Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Second Quarter ended June 30, 2019. I'm Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a 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 22, 2019. 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 Web site 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 22, 2019, 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.

Thank you, Andrea. Good morning and welcome to the call. Our strong results this quarter once again demonstrate the power of combining consistent credit and expense management with a focus on relationship banking. The Bay Area economy remains solid with robust levels of new business investments, hiring and overall activity. This is fueling steady loan demand throughout our markets. Bank of Marin’s commitment to disciplined underwriting enables us to meet that demand while maintaining our pristine credit quality. Now let me walk you through some of the financial highlights for the second quarter. We reported net income of 8.2 million, up from 7.5 million in the first quarter and 7.9 million in the second quarter of 2018. Diluted earnings per share was $0.60 in the second quarter of 2019 compared to $0.54 last quarter and $0.56 in the same quarter a year ago. Loans increased to 1.76 billion at June 30, 2019 from 1.72 billion at June 30, 2018. While balances decreased slightly from 1.77 billion as of March 31, 2019, we are seeing a lot of loan activity across our market and the timing of new loans is hard to predict. Additionally, balances were impacted by the successful completion of a large construction project. We remain discipline in our deposit strategy serving our customers’ needs and providing them a fair return. Non-interest bearing deposits totaled 50% of total deposits at June 30 representing one of the strongest deposit franchises among our peers. The cost of deposits increased to 20 basis points in the second quarter of 2019 compared to 18 basis points in first quarter. Total deposits were down 76.6 million in the second quarter to 2.1 billion primarily due to normal cash flow inflation of our large business customers. Additionally, we sold 16.1 million through deposit network which…

Thank you, Russ. Good morning. As Russ said, we delivered another quarter of strong performance with earnings of $8.2 million. Earnings increased 756,000 over the first quarter which included the typical seasonality of higher personnel costs as well as the underwriting costs of new bank-owned life insurance policies or BOLI. Second quarter and year-to-date earnings reflects steady growth over 2018 as a result of loan growth, higher interest rates and expense controls. Net interest income of $23.8 million was virtually flat versus the first quarter and the tax equivalent net interest margin increased 2 basis points to 4.04% thanks to a higher percentage of loans in the earning asset mix. Comparing to 2018, net interest income increased 947,000 over the second quarter and 2.9 million over the first half, as earnings asset balances and yields increased with smaller increases in the cost of funding. The 2019 tax equivalent net interest margin increased 12 and 14 basis points from the respective quarterly and semiannual periods in 2018 for the same reasons. Non-interest income of $2.3 million in the second quarter of 2019 compared to $1.8 million in the prior quarter and $2.2 million in the same quarter a year ago. The increase of 503,000 from the prior quarter was primarily due to 283,000 in BOLI underwriting cost expensed in the first quarter and gains on the sale of investment securities in the second quarter. The BOLI cost and lower deposit network income in 2019 drove $435,000 decline in year-to-date non-interest income versus 2018. Non-interest expense of $14.9 million in the second quarter decreased $612,000 from the first quarter as salary and benefit costs from higher levels are typical in the first part of the year. Additionally, the first quarter included a 129,000 provision for losses on off-balance sheet commitments. The increase in non-interest expense from the second quarter of 2018 was primarily related to annual merit increases and additional personnel, partially offset by 268,000 less in professional fees, mostly attributed to our core processing contract renegotiations in 2018. Year-to-date, total non-interest expense was down slightly from 2018 and higher salaries and benefits were more than offset by the absence of conversion cost from the Bank of Napa acquisition and core processor contract renegotiation fees. In the second quarter, the bank delivered an efficiency ratio of 57.23%, a return on assets of 1.32% and return on equity of 10.26%. Our investment in the future starts with our people. The bank’s consistent performance is a testament to their ability to serve our customers and execute on strategic priorities while delivering solid results for shareholders. Now Russ would like to share some closing comments.

Thank you, Tani. We have successfully executed on our organic gross strategy as reflected by our performance in the second quarter. Our strong results led the Board to declare a $0.02 increase in the cash dividend, our 57th consecutive quarterly dividend to deliver additional value to our shareholders. With non-interest bearing deposits at or near 50% for the sixth straight quarter, the bank is a leader in the industry. Looking ahead with our focus on investment in talent and key markets like San Francisco, Santa Rosa and Walnut Creek and our ongoing work to develop future leaders through our Commercial Banking Academy, we are confident we have the right people in place to respond to this steady loan demand we’re seeing and meet our customers’ needs. Overall, we remain optimistic about operating conditions. Our experience through multiple credit cycles remains us that it is always prudent to be prepared for potential shifts in the economy that could affect our clients, but we do not see any notable signs of weakness in our market and we believe the bank is well positioned for a strong second half of 2019. Thank you for your time this morning. And now we will open it up to answer any of your questions.

Thank you. [Operator Instructions]. Our first question comes from Luke Wooten of KBW. Please go ahead.

Good morning.

Good morning.

Good morning.

Just wanted to start on loan growth. I saw that you guys had the construction payoff this quarter. How do you guys feel about that market going forward for the rest of 2019?

The construction market?

Yes, just the construction loan, do you feel it softening in construction loan market or do you feel that that was kind of a one-time in nature type portfolio?

That was paid off because they completed the project and they got long-term insurance company financing. So we continue to see a lot of activity in the construction market and we have some real good projects that we’re looking at. But it’s kind of the problem – not a problem, but construction activity you have a buildup in balances over time and then 18 to 24 months after, they typically get refinanced out in some kind of longer-term financing and get paid off. And so that was just one project, a pretty large project for us that was completed and we financed out and so we got paid off, which was fine. That’s actually the way it’s supposed to work.

Yes, it’s a good problem to have. And just kind of switching over to the expense side for a second, just on the new digital platform, just kind of wanted to see how that’s kind of trending and then how we should look at expenses for that going forward for the rest of the year?

Yes, so we expect a reduction of approximately 295,000 per quarter beginning in Q3 as we’re no longer running the two digital platforms in parallel. The new platform replaces six different solutions with a single solution supporting both consumers and businesses and it’s providing more intuitive interface for the customers and also in the future will allow us quicker time to market on new functionality in the future. So hopefully you’ll see a decline starting this quarter and we’re moving forward on the digital platform. Does that answer your question?

Yes, that’s perfect. Thank you. That’s super helpful. And then just kind of offsetting that just on the Petaluma Branch closing, we should see the full benefit of that in 4Q, correct, because it’s closing in August?

Yes, we’ll see the benefit of reduced staffing needs. However, the lease isn’t up until early next year, February. So we still have lease payments that we make during that time.

Okay, that’s perfect. I’ll step back. Thank you for your answers.

Thank you. Our next question comes from Jeff Rulis of D.A. Davidson. Please go ahead.

Thanks. Good morning.

Good morning, Jeff.

Russ, you’ve talked about the outlook for the second half of the year and the payoffs occur. I guess as you assess your growth potential and sometimes you can’t really control the payoff portion, but kind of looking at loan growth for the year you’re flat year-to-date on balances. How do you think that shapes up in terms of a net growth perspective or maybe offer some insight if maybe not specific to that but just kind of puts and takes of the back half of the year?

Interesting enough, Jeff, our pipeline right now is more than twice than it was at this time last year. We see really good opportunities in a number of markets including the East Bay and WC and Rosa and San Francisco and Napa. And we’ve completed our – for the most part, we’ve completed most of the hiring for those – also recruiting. We’ve added a couple of people over at Walnut Creek in one production office that we opened there. So the benefit of that definitely takes time as we bring on new people, but we’ve definitely seen a much more robust pipeline than we had a year ago. So how does that translate into numbers, I can’t tell you that because sometimes these things take longer to get locked in than others. But I’m feeling pretty good about the loan portfolio and the opportunity for growth for the next six months.

Great. So pipeline is 2x year-over-year and you feel like the staffing is in place to capture any additional growth, so it sounds like a positive message.

Definitely a positive. I feel very good about our commercial banking officers. They’re all – the addition of some new people as well as the ones that have been here, we’re seeing a lot of great activity.

And then maybe one for Tani just on the margin, I think the bank’s still asset sensitive and I looked at this quarter and if you strip out kind of the non-PCI accretion actually suggested a stronger core margin, how do you see that kind of trending particularly if we were to see a rate cut or two at the balance of the year?

So about half of our loan portfolio is fixed and half adjustable, but only about 13% is floating based on the primary. So if rates change, roughly about 20% of the portfolio will be priced within a 12-month period. The one thing that I think will serve us well in light of the expectations that the Fed might lower rates at the end of this month is that over the past year, we’ve extended the durations on both the loan and investment portfolios moderately and that should help our margin to hold in well in a falling rate environment.

Got you. So it sounds like protecting that margin despite I guess the gap sensitivity, you think it’s a pretty stable outlook all things being equal?

Well, of course it’s really tough to know. There is some debate as to whether the Fed’s going to go 25 or 50 basis points. And depending on how fast they move, there is little bit of room on the deposits side. But the key to all of this is what happens to the longer end of the yield curve and whether – if the yield curve steepens when the Fed cuts rate, then that could have a positive impact on new loans coming onto the balance sheet. As of right now, the new loans that are coming onto the balance sheet continue to come on at average rates higher than the existing portfolio rate.

Great. And then just one last question on that branch closure. You talked about potential cost savings, but is there any exit disposals kind of upfront costs on the closure of that that you’d anticipate --?

There are some small numbers in terms of the accelerated depreciation and lease expense that we booked in the second quarter and little more in the third quarter, but they’re really not material.

Okay. Thank you.

Thank you. Our next question comes from Tim O’Brien, Sandler O’Neill & Partners. Please go ahead. Tim O’Brien: Good morning.

Good morning.

Good morning, Tim. Tim O’Brien: All right, Tani, I’m going to ask you this again because I didn’t catch the numbers. You said the percentage of loans that re-price 12-month window was – the floating rate that re-price, what was that percentage you gave?

The floating rate is 13%. Tim O’Brien: Got that.

But there’s also some adjustable rate. So when you add the total of maturities, adjustable rates and floaters, it’s about 20% within 12 months. Tim O’Brien: 20% in 12 months, great. And then you also gave a deposit number for deposits that moved off balance sheet to like Cedars and other networks. What was the dollar amount of that you gave?

16 million increase from last quarter. Tim O’Brien: 16 million increase; okay, great. And then regarding the sizable payoff on the construction loan, was that a TIC loan construction project?

No. That was actually over the East Bay. It was a multifamily project in the East Bay. Tim O’Brien: Got it.

That built out beautifully. Tim O’Brien: So what’s sizable for you? What was the payoff on that, Russ?

That was 11 million. Tim O’Brien: And do you have any other projects that are pending completion here in the second half that are on-track and on-schedule to complete that credit payoffs that should hit payoffs?

Yes, we have projects coming through all the time. Nothing’s that big. So while things may payoff, they’re not – that was kind of a large one that relatively from the portfolio perspective, it was a large one which paid off had an impact. But I don’t see anything having that kind of an effect on the payoffs in the second half. Tim O’Brien: And then last question, CECL plans in light of the FASB ruling this week for you guys?

Yes. That ruling won’t impact us. We’re in great shape on our CECL preparation. So our system is in place. We’ve been collecting data for several years now and we’re running parallel now and will be through the end of the year. Tim O’Brien: Great. Thanks for answering my questions.

Thanks, Tim.

[Operator Instructions]. Our next question comes from Matthew Clark, Piper Jaffray. Please go ahead.

Hi. Good morning.

Good morning.

Good morning.

On expenses, Tani, you quantified the relief you expect on the systems, your running dual systems. Can you help us also with the savings you expect from the branch closure when that lease is up next year?

I don’t have those numbers exactly. I can come back to all of you after the call with that.

Okay. And then just thinking through what rates have done here in short order, can you give us a sense for the asset side of things and what you’re seeing in terms of new securities? What you might be buying and the rates at which you’re getting? And then same thing on new business within the loan portfolio, I know you said it was above the current portfolio but just wanted to get a better sense for the rate.

So, we’ve actually been selling securities out of the securities portfolio to bolster our cash position as some of our deposits went off balance sheet to the deposit networks and also just to accommodate the large fluctuations in cash balances that come from some of our large customers’ cash flows. So we haven’t been purchasing a lot recently. We’ve been more selling. But earlier in the year and when rates were higher, we were actually – as I said, we did some lengthening, we purchased some agency securities that had a little bit longer duration tied to commercial projects. And so those have yield maintenance provisions that help to keep the rates high on the investment portfolio for a longer period of time.

Okay. And then just on the lending side of things, you’re slightly above the portfolio. Is that the sense now or --?

Yes, there’s no real change in our loan pricing trends. But as I said before, the new loans that we’re actually seeing coming into the portfolio on average are at a higher rate than the existing portfolio rate.

Okay. And then just on capital, Russ, you guys have been pretty proactive with the dividend and share repurchase. Can you update us on M&A prospects these days and what you’re seeing, if anything?

In the Bay Area and we’ve been pretty clear about our desires to be around the Bay Area. There’s some activity that you see. You all know that the Heritage is buying Presidio. Other than that, it’s been pretty quiet in the market. We’re still very interested in acquiring Bay. But if that doesn’t happen, we remain focused on growing organically. You can’t never time or plan for an acquisition. They happen when they happen. And banks are sold, they’re not bought. So we continue to keep our theories out there. But right now, there’s nothing going on for us. We’re focused on filling out our offices, going through organic growth like Walnut Creek and looking at new potential situations ultimately in terms of organic growth.

Great. Thank you.

We have no further questions via the phone lines. I’ll turn the call back over to our speakers.

Okay. I want to thank you all for attending – for being on the call this morning. And we all look forward to talking to you again next quarter. If you have any questions, however, you can certainly call either Tani or myself. Thank you so much.

Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.