. We also reported a $165,000 provision for off-balance sheet commitments related to the increase in classified loans. The increase in non-interest expense combined with lower revenues led to an increase in the efficiency ratio to 65.92%, and our return on average equity was 7.92% for the quarter. We have a very strong capital position, and a low-cost deposit base, both of which position us well for future growth. Now, back to Russ for some closing comments.

Thank you, Tani. Long-term success in this business has a lot to do with discipline, fundamentals, and strategic planning. Both of which have underpinned our consistent performance over many years. As we look ahead, we will stay true to our mission and our market. We are investing in a number of strategic initiatives to help us increase our market penetration and build the value of the franchise. This summer, we'll be opening our first new branch since the Bank of Alameda acquisition, in 2013. This office, located in Healdsburg, California, will extend our footprint north, and help us solidify our presence in a vibrant and growing market. This office will complement our team's extensive wine industry financing expertise. We will also be expanding our geographic reach by adding a commercial banking office in the East Bay, which continues to be one of the strongest growth markets in the Bay Area. For each of these new offices we already have a strong base of clients in the area. Our commitment to opening local offices to better serve the needs will help grow our presence and broaden new relationship opportunities. Finally, while we have had success hiring new lenders and regional management in the last year, we believe it is also important to develop our own lending team internally to build base [ph] and strength. Accordingly, we are establishing an intensive in-house training program. We will be recruiting from local universities to train new commercial loan officers who will ensure the continuity of our lending principles and customer-centric culture. It is important to note that all of these initiatives are long-term commitments, and critical to the success of our strategic plan. We manage for the long term, which has served the bank and our shareholders well throughout our 27-year history. I want to thank you all for your time this morning. And now, we will open it up to answer any of your questions.

Thank you. [Operator Instructions] And our first question over the phone comes from Tim O'Brien with Sandler O'Neill & Partners. Please proceed with your question.

Hi, good morning, Russ and Tani. It's actually Alex Morris on for Tim.

Hi, Alex.

Hi, Alex.

Just to start off, I was wondering if you guys could give just a little bit of color on the $9.6 million criticized loan that moved to non-accrual, I know in the press release it mentioned that they -- sorry, just any kind of additional color you could provide on that?

We really -- for the privacy of our customers, we can't give you a lot of information. The only thing I would say, it's a long-term relationship. We feel very good about working with our client and we don't anticipate any loss potential in this credit.

Okay, understood. Appreciate that. And then Tani, I apologize if I missed this in your prepared remarks, that $275,000 for the one-time expenses, was that tied to the new stock comp accounting rule or was that something else?

The $275,000 was the decrease in deferred loan origination costs. So we had a higher volume of loan originations in the fourth quarter than we did in the first quarter. And so we deferred fewer expenses in the first quarter.

Understood. That's it for now; I'll hop back in the queue. Thank you.

Thanks, Alex.

Our next question comes from Jeff Rulis with D.A. Davidson and Company. Please proceed with your question.

Thanks, good morning.

Good morning, Jeff.

Maybe another follow-up, Tani, on the quarterly expense, it seems like -- I'm just trying to get a handle on what's going to remain, and maybe what was a little one-timeish in the quarter, particularly give the sort of the branch and office initiatives that are underway and then you get the sort of the off-balance sheet commitments and some seasonal comp stuff. So, maybe just a little more detail on kind of that operating expense level, and puts and takes.

So, the increase in salary and expense and the associated increases in incentives and payroll taxes and benefit, those are sort of permanent changes, if you will because we did fill a lot of open positions over the course of the past year. The increase in the 401(k) and the taxes related to resetting to zero for the beginning of the year, as 401(K)s and payroll taxes hit their caps, of course those will go down over the course of the year. The deferred loan origination…

Can you gauge on the kind of number on that?

Pardon me?

Any sort of number to that in terms of how much higher than normal that is in Q1 versus the balance of the year?

So, the increase from Q4 to Q1 for the 401(k) itself, which was the effect of the increased match to 70% plus a higher cap plus the reset to zero, was worth about $288,000. So part of that will start to decline over the course of the year. I can't say exactly how quickly it will decline.

Let me add one thing too. It's, as you know, when you have 401(k) and you have, now since we've increased the match which is significant -- I mean increased the percentage, significant because our employee then -- it's a real employee benefit to get their match easier. And so those that are deferring a bigger percentage of their salaries, they're going to hit their cap faster. And so a lot of our 401(k) match will be front-loaded. So, while it's not all in the first quarter, yield from the first quarter, to second, to third, it will decline significantly, and that 288, that number from the first quarter from the fourth quarter. So it's hard to actually break down the number exactly. But since we paid bonuses in the first quarter, in the bonus number we take the deferred amount that the employee defers for the 401(k), and so that's in there at an elevated level because it's a bonus. And so you get a bigger number that first quarter. So I don't expect that number to be even close to that, that 288 in the second quarter.

Okay, that's very helpful, thank you. And maybe the last piece of that would just be any -- what have you incurred from any of the branch of office initiatives that are kind of baked in or will we see a pickup in the coming quarters related to that piece?

Yes, we actually haven't -- there's nothing yet because we just signed a lease up in Healdsburg. We've identified employees to be moving with the internal. So, there's no cost yet. You'll start seeing -- we wanted to make sure you understood that we were doing it. You'll see those numbers beginning in the second quarter. And then, fully baked kind of in the third is really the expectation. We are out there looking for people, particularly for not only for the branch in Healdsburg, but the commercial banking office over in East Bay, that there is really nothing in these numbers that reflect any dollars for that. That being said, we've had significant increases in salary because of the hirings we have done in Oakland office and in Santa Rosa. If you are comparing first quarter -- last year first quarter, this year we completed hiring of our team of three people that we brought in over the last year in Santa Rosa. And then we've also hired people in our business banking unit which is here in Novato, which is a small business lending unit, we've filled vacancies. So we've had a fair number of vacancies. And frankly, we've been filling it. We've been filling the pipeline with people, which is great. It's the good news. The bad news is it takes time for people to introduce and say you bring me people in and it takes a while before they are bringing in and growing our loan portfolio. So it is kind of what it is I suppose you just have the expense in the first quarter you don't necessarily have the resulting revenue that will come from that from the hiring of those people.

Got it. And then, the tenants in common, could you remind us that the total size of that portfolio as it stands today and maybe how large -- it's sounds like there is some positive comments in the release, but how large could that piece be, or if you can range about it at this point?

Sure. The TIC portfolio, I think it's somewhere in the 50 range. But let me give you the exact number on that. It's actually $61 million in TIC. We have seen growth in that -- certainly the TIC is a reflection of the very difficult housing market in San Francisco. And our 12 years in the business, we've never had a default. And there aren't that many lenders that actually -- make actual interest loans for these TICs in general -- in the city. So we had some nice growth in that over this quarter. I think it was 6 or $7 million -- $9 million -- I am sorry, $9 million in the quarter of new TIC loan. Then as you can imagine in San Francisco, the price of housing that's probably not gotten any units, but it's still a great add for us and because you don't have a lot of competition for that, it's -- we have some pretty good returns out of that portfolios.

Great. And maybe one last one for Tani, just the tax rate, would we expect that to pump back up in -- that remaining three quarters for the year?

So, obviously the dollar amount as taxes was lower because of the lower earnings in the quarter. We also -- so there are a couple of moving parts there. We also had the implementation and the new accounting rules for excess tax benefits on stock based comp, and that lowered the tax by about 133,000 for the quarter. And also, we just have a higher balance of tax advantaged loans and securities on the balance sheet. So, those are going to remain in effect.

Okay. So, tax rate similar to or I guess in a more higher profitable quarter, we could see a potential lift in that number?

Yes.

And then the stock based impact, is that oversized or outsized in Q1?

Yes. So, on that one, that's just to change of moving from the booking to equity versus moving it to the tax provision.

I guess some others have suggested that Q1 is maybe in this change it's been a little more sizeable in Q1 relative to…

Because of -- yes, because of the accumulated impact; I think I'll get back to you on that one because I don't know the piece of that that sort of cumulative versus quarterly impact.

Okay, thanks. I will step back. Thanks for the commentary.

Thanks, Jeff.

We have no further phone questions at this time.

We have a question from the web -- from the online participants. The question is, please discuss the interest rate sensitivity the asset side of the balance sheet, given 49% DDAs I would have expected some meaningful margin expansion. So we -- remember that there was a significant impact of acquired loan accretion decline which impacted the margin in the quarter. So if you look at the fourth quarter or the first quarter of 2016, those two quarters had a fair amount of accretion. And you can see the exact amounts in the press release. So if you take those out, we actually did have a bump in our margin. We had in fact a flat loan yield and an improving securities portfolio yield, which resulted in a net increase if you remove the effect of the accretion.

We also had another question that came in and that question was, what is your expectation for deposit growth in 2017, following the strong growth in Q1? As we have a pipeline in the commercial banking side, we also have a very strong pipeline and sales process in our retail side for a deposit growth. And the pipeline currently is very strong and the expectations are that we will continue to grow similar level, and if it's positive, very, very -- it's more difficult than the long pipeline to predict, because when you have a financing opportunity there is a need and it gets done because of that need to actually move deposit balances from one bank to another sometimes it takes a while a longer than we would anticipate it, but we are pretty excited about the opportunities we have. And that you can -- as you saw, our demand deposit growth continues to be very strong. And we are here now at close to 50%. And that to me is an indication that we are building relationships as opposed to money that's just flowing in because of rate although it really never has with us, but it's really relationship-based. We are seeing some really outstanding deposit opportunities up in Santa Rosa and also East Bay. So, pretty excited about that because historically our deposit growth has been fueled for a big part out of Marin, but now we are starting to see very strong opportunity in different markets. And so as we look forward, that's a real positive sign.

If there are no more questions, I would like to thank everyone again for listening this morning. And we look forward to talking to you again next quarter. Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.