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Bank Of Marin Bancorp (NASDAQ:BMRC)
Q3 2019 Earnings Call
Oct 21, 2019, 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 Bank of Marin Bancorp's Earnings Call for the Third Quarter Ended September 30th, 2019. I'm Andrea Henderson, Director of Marketing for Bank of Marin. [Operator Instructions] As a reminder, this conference is being recorded on October 21, 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, October 21, 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, Chief Executive Officer & Director

Thank you, Andrea. Good morning, welcome to the call. By any measure, our third quarter performance was once again excellent. We produced strong deposit and loan growth, while maintaining exceptional credit quality. These results demonstrate the success of our organic growth initiatives and our discipline in the way we operate. The investments we've made in banking account [Phonetic] are driving consistent loan growth and enhancing our reputation across the footprint. Our business development activity is strong across our Bay Area markets, Marin, Sonoma, Napa, the East Bay and San Francisco, and we have a strong pipeline of new opportunities to fuel continued growth.

Now, I'll walk you through some of the highlights of the third quarter. Net income was $9.4 million, up from $8.2 million in the second quarter and $8.7 million in the third quarter of 2018. Diluted earnings per share was $0.69 in the third quarter of 2019, compared to $0.60 last quarter and $0.62 in the year ago quarter, after adjusting for the two-for-one stock split last November. Loan originations increased to $77 million in the quarter from $53 million a year ago. This drove $33 million -- $33.8 million of loan growth for the quarter, resulting in total loans of $1.8 billion at September 30th. Deposits increased to -- increased $122.5 million in the third quarter, primarily due to normal cash fluctuations in some of our large business accounts and total deposits were $2.22 billion at quarter end.

At September 30, non-interest bearing deposits accounted for 50% of total deposits and our cost of deposits remained very low at only 21 basis points for the quarter. We have been at or near these level since the beginning of 2018, making our deposit franchise one of the strongest among our peers. Our credit quality remains excellent, non-accrual loans declined to only 0.02% of the total loan portfolio at September 30th, which was down 1 basis point from the prior quarter. We recorded a $400,000 provision for loan losses in the quarter, which is in line with our loan growth. Recognizing the bank's continued solid performance, our Board of Directors declared a cash dividend of $0.21 per share payable on November 8th, 2019. This represents a 30% payout ratio and a 2% dividend yield based on our September 30th, 2019 share price.

Now let me turn it over to Tani for additional insight on our financial results.

Tani Girton -- Executive Vice President & Chief Financial Officer

Thank you, Russ. Good morning. As Russ mentioned, Bank of Marin delivered another quarter of strong performance with earnings of $9.4 million. Earnings increased $1.2 million or 15% over the second quarter of 2019 and $768,000 over the third quarter of last year. Year-to-date earnings of $25.2 million translate into a return on assets of 1.33% and return on equity of 10.4%. In addition to solid loan and deposit growth, there were two items that benefited net income in the third quarter. One, a $562,000 bank-owned-life insurance or BOLI benefit; and two, a $327,000 tax adjustment related to the true-up of our deferred tax liability. Taken together, these items accounted for $0.06 per share of net income and without them return on assets and return on equity for the quarter would have been 1.35% and 10.28% respectively.

Net interest income of $24.2 million was up $362,000 from last quarter and up $612,000 from the third quarter 2018. The increase from last quarter was largely due to interest recovery on a land development loan. This recovery combined with higher average loan balances and higher yields across interest earning categories accounted for the year-over-year increase in net interest income and was only partially offset by higher rates on deposits. The tax equivalent net interest margin of 4.04% was unchanged from the second quarter and up 7 basis points from the year ago quarter. The 7 basis point increase over third quarter of last year, as well as the 12 basis point year-to-date increase over 2018 were both due to higher interest rates and loan growth.

Non-interest income was $2.7 million, an increase of more than $400,000 from both the second quarter 2019 and the third quarter 2018. The increase was due to the BOLI benefit, I mentioned earlier. Year-to-date non-interest income was up by a smaller amount due to the underwriting costs on new BOLI policies purchased earlier this year and lower deposit network income in 2019. Non-interest expense in the third quarter decreased by $716,000 to $14.2 million from the second quarter, primarily due to severance paid in the second quarter and increased deferred costs associated with higher loan originations in the third quarter.

Importantly, we completed our transition to an enhanced digital platform in the third quarter. As a result, we are no longer absorbing the added cost that come from running two digital banking platforms in parallel. In addition, last quarter's FDIC assessment was reversed in the third quarter since the insurance fund was above its required reserve ratio. With the first nine months of the year, non-interest expense was up less than $100,000 from last year. The modest increase coupled with revenue growth resulted in an efficiency ratio of 56.8%, which is a testament to our ongoing focus on expense control.

In conclusion, our strong operating fundamentals, excellent credit quality, steady balance sheet growth and prudent expense management should continue to position Bank of Marin for long-term success. Now, Russ, would like to share some closing comments.

Russell A. Colombo -- President, Chief Executive Officer & Director

Thank you. Tani. We are optimistic about the balance of the year based on our strong performance in the third quarter, which is a direct reflection of our consistent business practices. We are gaining traction in all of our key markets and our team is successfully winning new business. We have an exceptionally strong base of low cost, non-interest bearing deposits that should allow us to deliver consistent performance in any interest rate environment. We are disciplined in our underwriting and our focus will always be on building long-term customer relationships, based on service and market expertise.

Before I open up the call to questions, I want to comment on my plans to retire. As you may have seen, we recently announced that our Board of Directors, has engaged Korn-Ferry to conduct a search for my successor. No date has been set for my retirement and I plan to continue to serve as CEO until my successor is appointed and in place. It has been a privilege to lead Bank of Marin for more than 13 years and I'm committed to making sure that we have a smooth and successful transition. Thank you for your time this morning and now we will open it up to answer questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from line of Jeff Rulis with DA Davidson. Please proceed.

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Thanks, good morning.

Russell A. Colombo -- President, Chief Executive Officer & Director

Morning Jeff.

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Question on the -- just the expense line. It seems like you've got some moving pieces in there. I guess the first question would be, can we anticipate any further synergies or -- from the systems transition? I would assume also the FDIC reversal normalizes in the next quarter, but any thoughts on expense levels and ability to achieve any further synergies there?

Tani Girton -- Executive Vice President & Chief Financial Officer

So I think we pretty much now gotten to steady state in terms of our conversion on the technology front and our core processing and digital platform. And so the third quarter expenses are indicative of the future on that line, of course, there are a lot of other expenses included in that data processing line besides the core processor and digital platform, but in general, those synergies, have all been recognized. With regards to the FDIC assessment, as long as the fund remains above the the threshold, we will not have to pay those assessments, but we have to wait for them to measure each quarter.

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

All right. So a manageable level and modest growth from here is it OK to estimate?

Tani Girton -- Executive Vice President & Chief Financial Officer

I think I heard what -- I think you said that growth just sort of normal growth from this point, is that what you said?

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Right. Yes.

Tani Girton -- Executive Vice President & Chief Financial Officer

Yes, I think that makes sense. I mean we don't typically have a spike in the fourth quarter in expenses for any particular reason.

Russell A. Colombo -- President, Chief Executive Officer & Director

There's no projects or otherwise that would indicate any increased expense levels. No new teams that we're hiring right now that will bump that, so in the fourth quarter, we expect it to be relatively normal in that respect.

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Okay, thanks. And then on the margin, the interest recovery. I was trying to get maybe to a core number if you had, what 404 [Phonetic] reported, but what is the recovery add and then I see the accretion tables have gone, maybe those have just been minimized there, which is a basis point or 2 maybe immaterial, but was there any significant change sequentially on due to accretion.

Tani Girton -- Executive Vice President & Chief Financial Officer

No, accretion actually, we took the accretion table out of the release, because both historically and currently, there are not significant contributions from that. So the comparisons are not meaningful. And you saw, I'm guessing that the amount of the interest recovery was $388,000 in the press release.

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Right. In basis points, I guess we can calculate that, but I just wanted to get confirm the number

Tani Girton -- Executive Vice President & Chief Financial Officer

Let me get back to you offline on that one. Jeff, I have that, but...

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Okay. I'll step back. Thank you.

Russell A. Colombo -- President, Chief Executive Officer & Director

Thanks, Jeff.

Operator

The next question comes from line of Jackie Bohlen with KBW. Please proceed.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Hi, good morning everyone.

Tani Girton -- Executive Vice President & Chief Financial Officer

Good morning.

Russell A. Colombo -- President, Chief Executive Officer & Director

Good morning, Jackie.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Just looking to the deposit fluctuates -- debt fluctuations and I know that it can be volatile given the customers that you have at the bank, but were there any temporary balances in there or is it all just normal seasonal fluctuations?

Russell A. Colombo -- President, Chief Executive Officer & Director

Is there any what?

Tani Girton -- Executive Vice President & Chief Financial Officer

Temporary balances.

Russell A. Colombo -- President, Chief Executive Officer & Director

I guess operating accounts are always temporary right, because we have -- we have a number of large client -- a large deposit clients who -- their normal business that they have inflows of cash and outflows of cash, and I'll give an example of the type of business. We have a number of large contractors that do a lot of municipal state kind of work building roads and so they'll bid on -- bid on project. If they win the project, they get funded, the money comes in, sit there and as they do the construction, it kind of filters out. And so you have kind of money coming in and out at the same time, from new projects that you really can't project or predict, the reliability of those deposits when they come in. That's just one example. And we have a lot of them like that. So, sometimes you have these big upswing, sometimes you have downswings, but if you look over history the deposit levels continue to grow pretty consistently over time.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay, so nothing -- it's all very usual course of business. Nothing that you would anticipate a specific outflow going forward, just business as it goes?

Russell A. Colombo -- President, Chief Executive Officer & Director

Nothing unusual. There will be outflows, but there also will be inflows as we go.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Yes. Yes. Understood. And in terms of pricing, now that we have some of the rate cuts, I know that your deposit prices have been stable and have obviously performed very, very well as rates have increased, but just wondering if you've seen any sort of a change with the rate cuts than what you would anticipate going forward in terms of pricing on those.

Russell A. Colombo -- President, Chief Executive Officer & Director

Are you asking on the deposit side?

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Yes.

Russell A. Colombo -- President, Chief Executive Officer & Director

Are you talking about the deposit side or the loans side? The deposit side?

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

The deposit side.

Russell A. Colombo -- President, Chief Executive Officer & Director

Okay. I assumed the deposit side. Actually, we still see certain banks who we maybe don't have strong of a deposit base as us, offering pretty high interest rates, kind of counter to the drop in rates because still having to fund the portfolio. So we haven't seen that much of kind of backing off, it's just kind of the usual suspects who were providing the high interest rates. We were pretty flush those. So we don't have to compete. We try to -- we, like we always say we try to be fair to our good clients and we'll pay competitive interest rates to good clients, but we don't chase deposits with rates. On the other side of the ledger, if you were going to follow through to that, on the loan side, there is incredible pressure from all sides on the interest rates on particularly in longer-term financings, you've seen rates under 4% for 10 years, pretty consistently across the board from many, many Bank. So it's hard. You have to pick and choose your battlefield so to speak.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay. And that, yes, I was asking about the deposits and what's going to follow up on both, I apologize maybe if I was having some issues. [Technical Issues] Can you hear me?

Tani Girton -- Executive Vice President & Chief Financial Officer

Is anyone speaking? We can't hear anyone on the call.

Russell A. Colombo -- President, Chief Executive Officer & Director

We don't hear anything.

Operator

Hi, are you able to hear, this is the operator. Jackie Bohlen is speaking. Are you...

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Can you here me?

Russell A. Colombo -- President, Chief Executive Officer & Director

Jackie. I can hear you now.

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Okay, sorry. I must be having technical difficulties. I'll step back and figure that out. Thank you, guys.

Russell A. Colombo -- President, Chief Executive Officer & Director

Thanks, Jackie.

Operator

The next question comes from line of Tim O'Brien with Sandler O'Neill & Partners. Please proceed.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Good morning Russ and Tani. Can you hear me?

Russell A. Colombo -- President, Chief Executive Officer & Director

We can hear you fine Tim, Thank you.

Tani Girton -- Executive Vice President & Chief Financial Officer

Good morning Tim.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

That's great, glad. Just to follow up a little bit more on the color you provided on loan pricing. Did you guys make accommodations on the pricing front in order to help support loan growth this quarter? And if so, could you give a little bit of color on what you might have done there and how to be great.

Russell A. Colombo -- President, Chief Executive Officer & Director

We haven't -- if you're asking if we do very low interest rates to try and drive loan growth? The answer is no. And do we compete with on good customers from time-to-time on more aggressive rate? Sure, from time-to-time, but we didn't do anything new, nothing different than we've done historically, Tim. So you're not going to see this great swing of the net interest margin downwards because of it. It's pretty competitive out there, but we pick and choose what we're going to do and when we're going to do it.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Yeah. And then in the first -- in your opening remarks, Russ, you just mentioned that your pipeline remains strong. So you're -- in that kind of -- bleeds into your optimism for the full year. So you're feeling pretty good about production opportunities in the fourth quarter, I guess, is that an other way to translate that?

Russell A. Colombo -- President, Chief Executive Officer & Director

Yes, we have a very strong pipeline,. I would say that we are significantly higher pipeline today than we were this time last year.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

And how about at the end of the -- how about the -- the start of the third quarter? How does the pipeline compares sequentially?

Russell A. Colombo -- President, Chief Executive Officer & Director

It's definitely up. We had -- the interesting thing about this quarter is that when I look at the -- where the fundings came, it was across the board and I'll throw a couple of names out. San Francisco, Napa, Marin, Commercial Banking Office here in Novato, our office in Oakland, all of them did, had really good quarters. And they all have very good strong pipeline. We feel -- one thing I would say, I feel really good about the staffing that we have across our commercial banking offices. We have leadership in all the offices we have. As any bank does, we have a couple of opening for commercial bankers, but when you have good people in place and you have it stacked [Phonetic] properly, you will see loan growth, because these are -- we have really good team. So I'm very optimistic for the future because of the people we have in place.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

And then I would imagine last question, you were coming into the planting season for banks for updated strategic planning and such. Can you give some general thoughts about, I guess kind of how you're initially looking at 2020 relative to 2019. Do you -- are you more optimistic? Do you think you feel like it, at this time this year relative to a year ago or what are your thoughts there?

Russell A. Colombo -- President, Chief Executive Officer & Director

I'm still very optimistic. I think that we're pretty disciplined about the way we operate and we don't -- as I've said many times before, we don't stretch to do deals and structure. We maintain our discipline in how we do transactions and that shows up in our credit quality and that also shows up in our loan volume because of the disciplined approach we have in really building our pipelines and executing on that, we've done really well. From the economy standpoint, I feel OK about it. It's always hard to judge what's going to happen, but in the Bay Area -- Bay Area has very strong economy as you know, and I haven't seen big signs that we're going to have a big turn down in the next year. So I'm very -- I guess I would say I am cautiously optimistic about the year ahead, kind of same place I was a year ago.

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Okay, great, well thanks for answering my questions and congratulations on the quarter.

Russell A. Colombo -- President, Chief Executive Officer & Director

Thank you, Jim.

Operator

The next question comes from line of Matthew Clark, Piper Jaffray. Please proceed.

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Russell A. Colombo -- President, Chief Executive Officer & Director

Good morning, Matthew.

Matthew Clark -- Piper Jaffray -- Analyst

Can I have the amount of interest recoveries in 2Q as well. I'm just trying to hone in on the core NIM trend x [Phonetic] for just accounting accretion and the recoveries?

Russell A. Colombo -- President, Chief Executive Officer & Director

Recovery on interest item. I don't know that we had any interest recoveries in the second quarter, Matthew. I think the number is zero.

Tani Girton -- Executive Vice President & Chief Financial Officer

If at all, very small.

Russell A. Colombo -- President, Chief Executive Officer & Director

Yes.

Tani Girton -- Executive Vice President & Chief Financial Officer

Yes.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, that's fine. And then, can you speak to your plans for the excess cash liquidity. How should we think about the timing in north of redeploying those proceeds?

Tani Girton -- Executive Vice President & Chief Financial Officer

So we take liquidity into account as well as where the market is. And since we've had a little bit of a backup in the yield curve, we're at a good point for purchasing right now. But its really, we have to -- our primary objective in the investment portfolio is to make sure that we've got appropriate liquidity to account for the fluctuations and the deposit portfolio and to make sure that we have good buying opportunities. So we continue to do purchase investments, again, the same types of investments that we've always been purchasing, but we want to make sure that we do it at the right time given liquidity constraints and where the markets are.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then shifting gears to new business on the loan front in terms of given what rates have done. Can you give us a sense for whether weighted average rate is on new production? Just wondering if it's still above the portfolio yield or not?

Russell A. Colombo -- President, Chief Executive Officer & Director

I don't think we share that typically. With the new volume -- as I mentioned, there is a lot of price pressure coming in on longer-term transactions, but a good -- we're still getting decent returns on our portfolio. But as you can imagine, when you have -- you have the environment we have, the interest rate environment that we have, longer-term financings are being driven -- rates have been driven down and so we are, in some of the longer deals, we are seeing rates. As I said, we're seeing rates in the 3 -- in the high 3's. There is a little unnerve indicator, its tough to get a 4% NIM if you're lending money at 3.75%. So we're holding the line. We do this for -- we will make exceptions for really good client, but it's every transaction is different and we evaluate not only the rate, but what else that customer have, because if a customer comes in and they're asking for rates in 3.75 range I'll just say, but they have a lot of deposits and they have other business that we -- then we make those adjustments, but if it's a kind of a one-shot deal, it's pretty hard to do that at that price.

Tani Girton -- Executive Vice President & Chief Financial Officer

And just to add to what Russ -- I think the margin shows that we are holding our own in terms of the new originations and we look at the rates that they came in over the last quarter, they were coming in on average, pretty much at the portfolio rate.

Matthew Clark -- Piper Jaffray -- Analyst

Okay and then just last one for me on kind of reserving and provisioning the $400,000 of provisioning for growth on $34 million of net loan growth. Does that implies the coverage ratio around -- over [Indecipherable] relative to your reserve in 90 basis points? Should we assume that net reserve -- your coverage ratios have largely bottomed from here, I know it depends on mix in any given quarter, but...

Russell A. Colombo -- President, Chief Executive Officer & Director

It depends, I guess you're probably right when you said it depends on mix. I can't say that it's bottomed. I mean our credit quality has been so good and 90 basis points is total portfolio, and we do have -- we've made acquisitions. So obviously, if you took a number -- we have the number, but -- against the portfolio that is actually reserving for, that number is higher, right, because we have acquired portfolios. We're closer to 1% if you just apply, we deserve our [Indecipherable] well against the portfolio that it is reserved against, and excluded the acquired portfolios from the acquisitions. So it's -- those numbers, I always question the calculation of reserve, when it's actually against a different portion of the portfolio than the entire portfolio. So I can't make a comment that has been bottomed because of the way that the calculation does.

Matthew Clark -- Piper Jaffray -- Analyst

Understood, thanks.

Operator

[Operator Instructions] There appear to be no further questions on the telephone lines.

Russell A. Colombo -- President, Chief Executive Officer & Director

Okay. Well, I want to thank everyone again for joining us this morning and we look forward to speaking with all of you again next quarter. Thank you for calling in.

Tani Girton -- Executive Vice President & Chief Financial Officer

Thank you.

Russell A. Colombo -- President, Chief Executive Officer & Director

Thank you, Bye.

Duration: 29 minutes

Call participants:

Andrea Henderson -- Director of Marketing

Russell A. Colombo -- President, Chief Executive Officer & Director

Tani Girton -- Executive Vice President & Chief Financial Officer

Jeffrey Rulis -- D.A. Davidson & Co -- Analyst

Jacquelynne Bohlen -- Keefe, Bruyette, & Woods, Inc -- Analyst

Tim O'Brien -- Sandler O'Neill & Partners -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

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