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Bank Of Marin Bancorp (BMRC 3.13%)
Q4Â 2019 Earnings Call
Jan 27, 2020, 11:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Andrea Henderson -- Director of Marketing
Good morning and thank you for joining the Bank of Marin Bancorp's Earnings Call for the Fourth Quarter and Year Ended December 31, 2019. I'm Andrea Henderson, Director of Marketing for Bank of Marin. [Operator Instructions] After the call, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on January 27, 2020. 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 as we know as of today, January 27, 2020, 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.
Russell A. Colombo -- President and Chief Executive Officer
Thank you, Andrea. Good morning and welcome to the call. Bank of Marin full year 2019 results reflect the successful execution of our proven relationship banking model. We continue to deliver consistent loan growth, a low cost deposit base and exceptional credit quality.
Let's start with our 2019 highlights. Net income for the full year was a record $34.2 million, which represented a return on assets of 1.34% and return on equity of 10.49%. Diluted earnings per share were $2.48, up 6.4%. We grew our loans by $79.4 million or 4.5% based on a record year of originations, with contributions across our footprint. Deposits grew $161.7 million for the year to $2.3 billion. Non-interest bearing deposits increased $62.8 million in 2019, and comprised 48% of total deposits at year end. For the year, our cost of deposits remained very low at 20 basis points. Non-accrual loans represented just 0.01% of total loans at year end, reflecting our unwavering focus on credit quality.
In 2019, we successfully executed on the organic growth initiatives that we discussed at the start of the year. We opened a new loan production office in Walnut Creek and strengthen our presence in San Francisco by bringing in well established commercial banking lenders. We made significant progress in staffing across our markets that should position us well for continued loan growth and market share gains in 2020. With favorable outlook on top of our strong 2019 performance, our Board of Directors declared a cash dividend of $0.23 per share on January 24, 2020, an increase of $0.02 per share. This represents the 59th consecutive quarterly dividend paid by Bank of Marin Bancorp.
Our $25 million stock repurchase program expires February 28, 2020. We repurchased 42,349 shares totaling $1.9 million in the fourth quarter and 356,000 shares, totaling $15 million over the year 2019. With the current share repurchase program nearing exploration, Bancorp's Board of Directors approved a new repurchase program on January 24 of up to $25 million in Bancorp's common stock. The new program will expire February 28, 2022.
Now let me turn it over to Tani for additional insight on our financial results.
Tani Girton -- Executive Vice President and Chief Financial Officer
Thank you, Russ. Good morning, everyone. As Russ stated, we built solid momentum through 2019, producing net income of $34.2 million for the year. This marked a 5% increase over 2018 and continued Bank of Marin's long-term upward earnings trend. Over the past five years, we've produced an average earnings growth rate of more than 10%, due to the successful execution of our two-pronged growth strategy. First and foremost is consistent organic growth. We amplified that growth by effectively integrating and building on strategic acquisitions, as we have done with the Charter Oak Bank, Bank of Alameda, and Bank of Napa acquisition.
Year-over-year net interest income grew $4.2 million or 4.5% driven by higher loan balances and yields. The impact of higher interest-bearing deposit balances and rates was mitigated by the early redemption of subordinated debt in 2018. Non-interest income declined $1 million from 2018, which included a $956,000 gain on the sale of Visa Class B shares and higher fees on deposits sold to third-party networks in 2018. In 2019, a $562,000 payment on bank-owned-life insurance policies was partially offset by expenses on new policies purchased.
Notably, non-interest expense of $58 million was down from 2018, while salaries increased 7.5% year-over-year primarily driven by hiring for our commercial banking offices, our data processing, professional services and health insurance costs declined due to the renegotiation of contracts. There were no acquisition related expenses in 2019, an FDIC insurance premium payments were not required in the last two quarters of the year as the deposit insurance fund exceeded its billing threshold. The full year 2019 efficiency ratio of 55.3% declined from 57.3% in 2018, demonstrating our commitment to careful expense management that is balanced with strategic investments in talent, and technology.
Now turning to our fourth quarter results. Net income was $9.1 million in the quarter compared to $9.4 million in the third quarter. There were three events in the third quarter that led to higher net income, a $388,000 interest recovery on a land development loan, a $562,000 benefit on bank-owned-life insurance and a $327,000 tax adjustment related to the true-up of our deferred tax liability. Diluted earnings per share were $0.66 in the fourth quarter compared to $0.69 in both the prior quarter and the same quarter a year ago, after adjusting for the November 27, 2018 stock split. Our return on assets was 1.37% and return on equity was 10.75%.
Net interest income was fairly stable quarter-over-quarter as growing loan balances mostly offset declines in yields related to federal reserve interest rate reductions and the third quarter interest recovery. In line with strong loan growth, we recorded a $500,000 loan loss provision in the fourth quarter compared to $400,000 in the third quarter of 2019 and no provision in the fourth quarter of 2018.
Non-interest expense of $13.3 million in the fourth quarter of 2019 was down from $14.2 million in the prior quarter and $13.7 million in the same quarter a year ago. The decline from the third quarter was mostly due to an incentive bonus adjustment and higher deferred loan origination costs related to a higher volume of new loans. Most of the decline from the fourth quarter of 2018 was due to lower data processing costs and the absence of FDIC insurance premium payment. Disciplined expense control enabled the bank to reduce its efficiency ratio to 50.8% in the fourth quarter of 2019 from 52.8% in the prior quarter and 51.3% in the fourth quarter last year.
I'd now like to discuss the new accounting standard related to credit losses, commonly known as CECL. This went into effect on January 1, 2020 and had no impact on our 2019 results. Our primary credit loss methodology will utilize a discounted [Phonetic] cash flow approach that considers the probability of default and loss given default. Parallel testing occurred throughout 2019 and we estimate that our implementation of CECL will result in an increase of 5% to 15% of our December 31, 2019 allowance for loan losses, which will reduce retained earnings net of tax.
In closing, we are very pleased with our 2019 results and all of the work accomplished during the year that positions our teams to build off this great success as we move forward in 2020.
Now Russ would like to share some closing comments.
Russell A. Colombo -- President and Chief Executive Officer
Thank you, Tani. The Bank celebrated its 30th anniversary on January 23. We're very proud of the progress we've made and the success we've had over the last three decades. We have built one of the strongest and lowest cost deposit franchises in the country, with close to 50% of funds in demand deposit accounts. That's a result of a true commitment to our relationship banking model. Our focus on sound underwriting and comprehensive understanding of our clients and markets produces a high quality loan portfolio with industry-leading credit metrics, rarely having to deal with problem loans, allows us to focus on attracting and serving customers.
Our steady and safe loan growth paired with our low cost deposit base drives continued growth in the earnings per share. With an efficiency ratio at 55.3% for the year, it's clear that we manage expenses exceptionally well. We spend wisely, when it can help us provide more services to our customers and grow our market share. This is evidenced by the recent hires I noted in Walnut Creek and San Francisco. We are always mindful of expenses. For example, we review all contracts and leases upon renewal and often find opportunities to drive efficiencies and reduce costs.
Looking ahead, we believe we are well positioned for growth in 2020. We serve one of the most economically vibrant regions in the country. We have a strong technology sector as a foundation and the Bay Area is growing and economically diverse. Unemployment across our markets is very low. Here, in Marin County, it's just about 2%, which is basically full employment. This drives ongoing economic activity and opportunities for loan growth. There is substantial momentum for local businesses and for the bank. And we are confident, we can further build on this in 2020.
We also feel we are well positioned to grow our presence in our existing markets. And to consider expansion into new markets with de novo offices or acquisitions. Our consistently strong performance, coupled with our proven history, give us a strong position to acquire other community banks. While acquisitions are a very important part of our long-term strategy, we take a disciplined and selective approach to evaluating opportunities. All in all, I'm very excited about the future of this bank in 2020 and across the next 30 years.
Thank you for your time this morning. And now we will open it up to answer your questions.
Questions and Answers:
Russell A. Colombo -- President and Chief Executive Officer
Thank you. [Operator Instructions] Our first question is from the line of Jeff Rulis with D.A. Davidson. Please go ahead. Your line is open.
Jeff Rulis -- D.A. Davidson -- Analyst
Hi. Good morning.
Russell A. Colombo -- President and Chief Executive Officer
Good morning, Jeff.
Tani Girton -- Executive Vice President and Chief Financial Officer
Good morning.
Jeff Rulis -- D.A. Davidson -- Analyst
The first one is on expenses and I guess you had a year-over-year decline and I think Tani kind of outlined a bunch of the -- some of the levers to pull. You had some contract negotiations, obviously, the FDIC expense line item in a true-up on the salaries in the fourth quarter. So declined year-over-year moderately I guess, expectations as you invest in the business for '20. First question is, expectations for broader expenses in '20? And then, Tani, if you could provide detail on the FDIC expense early part of the year, if we expect to normalize those going forward? Thanks.
Tani Girton -- Executive Vice President and Chief Financial Officer
Sure. Just to clarify, I think you mentioned a true-up on salaries. It wasn't really a true-up on salaries. We've just brought in some new hires in our commercial banking area, which is what drove our salary lines up a little bit. And in terms of going forward, I think we continue to look at any contracts that come up for renegotiation. To the extent that we had vacancies in 2019, a lot of those vacancies have been filled. And so, if we have a lower vacancy rate in 2019, I mean, in 2020 than we did in 2019 plus with our new hires, you could see a lift in salary expense, again that's consistent with the fourth quarter levels.
And then finally, on the FDIC premium, as long as that -- the insurance fund remains above its threshold, we won't have to pay those insurance premiums and it has been trending up. So our expectation is that it is likely that at least for the first quarter or two, we may not have to pay that, but there is no telling because there are a lot of bank results that go into producing that number and if something happens then obviously all that's -- are off. So, but we have had two quarters and we do notice that the insurance fund is increasing in value, so that -- if that trend continues, then we will probably continue to get relief.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. And Tani, if I could just circle back then on the comp line that really does seem to be kind of the -- it was pretty front-end loaded in 2019, I assume on hires and as that sort of transition lower throughout the year. So if I read you right, I mean, you'll continue to invest in finding new folks, but is there a -- I mean you were kind of $1.5 million range on that salaries and benefits, is there a quarterly number that you think you -- maybe 4Q, does that seem artificially low at 7%, 8%? Any further color there?
Tani Girton -- Executive Vice President and Chief Financial Officer
No, I don't think so. Because we actually -- our staffing levels were pretty good in the fourth quarter. And what happened in 2003 is that we had a severance payment and that bumped salaries up in the third quarter.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. And last one is just a question broader on growth, 4.5% loan growth, 7.5% roughly on deposits. Looking at payoff activity and the overall environment, Russ sounds like you're pretty positive on origination activity. Just thoughts on '20, in general, is that, that anything that could be changing, what you're hearing out in the market from a demand side?
Russell A. Colombo -- President and Chief Executive Officer
No. It's pretty consistent and the good news for us is that we have staffed up these offices and we're really pretty much full employment. I think we may be have one opening in all of commercial banking right now which is fantastic. And that when you hire, there is a little bit of a lag period. But you should see better -- greater production going forward. We had great production in 2019, and I'm very confident about 2020.
And one of the things, I just wanted to mention to the salaries in the fourth -- you said that -- you thought the salaries are front-loaded. They were more back-loaded frankly, because we hired a lot of those people kind of near the end of the year. And the fourth quarter typically, we have an accrual of bonuses that goes on through the year and if we think we're going to be over accrued then we do reverse them. And so there was some accrual reversal in the fourth quarter which happens every year. So that fourth quarter is kind of a weird number, probably got most of the salaries, but it does have an accrual reversal in the future and that's what it was. But tell you, as I look forward to the next year, I'm pretty -- feel pretty good about the opportunities for growth in commercial banking.
Jeff Rulis -- D.A. Davidson -- Analyst
Okay. Thank you.
Operator
Thank you. We do have another question from the line of Matthew Clark with Piper Sandler. Please go ahead. Your line is open.
Matthew Clark -- Piper Sandler -- Analyst
Hi. Good morning.
Tani Girton -- Executive Vice President and Chief Financial Officer
Good morning.
Matthew Clark -- Piper Sandler -- Analyst
On the comp line, can you maybe quantify how much the lower accrual was and how much FAS 91 impacted that $7.8 million?
Tani Girton -- Executive Vice President and Chief Financial Officer
FAS 91, I'll have to dig a little bit, for the bonus accrual was about $500,000 reduction.
Matthew Clark -- Piper Sandler -- Analyst
Okay. And then on the pipeline can you speak to -- I guess how that pipeline looks going into 1Q here maybe year-over-year? Just to give us a sense for how that may have changed?
Russell A. Colombo -- President and Chief Executive Officer
There is two components to that. There is the existing staff and there is people that we just brought in. So we feel pretty good about it. We obviously -- when you have a really good fourth quarter, a lot of work that you've been doing during the year translates into business, and so then you do have a reduction in your pipeline first quarter and so and it takes time to build that back up. So while I don't think it's a big impact, it's probably off a little bit just because we booked everything that we are working on. So that being said, I'm very confident about the people that we have and now with our -- we've staffed up San Francisco and Santa Rosa and Walnut Creek. And so I feel pretty good about the opportunities for growth of our commercial loan portfolio.
Matthew Clark -- Piper Sandler -- Analyst
Okay. And then just on loan yields, they were down a little bit here. I know part of that was from the recoveries. So difficult comparison relative to the third quarter. But still, even adjusting for that, there was still some pressure. Can you give us a sense for where kind of new money yields are coming on the books and what might be running off in terms of yield?
Russell A. Colombo -- President and Chief Executive Officer
Yeah. Okay. Yeah. So the new -- kind of, the new loans that are coming on around the average -- around those new loans is about 4.3% -- 4.3%, whereas the existing portfolio is probably at 4.8%, 4.9%. So you're seeing definitely a lots of pressure coming down on the loan yields. That being said, I think you'll see that across the industry.
Matthew Clark -- Piper Sandler -- Analyst
Okay. And then just any update on M&A in terms of conversations or opportunities out there for you?
Russell A. Colombo -- President and Chief Executive Officer
We keep talking to people. The key problem is, as we always say, a bank is sold, they're not bought. There's not a lot of banks left in the Bay area. So as I mentioned, I think in my comments, we're looking at not only necessarily M&A in the Bay Area, but we might look at contiguous markets, but there's nothing new to this part at this point. My job is to talk to other banks and I continue talking, but nothing new at this point.
Matthew Clark -- Piper Sandler -- Analyst
Okay. Thank you.
Tani Girton -- Executive Vice President and Chief Financial Officer
Matthew, this is Tani. I dug out the deferred loan origination cost for the fourth quarter that was roughly $900,000 and that was up about $100,000 from the third quarter.
Matthew Clark -- Piper Sandler -- Analyst
Great. Thanks.
Operator
Thank you. [Operator Instructions] Our next question is from the line of Jackie Bohlen with KBW. Please go ahead. Your line is open.
Jackie Bohlen -- KBW -- Analyst
Hi. Good morning.
Tani Girton -- Executive Vice President and Chief Financial Officer
Good morning.
Russell A. Colombo -- President and Chief Executive Officer
Good morning, Jackie.
Jackie Bohlen -- KBW -- Analyst
I would be remiss, if I didn't start us off with a compensation question. And just one quick one. Tani, I have in my notes that payroll taxes, usual -- and other seasonal items, usually increase compensation by about $1 million between 4Q and 1Q. Is that still the run rate you're expecting?
Tani Girton -- Executive Vice President and Chief Financial Officer
It might be a little bit higher, just given the higher level of salaries in general. But I think that we do get a pretty big bump in payroll taxes as well as in 401(k) match in the first quarter. So those expenses will go up.
Jackie Bohlen -- KBW -- Analyst
Okay. Thank you. And then lastly, you talked about new contiguous markets from both de novo and M&A perspective. And I have kind of a two-pronged question here. First off, what would you can consider to be attractive contiguous market. And secondly, if M&A doesn't happen in that way, would you look to do de novo in those markets?
Russell A. Colombo -- President and Chief Executive Officer
So the contiguous markets, certainly we're not in the South Bay, we're not -- we were not really other -- we're not any farther south than Oakland, Alameda and the East Bay. So there is markets -- they were really not -- I mean on the Peninsula, we have an office, San Francisco, we have nothing from San Francisco South. So there is a number of contiguous markets for you that we would consider if something came up for either M&A or for de novo offices.
And if we don't -- if there's not M&A, then we will continue on the growth of just organic growth and we've been able to see good -- we've been able to attract good people in all of our markets and that will translate into business and if we can -- if we don't buy anything and we are doing just fine. And we're showing nice loan growth, almost 5% on the loan side; 7% on the deposit side. Those are good numbers and given the market, I think that -- and our margins while they're down a little bit, still continue to be good. I'm pretty, pretty confident about the future regardless of whether we have M&A or not.
Jackie Bohlen -- KBW -- Analyst
Okay. And given the high quality of your brand, do you get bankers or teams of bankers from some of the markets you're looking at that inquire about coming to work for you?
Russell A. Colombo -- President and Chief Executive Officer
I'm not sure that people are just calling us to come work for us. It's more an outreach. We have a program where we have identified in all of our markets, it's really part of the branch managers' jobs as well as the regional manager and the commercial banking side's job to identify the top markets and the top bankers in their markets. And so just like having a loan portfolio, we have a banker ports -- banker pipeline and so we know -- our job is to get to know those people and if there are opportunities then we know who to reach out to. And that's when you have a need, it's better to be able to go to those people directly and that you've identified as good as opposed to calling up a search firm to help us. So that's a strategic initiative we have just to make sure we know all the top bankers in every market we do business.
Jackie Bohlen -- KBW -- Analyst
Okay. That's helpful. Thank you. And then just one last one for me. You had really strong origination volume in the quarter and it accelerated throughout the year, most notably in the second half. And is that timing driven, market driven, is that part of the new hires you invested in Walnut Creek and San Francisco? How would you characterize that?
Russell A. Colombo -- President and Chief Executive Officer
Yeah. Our Board will say it's bonus driven, but I won't say that. It's just all over the map. I mean, I think that there is a push certainly by lenders as you get closer to the end of the year to meet their goals, to meet their targets. And as you get later in the year, the push gets harder and they really push hard. So that being said, I think there is a lot of activity -- since there is a lot of activity in the first -- in the fourth quarter, it tends to fall off a bit early in the year. And then it picks up again as you get later into the spring and to the summer and then certainly near the end of the year. So that's -- it's a pattern that has existed for a number of years here. This is not unusual, and we keep thinking it will be great if we can front-load more of that, it just doesn't happen that way. And I think that pattern will probably continue this year. I mean, we had slow originations earlier in the year. But as you say, it picked up in the summer and it really picked up at the end of the year.
Jackie Bohlen -- KBW -- Analyst
Okay. All right. Thank you. That's all I had.
Russell A. Colombo -- President and Chief Executive Officer
Okay. Thanks.
Operator
Thank you. And I'm showing no further questions on the phone lines.
Russell A. Colombo -- President and Chief Executive Officer
Okay. If there's no other questions, I want to thank everyone for joining us this morning and we will look forward to talking with you again next quarter. Thank you.
Tani Girton -- Executive Vice President and Chief Financial Officer
Thank you.
Duration: 29 minutes
Call participants:
Andrea Henderson -- Director of Marketing
Russell A. Colombo -- President and Chief Executive Officer
Tani Girton -- Executive Vice President and Chief Financial Officer
Jeff Rulis -- D.A. Davidson -- Analyst
Matthew Clark -- Piper Sandler -- Analyst
Jackie Bohlen -- KBW -- Analyst
