Image source: The Motley Fool.
Bank Of Marin Bancorp (BMRC 0.07%)
Q4Â 2018 Earnings Conference Call
Jan. 28, 2019, 11:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
See all our earnings call transcripts.
Prepared Remarks:
Andrea Henderson -- Director of Marketing
Good morning, and thank you for joining the Bank of Marin Bancorp Earnings Call for the Fourth Quarter and Year Ended December 31, 2018. I am 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 January 28, 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 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, January 28, 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.
Russell A. Colombo -- President and Chief Executive Officer
Thank you, good morning. Welcome to the call. Bank of Marin's record fourth quarter and year-end 2018 results are a testament to the balanced execution of our strategy based on disciplined lending, underwriting and credit management. Combined with consistent expense control and adherence to our relationship banking model, this approach also is attracting industry-leading level of low-cost deposits and gain market share.
Let's start with some of the notable highlights. Net income for the fourth quarter was $9.7 million compared to $8.7 million in the previous quarter and $1.1 million in the fourth quarter of 2017. Diluted earnings per share were $0.69 in the fourth quarter of 2018 compared to $0.62 last quarter and $0.08 in the same quarter a year ago, after adjusting for the November 27, 2018, stock split. Loan growth for the year was $84.9 million or 5.1% in 2018. Loans increased $35 million to $1,764 million in the fourth quarter compared to $1,729 million in the previous quarter. Deposits, while down $38 million in the fourth quarter due to normal cash fluctuations of our large business clients, were up $26.1 million over the course of the year to $2,175 million at December 31,
2018.
Non-interest-bearing deposits grew by $51.9 million in 2018 and comprised 49% of total deposits at year end. Throughout business cycles, our strong credit culture has been always an underpinning of our success, and 2018 was no exception. At year end, nonaccrual loans represented 0.04% of the bank loan portfolio. In 2018, we continued to invest in organic growth initiatives. We expanded our footprint in the East Bay and hired Wim-Kees van Hout to open a new commercial banking office in Walnut Creek. We also strengthened our team in Sonoma County, naming David Casassa as Commercial Banking Regional Manager for our Santa Rosa market. Our Board of Directors declared a cash dividend of $0.19 per share on January 25, 2019, an increase of $0.015 per share. This represents the 55th consecutive quarterly dividend paid by Bank of Marin Bancorp. It is worth noting that since August 2005, Bank of Marin's average dividend yield growth rate has been 10.2%.
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. Net income of $32.6 million reflects the successful execution of our strategy to grow organically and leverage acquisitions in 2018. Net interest income of $91.5 million grew $16.6 million or 22% over the 2017 level, thanks to higher average balances of loans, investments and non-interest bearing deposits, as well as higher average yields across all earning asset category.
Net interest income of $23.3 million in the fourth quarter included a $916,000 charge for accelerated purchase discount accretion on the early redemption of one subordinated debenture assumed in the NorCal Community Bancorp acquisition. This removes the high cost source of borrowing and the bank will benefit from reduced interest expense going forward as a result of the transaction. The tax-equivalent net interest margins of 3.85% in the fourth quarter and 3.9% year-to-date were negatively impacted by 15 basis points and 4 basis points respectively, as a result of the early redemption. Even so the full year 2018 tax-equivalent margin improved by 10 basis points for 2017 and the reported net interest margin improved by 17 basis points. Non-interest income in the fourth quarter was $3.4 million compared to $2.2 million in the third quarter and $2 million a year ago.
In the fourth quarter of 2018, we sold 6,500 shares of our Visa Class B holding for a gain of $956,000. The bank also received a $180,000 special dividend from Federal Home Loan Bank of San Francisco. Full year 2018, non-interest income of $10.1 million was $1.9 million higher than last year due to the Visa stock sale and special FHLB dividend as well as fees from the sale of excess deposit balances to deposit network. Fourth quarter 2018, non-interest expense of $13.7 million was generally in line with the third quarter and lower than a year ago, primarily due to $1.7 million in acquisition-related expenses in the fourth quarter of 2017. Non-interest expense of $58.3 million for the full year increased $4.5 million over 2017 as a result of additional personnel, rent and core deposit intangible amortization from the Napa acquisition. Annual merit increases and higher insurance expenses for all employees, some stock-based compensation awards reaching retirement eligibility and $1 million in core processor contract renegotiations consulting expense.
The effective tax rate of 24.9% in 2018 was down almost 20 percentage points from 44.6% last year, roughly half of which was related to the 2017 deferred tax asset writedown. Continued expense control enabled the bank to reduce its efficiency ratio to 51.34% in fourth quarter of 2018 from 54.2% in the third quarter. The full year efficiency ratio of 57.3%, was more than 7 percentage points lower than in 2017. As Russ said, disciplined across all areas of the bank continues to drive profitability. Our strong credit culture is reflected in the low level of non-performing loans and there was no provision for loan and lease losses or for off balance sheet commitments during the quarter or the year.
The bank keeps it focus on relationships, rather than trying to win on price. And by doing so, kept its cost and deposits at 10 basis points in 2018 versus 7 basis points in 2017. Recent increases in deposit pricing raise the cost of deposits to 14 basis points in the fourth quarter, still relatively low due to our high percentage of non-interest bearing deposits. As a result, Bank of Marin was able to achieve a return on assets of 1.52% for the quarter and 1.31% for the year. Return on equity reached 12.37% for the quarter and 10.73% for the year. We are very pleased with these results. We remain committed to the principles underlying our success and are ready to take on the new year.
Now Russ would like to share some closing comments.
Russell A. Colombo -- President and Chief Executive Officer
Thank you, Tani. There's an old saying in the banking industry, bad loans are made in good time. The dynamic and protracted economic expansion that the San Francisco Bay Area has experienced for so many year can not last forever. In our view, investors and business owners would be wise to keep a cautious eye on possible peril, and it is imperative that banks maintain discipline in the way we operate. At the Bank of Marin, this is just how we do business. We continue to apply the same standards to our lending practices that we always have, reflecting both the variety and health of the local economies that we serve. Our lending activities continue to grow safely across the footprint. In Marin, Sonoma, Napa, in East Bay and San Francisco commercial banking markets. This extense is built from the strong relationship we have with our client. A true indication of our relationship banking model is the growth of our deposits. Close to 50% of those funds are in demand deposit accounts, primarily operating cash for our clients' businesses.
In 2018, we added key people and expanded our presence in growth markets. Our primary focus for 2019 would be on leveraging our talent to drive organic growth and further enhance our profile and reputation across our footprint. It is important to note that our vibrant local economy is fueled in large part by the technology industry. If there is a fall-off in the tech sector, the market volatility would most certainly have an impact on the entire Bay Area economy. While we not -- do not lend to these tech -- to the tech companies directly, we recognize and are well prepared to respond to a downturn in that sector should it develop.
We're structured to manage these changing cycles thanks to our balanced approach of consistent loan underwriting, maintaining close business relationships with our client and a solid understanding of our market. In this low-cost and favorable deposit base, solid opportunities for loan growth, and our unwavering commitment to relationship banking, we're well positioned to carry our successful performance into 2019.
I'd like to thank you for your time this morning. Now, we will open it up to answer any of your questions.
Questions and Answers:
Operator
(Operator Instructions) Our first question from the telephone lines comes from the line of Jeff Rulis with DA Davidson. Please proceed.
Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst
Thanks. Good morning Russ and Tony.
Tani Girton -- Executive Vice President and Chief Financial Officer
Morning.
Russell A. Colombo -- President and Chief Executive Officer
Good morning, Jeff.
Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst
Question on the operating expenses. I guess, first, in the quarter, anything kind of one, it look fairly core, but anything that was somewhat low that would drive kind of a base, what's that or was just fairly core? And then, I guess, second part of that is just expectations in '19. If you look out on kind of planed hires or other events that may kind of range bound, what you think expense growth would be in '19?
Russell A. Colombo -- President and Chief Executive Officer
We do -- it's basically core. But we do have -- we did have some openings in commercial banking that we are in the process of filling, so that will drive cost up a bit. But for the most part, I think those -- we -- and there's always a percentage of positions in the bank that are open. And so if we were 100% fully staffed, that would drive that number up a little bit. But for the most part, that's pretty much core -- the core expenses.
Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst
Okay. And then on the Visa sales, you said it roughly half or so of that balance. Is that something that you would revisit annually, quarterly on additional sales? Or how would you approach that ownership going forward?
Tani Girton -- Executive Vice President and Chief Financial Officer
So we keep an eye on that portfolio all the time. The reason why this was a good time to sell is that the prices in the market had run up quite a bit. And we wanted to capture some of that. While certain of that acts as a little bit is a hedge against future volatility and those prices going forward. So I would say that while we keep an eye on it, our desire at this point is to maintain that position for some time going forward.
Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst
Okay. I will step back. Thank you.
Russell A. Colombo -- President and Chief Executive Officer
Thank you.
Operator
The next comes from line of Jackie Bohlen with KBW. Please proceed.
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Hi, Russ. Hi Tani.
Tani Girton -- Executive Vice President and Chief Financial Officer
Hi.
Russell A. Colombo -- President and Chief Executive Officer
Good morning, Jackie.
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Just wanted to kick it off. Russ, your prepared remark comments sounded more cautious in terms of just the economy and how you're viewing it? I wanted to know if -- number one, if I am interpreting that correctly? And number two, how that translates to loan generation?
Russell A. Colombo -- President and Chief Executive Officer
You are interpreting it correctly. I'm cautious just because we've been in this protracted period of expansion and the Bay Area has a fair amount of technology. So as an organization, we have to be prepared for the future. And If we have issues, the industry falls off, it will have an impact on the markets that we serve, even though we're not a technology lender. But that being said, we still have the same growth expectations we've had historically. And we -- on the loan side, we had little over 5% growth this year. That's been pretty consistent over time and we have maintained the same discipline that we've had historically. And we continue to build these relationships, and despite the fact that there's pressure on pricing and all these things, we continue to maintain -- continue to generate that type of volume and growth. And I don't expect it to be any different in the next year than we've had historically.
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Okay. So more just caution based on where we stand in the cycle today versus any weakness that you're seeing in different areas?
Russell A. Colombo -- President and Chief Executive Officer
Not really seeing weakness. Just -- it's only kind of wise to be a little cautious after this extended period of growth. I just -- technology, in particular. We've had -- if you look back in the history, there are periods, you go back, back to the early 2000 when technology had a big correction, as I like to put it. And that had a great impact on everyone. So I just -- maybe I'm just cautious by nature. I just want to make sure that we're prepared for any downturn. That being said, we are opening off the Walnut Creek. We're restaffing in Santa Rosa. We're really building for growth, but we're being smart about that.
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Okay, definitely wouldn't expect anything less. One last one just if you could provide an update on pay-offs? And how January is looking in terms of that so far?
Russell A. Colombo -- President and Chief Executive Officer
Yes. In the pay-off side, we had a big -- every year, there's a certain percentage of pay-off that occur. And we kind of plan for around 10% of our portfolio to insure. December sales was actually down in terms of pay-offs. But we had the normal asset sales. I mean we had a few that we wanted to exit that were credit issues. We did have a few that the financing is -- a lot of it was -- and some of -- one of it was really, completely rate driven. We just wouldn't compete. We had another where they refinanced longer term with a property that was a bigger property that we refinanced out with longer term. So those kinds of things happen. The pay-offs for the year were guided where we expected. Actually, slightly below the 10%, which we've been planning. So only about 8% during the year. So that was actually good and we only planned for that. We hope that we get less than 10%, but we plan as we do our budgeting process. We look to the future, we always plan for about 10%, which means to hit mid-digit -- mid-single-digit growth, you have planned for like 15% volume, 15% increase in volume. So I kind of...
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Okay. Thank you for that. Thanks, Russ, that's very helpful. I'll step back.
Russell A. Colombo -- President and Chief Executive Officer
Okay. Thanks, Jackie.
Operator
The next question comes from line of Tim O'Brien with Sandler O'Neill. Please proceed.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Good morning, Russ. Good morning, Tani.
Tani Girton -- Executive Vice President and Chief Financial Officer
Good morning, Tim.
Russell A. Colombo -- President and Chief Executive Officer
Good morning, Tim.
Timothy O'Brien -- Sandler O'Neill -- Analyst
First question. Had core systems contract that you guys were in negotiations on is that finalized now? And does that have an impact on your $1 million quarterly data processing expense run rate?
Russell A. Colombo -- President and Chief Executive Officer
Well, it -- first of all, it is finalized that's why we are getting the benefit of that. However, we're in the middle of a conversion of our mobile platform to a new system of Q2. And when that -- we're running -- those costs are in there now and we're still running their old system. So there's some overlap at this point in terms of the cost. That will end until mid-second quarter. So we're -- you're not going to really see those numbers change a lot in the first quarter and a half to two quarters, and then you'll see an impact.
Timothy O'Brien -- Sandler O'Neill -- Analyst
And how big is that kind of -- do you book it cost piece, Russ? Kind of do you have a ballpark sounds? Is it a couple hundred thousand or $100,000 or something that will come out, ultimately, starting in the third quarter?
Russell A. Colombo -- President and Chief Executive Officer
It's about -- the number is about $100,000 a quarter.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Great, fair enough. And then a question for you Tani. The remaining $2.6 million in sub-debt. Do you happen to -- can you tell us the coupon on that? What that interest rate is on the remainder? And that's -- is that Bank of Marin issued debt or something else?
Tani Girton -- Executive Vice President and Chief Financial Officer
Well, that was originally issued by NorCal.
Timothy O'Brien -- Sandler O'Neill -- Analyst
That was the piece that you guys redeemed, right, that you guys called? The -- you called $2.6 million?
Tani Girton -- Executive Vice President and Chief Financial Officer
There were two pieces.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Okay.
Tani Girton -- Executive Vice President and Chief Financial Officer
There were two. And we redeemed one of them, which was the higher rate one. And the remaining one has a coupon rate in the -- it's in the high five to low six area. But, of course, we purchased those at significant discount. So a portion of that coupon -- a portion -- sorry, the coupon is lower than that. A portion of that all-in rate is the discounting amortization.
Timothy O'Brien -- Sandler O'Neill -- Analyst
And those qualify for Tier 2 capital. Is that right for you guys even?
Tani Girton -- Executive Vice President and Chief Financial Officer
Yes.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Okay, so chances are you'll retain that. That's a good investment to keep in this environment?
Tani Girton -- Executive Vice President and Chief Financial Officer
So I'd say the other one was significantly higher in terms of the rate we were paying on it. And so it really depends on -- we don't need the capital. So depending on where the rate goes in the future, we may decide to early redeem the other one. But right now, we think it's at a pretty fair level.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Great. And then do you happen to have the share count -- the shares you -- number of shares you repurchased this quarter. Not for the -- I got the full year number from the press release.
Tani Girton -- Executive Vice President and Chief Financial Officer
I don't have the fourth quarter number offhand, but I can get that for you.
Timothy O'Brien -- Sandler O'Neill -- Analyst
That'd be awesome. And then last question. A little color, could you guys provide on interest rate sensitivity heading into 2019, kind of the profile of the -- of your balance sheet?
Russell A. Colombo -- President and Chief Executive Officer
We have about 20% of our portfolio -- our loan portfolio is floating rate immediately. So if the rate -- if there's changing rate, it will increase, decrease whatever the case might be. Another 30% is -- 35% is floating. But it's three months to five years. So it's like a variable rate and -- where you leased at. At the end of the term based on the current rate. And the rest is fixed.
Timothy O'Brien -- Sandler O'Neill -- Analyst
Great. All right, thanks for the help, guys.
Russell A. Colombo -- President and Chief Executive Officer
Okay. Thanks, Tim.
Operator
And there appear to be no further questions on the telephone lines.
Russell A. Colombo -- President and Chief Executive Officer
Okay. Well, I thank you for joining us this morning. I look forward to speaking with everyone again next quarter. Thanks for calling in.
Duration: 25 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
Jeffrey Rulis -- D.A. Davidson & Co. -- Analyst
Jacquelynne Bohlen -- Keefe , Bruyette & Woods , Inc. -- Analyst
Timothy O'Brien -- Sandler O'Neill -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
