Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Fourth Quarter, ended December 31, 2017. I am Jarrod Gerhardt, Senior Vice President, Director of Marketing for Bank of Marin. [Operator Instructions] As a reminder, this conference is being recorded on January 22, 2018. Joining us on the call today are Russ Colombo, President and CEO; and Tani Girton, Executive Vice President, Chief Financial Officer. Our earning 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 22, 2018, 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 the 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, Jarrod. Good morning, and welcome to the call. We are pleased to review our results with you for the fourth quarter and year end. Let's start with some highlights. We successfully completed our acquisition of Bank of Napa, which positions Bank of Marin for continued growth in both Napa County and the Wine Industry, which have become a strategic focus for us in the recent years. Net income for the fourth quarter was $1.1 million and as compared to $5.1 million last quarter and $5.7 million in the fourth quarter of 2016. These results were directly impacted by a deferred tax asset write down of $3 million, which amounts to 1.16% of tangible equity. We also incurred $1.1 million in after-tax expenses related to our acquisition of Bank of Napa. Without these two items, diluted earnings per share would have been $0.80 for the fourth quarter and $3.28 for the full year. And net income would have been $5.2 million and $20.5 million for the quarter and the year ended December 31, 2017, respectively. Please refer to Page 5 of our press release for a more detailed reconciliation of these non-GAAP financial measures. Our organic growth was strong in 2017, as a result of healthy and broad-based increases in both deposits and loans. Deposits increased through organic growth by $144.5 million or 8.2% year-over-year. In combination with the $249.9 million in deposit we acquired with Bank of Napa, total deposits were up 21.2%, $2.2 billion at year-end, as compared to $1.8 billion at the end of 2016. Non-interest-bearing deposits increased by $90 million in the fourth quarter of 2017 and comprised 47% of total deposits by year-end. Organic loan growth for the year was $59.5 million or 4%, combined with $132.9 million in loans acquired from Bank of…

Thank you, Russ. Good morning. As Russ mentioned, when comparing 2017 earnings for the fourth quarter and full year to early periods, it is helpful to refer to the table on Page 5 of our press release. This table begins with reported earnings for the period shown and renewals the impact of acquisition related expenses and the deferred tax asset write down associated with the tax cut and Jobs Act of 2017, which was passed in December. 2017 non-GAAP comparable net income of $20.5 million and $3.28 per share demonstrate the same underlying strength as 2016's record earnings, when you consider that $2.9 million or $0.47 per share of 2016 earnings were related to loan recovery and early payoffs of acquired loans. As we walk through the income statement, quarter-over-quarter comparisons also demonstrate continuing growth and profitability, while investing in our team and our platform. 2017 fourth quarter net interest income was $20 million compared to $18.8 million in the third quarter and $18 million in the fourth quarter last year. For the year, net interest income totaled $74.9 million compared to $73.2 million in 2016. The higher level of interest earning asset in 2017 more than offset the interest recovery and accelerated acquired loan accretion of 2016. Non-interest income in the fourth quarter was $2 million compared to $2.1 million in the third quarter and $2.5 million a year ago. 2016 benefited from a $347,000 special dividend from the Federal Home Loan Bank of San Francisco and in 2017, we recorded net losses of 195,000 on investment securities, sold mainly due to the cotangent [ph] tax law ramification. For the year, non-interest income was down $893,000 due to this special FHLB dividend and gains on the sales of investment securities in 2016. Fourth quarter 2017 non-interest expense was higher…

Thank you, Tani. As you just heard, we achieved a great deal in 2017. We grew deposits and loans organically by expanding our existing customer relationships and developing new ones. We hired the right people, we strengthened our platform and to help unlock future growth opportunity. We completed a strategic acquisition that enhances our position in Napa, as well as the Wine sector, and we did all that while continuing to deliver strong financial results. By any measure, we had a productive year and we appreciate the efforts of everyone on our team who contributed to this success. Importantly, the investments we made in both organic growth and the Napa acquisition in 2017 should position us very well for 2018. In the coming year, we will continue to evaluate strategic M&A opportunities that fit with our culture and add value to our shareholders. We continue to have conversations with banks in markets that we find appealing. A primary focus for 2018 will be organic growth, which we are set to deliver based on the strengthen of our team, our expanded footprint in the Bay Area market, our track record and reputation, and our relationship banking model. I'm pleased to report that our new hires in 2017 and the Bank of Napa team are off to a great start. Our team has never been stronger. Our new CLO, Jim Kimball, has been on the field, meeting with bankers and developing sales and marketing strategies to better serve existing customers and attract new ones. Jim's proven track record of building a meaningful productive team is a great asset for the bank. Last year, we enhanced our market division through the acquisition of Bank of Napa, expanded our presence in Sonoma County by opening [indiscernible], and our Oakland commercial banking team created real momentum in the very lucrative East Bay market. The addition of key people and the expansion of our footprint have bolstered Bank Of Marin’s already strong reputation. This has allowed us to continue to build market share, even as more community banks are migrating to the attractive Bay Area market and the Central Valley in Southern California. We believe our strong competitive position is in large part due to the relation banking model that has served us well for the past 28 years. We think it advantage when it comes to building trust and long-term relationships with clients and generating loan growth and a low-cost deposit base. We expect that with the recently passed tax reform, many businesses will be investing in growth and we look forward to supporting the growth plan. As we continue to serve customers across a wide range of industry sectors, the wine making and non-profit organizations, we will remain focused on this model. We are excited about the future and the many opportunities we see to enhance the value of our bank. I will thank you all for your time this morning, and now, we will open it up to answer your questions.

[Operator Instructions] Our first question on the audio line comes from the line of Jeff Rulis with D.A. Davidson. Please proceed with your question.

Thanks. Good morning.

Good morning, Jeff.

Good morning.

Russ, I may have missed your – as you list the final loan and deposit totals from Bank of Napa, do you have those available?

They are actually in the release, if you look on page - hold on a second, page 6 of the release. You can see loans were $135 million and total deposits were $250 million, rounded.

Okay, sorry about that. Russ, just going back to the '18 strategic focus is on organic growth. Could you put that into any context of - it sounds like '17 was more of a reinvestment or acquired acquisitions that while you continue to look for those. I don't know if that means that the - your organic expectations for '18 would be greater than '17. If you could, kind of, put any words around your expectations versus '17 and '18?

Sorry, let me it frame it this. In '17, we did make the acquisitions. We also made some strategic hiring, including Jim Kimball, Scott McAdams and open an office in Hillsburg [ph]. And so, as we look to '18, we continue to talk to banks about potential acquisitions. However, acquisitions happen when they happen and it's difficult to plan for that. So we focus – we’re focus on this year coming up on strategic - on organic growth. And we think we're in a great position. We have, since Jim came over, Jim was with Wells Fargo prior to being here. He has got a lot of experience in the North Bay in particular. And bringing that knowledge and experience and in addition to that Scott McAdams in Napa has the same, a lot of experience in North Bay. And So I believe that as we go forward we’re going to see some real results out of – out of these markets because of the people we brought on, and the teams that they attracted as we go forward. So organic growth, we're confident about organic growth in the future. I can't give you numbers because we don't give guidance on that, but needless to say, we're - our expectations are high in terms of what we can do in this market.

Got you. So I guess if 4% organic growth in '17, that would be at the low end of what you think in '18?

Like I said, our expectations are high for our growth, going forward.

Fair enough. And so I guess as it ties into the provision level you alluded to this quarter that the pickup there was based on growth and kind of the unknown risk from the fires. Any comment on provisioning levels as you are more optimistic perhaps, on growth and that unknown, - any commentary on the provisioning levels?

Sure. First of all, the provision is really the growth that we experienced in growth that we – in terms of growth expectation in the first quarter. So some of that is related to that because we really anticipate that there is a fair amount of loan to book in this first quarter. There's a pretty strong pipeline, and there's a number of loans that carried over that we - frankly, our expectations are closed in the fourth quarter [indiscernible] so not because of anything going wrong, it's just sometimes they don't make it. So our expectations are very high for that first quarter. In addition, as we mentioned about the fires, we really don't know what the long-term impact of that going is going to be. And so, part of the provisioning is really, kind of, safety, just because we don't know what the impact and we plan for the worst and hope for the best, that's kind of the way I would term it. So part of it is that. And whenever you have an acquisition, it takes time to integrate that and it does change the organization to a certain extent, so we provision for that. That being said, so far, this acquisition has gone really well. And the people are terrific that we've - from Bank of Napa, that we've acquired. Their culture matches are exceptionally low, and we're very, very pleased thus far as we move towards full integration, which will be in April.

Okay. Thanks, Russ. And then, two quick ones for Tani. Just the merger cost, the $1.7 million this quarter. What categories did those come from and are we anticipating more merger costs going forward and then the next one on just your expected tax rate in '18 and '19? Thanks.

Okay. On the merger cost, those are running pretty much in line with what we expected. Our most recent forecast is that when all is said and done, there will be a little left and we model then evaluated the deal. We are looking at 2018. We think we have about $1 million more to go, roughly. And if you have another part of the M&A cost question.

It was more - yes, within the line item, was that in data processing? If I were to, kind of, itemize that in salaries or...

Yes. So the biggest component of the acquisition expenses are in the conversions in the prior Bank of Napa data processing provider and conversion expenses to our data processing provider termination expenses on the data processing provider from Napa and then also professional services. So there are a lot of costs associated with getting the deal done in terms of writing the S4 [ph] and other filings that we have to do with the SEC - accounting expenses associated with those. Okay, and then on the tax question, we do expect the tax rate to go down associated with the change in the tax law. There are - so it's not entirely additive because there are some permanent differences that as a percentage of effective tax rate change because they are – hard dollar related. But going from a 35% tax rate to a 21% tax rate on a federal bases is going to have a significant impact on our tax rate and reduce it.

Okay. I read that - there's some puts and takes there if you were in that 34%, 35% previously, down to 21% at the corporate level in that ballpark, is it a decent assumption?

I'd say, if you take it down 10 percentage points, that's going to be conservative.

Okay. Thank you.

Our next question comes from the line of Tim O'Brien with Sandler O'Neill. Please proceed with your question.

Thanks. This is Thomas Kagan on for Tim. Good morning, guys. So somewhat similar to the previous question on just the data processing and professional service costs that came in around $2 million and $1 million in total for the quarter. I know you've broken out for the acquisition, are there any other non-recurring items in either of those and do you guys have a ballpark run rate range for each of these two items?

So those are the significant items. There is s not any anything significant embedded in other places associated with those…

Okay.

And with regard to other things might impact the income statement going forward, you know, you have scheduled accretion for the acquired loans. Of course, we don't know what impact any early payoffs we’re going to have on net interest income, but the scheduled accretion is a very small amount. So if you look at the table on page 4 of the press release, which talks about accretion in gains on sales – the purchase loans, you can see that scheduled accretion was 4 basis points for the fourth quarter. I don't think that will go up by much for scheduled accretion, going forward.

Okay, great. Thank you. And then just one quick additional thing. Is there any additional benefit - if any at all our remaining from your tax strategies that could influence the tax rate going forward?

Could you repeat the question one more time? Sorry.

Yes, yes. So just - I know you guys mentioned some information about the tax rate. But for you guys this tax strategies, is there any potential - anything that you might do in the future could that could influence the rate going forward in addition to just kind of the recent tax law changes?

I mean, one of the things we do is we do have a fair number of financing that we we've done and continue to do going forward for tax and borrowers. And so there is flows [indiscernible] that nature. But that's an interesting question, because obviously, the tax rate will affect the pricing on those and in our portfolio currently that's one of the things that those deals with price based on with the tax time, although, in many of them, we have the ability to make changes in those rates. So as we go forward, we're going to see how that market kind of, settles out because there will be – certainly be changes in the pricing of tax-exempt deals with only a 21% corporate tax rate that will make them less attractive, certainly, to the borrowers and close the gap somewhat to tax and financing. So we have to kind of step back on that particular program that we've been doing. We need to evaluate what we want to do and how we the price deals going forward and…

Okay. Yeah, that’s great. Thank you.

Okay.

Our next question comes from the line of Jackie Boland with KBW.

Hi. Good morning, everyone.

Good morning, Jackie.

Good morning, Jackie.

You had mentioned some lending in Oakland, just the increase that’s going on there. Can you just provide a little bit more color on what some of the drivers of that are?

I would say, the drivers of that are the team that we've assembled there. And we have - that particular office has really put together a very effective team of lenders, business development officers, personal [ph] bankers who out in the market and generating opportunities. That has been probably the most effective office we've had in our system over the last year. And we are in the market over they're and East Bay is, as you probably are aware, it is that [indiscernible] quarter is a tremendous number of C&I type opportunities. A lot of lightning, distribution, wholesalers, things of that nature, which gives us great opportunity to build our portfolio. And that team is doing a really terrific job. And the result is pretty easy to see. When you have great results, you usually have great people. That's the reason. And our people are performing at a very high level right now.

Okay, that's very helpful. Thank you. So that sounds like it's something that will continue to be a good source of growth for several quarters to come, into the foreseeable future, I would guess?

Yes, we certainly anticipate that. And obviously, we expect - our expectation for other offices that they would grow at a higher level too.

Okay. All right. And then one last one for me. In terms of deposit pricing in the quarter, how much of that was related to the acquisition?

So our cost of deposits really didn't change, and we did get some contribution in our CDA non-interest bearing accounts from Napa. We do get - periodically, we get a request from somebody who has seen rates going up but we haven't gotten a lot of pressure thus far to raise our rates. We haven't changed our pricing on our rates yet and I think our relationship model surfaced really well associated our deposit pricing because we have such a big percentage of CDA accounts. And those are really operating accounts and are not as interest rate sensitive.

Okay, so no - really not getting much pressure at this point in time even with the December rate hike from customers?

We certainly get pressure. I'm not saying that we don't get pressure. But that being said, what Tani said about the relation with banking [ph] model and demand because we have growth of $90 million in demand deposits in the fourth quarter. That speaks to the relationship model and while we're getting pressured, certainly the money market accounts, things of that nature. We're growing the demand deposit at such a clip that our cost of funding - our cost of deposits remains at 7 basis points, which is a pretty nice benefit that we have and really value of our franchise that we have, the high levels of demand deposits which keeps our cost of funding. And you know that the differential, as we go forward, with rates continuing to rise, the differential and the value of this deposit franchise that we have will show an even greater amount in the future because that margin will expand because of that.

Okay, great. Thank you. That’s very helpful.

Thanks, Jackie.

[Operator Instructions] Our next question comes from the line of Don Worthington with Raymond James. Please proceed with your question.

Thank you. Good morning, Russ, Tani.

Good morning, Don.

Morning.

Just while we are on the deposits subject, was there anything in the $90 million that you would consider to be temporary that you might lose in the first quarter?

We do have a number of large borrowers, I mean, large depositors, who have - keep the substantial deposits in the bank. I'll just give you a couple of examples. We have some large contractors who do a lot of municipal work. And when they get a new contract, then they get funded and the money comes in the bank, and when they do the work, they money goes out. But they are also bidding those other projects which bring other additional funds in. So while the money comes and goes, the totals are pretty stable. So we have that and there is a number of those that - those types of normal contractors that a number of that have exactly that - they have money coming in, they have in, we have ad agency, we have money coming in and then goes out. It's those kinds of deposits which - while are large and they are kind of transitory deposits, those others - the other deposits replacing on the other end. So we've been pretty - we watched that pretty closely. And this year – this year we had less of the migration out than in past years so it was not a dip, the deposit grew over the year. We never really had a time when we had a big decline.

Okay. All right, thanks. And then in terms of the securities portfolio, would you plan to be doing anymore restructuring of that, that might lead to gains or losses?

So, there may be a little bit more, but we evaluate the portfolio on an ongoing basis, and we're looking for upcoming changes, not only with regard to changes in credit on any one of -- any security in our portfolio, but also what the tax law ramifications, their impacts will be on the portfolio. We think we have most of that done, but there are a few other securities that we might take action on. But I think the bulk of it is probably done at this point.

Okay, thanks. And then, I guess, my last question is, in terms of the benefit from a lower tax rate, any thoughts on how that might be deployed? Your expenses, initiatives or dividend policy?

We're evaluating dividend policy, certainly. And we evaluate other ways to utilize the capital with growth opportunity. We look at it as an opportunity to make investments that may be we would have - in shorter time period, maybe we would have made over a longer time period. And so, we're looking at all those opportunities. And obviously, acquisitions, as they come along, building capital here, the problem with acquisitions these days seems to be that most acquisitions are mostly stock. They really don't utilize a lot of capital to create more capital. So I think we're - for us, it's an opportunity to step back and say, okay, so what kind of investments should we be making then maybe we would have deferred but now might be a good time to invest, because our earnings are going to be up substantially because of the tax change and it really does give us that opportunity to look at those investments.

Okay, great. Thank you.

Okay. Welcome.

And our last question is a follow-up question from the line of Matthew Clark with Piper Jaffray. Please proceed with your question.

Hi, good morning.

Morning.

I'm hoping to get a little more color around your commentary about the pipeline being substantial. I know your view of comparison aren't good with the Bank of Napa acquisition. But can you, kind of, sensitize maybe Legacy, Bank of Marin, and how that compares year-over-year and how much of that might be fire-related with maybe increased demand there or just the change in the environment with tax reforms?

I don't see the start with the fire related. I don't see a lot of demand from the - which is fire-related at this point. So it's going to take a long time to where they actually have projects that are starting to rebuild. It just takes -- it's a long time to get through the process. We have a pipeline which, going into this year, which is pretty substantial, particularly because we had – it was one of interesting times in the month of December, we had a big number that was we thought might close, and virtually, none of it closed and it all got pushed over to the first quarter. So we're looking forward to a good first quarter there. And what else was your question I don't remember beyond that?

Just trying to -- around tax reform, any kind of early indications of increased activity there?

I don't see it yet. But that's going to be developing over the next, I think, 6 to 12 months in terms of, kind of, like with us, when we say maybe we look at projects which we might have delayed, maybe we do them right now. We have customers, I'm sure, that will be looking at opportunities to do things that maybe they would have delayed, but now with the tax law changed, that they have more capital available to do those projects. And that would, potentially move to opportunities for us for financing. I'm very optimistic going forward about the opportunities that it's going to bring, because our customers will have more cash, more capital available to invest and I think just like with us I think that's going to happen.

Okay. And then just last one on the targeting cost [phase] for Bank of Napa. Any change in terms of the magnitude and timing as to how those are realized?

I don't think so at this point. We originally estimated 42.5%, and as far as we know right now, that's where we are on target with, but we'll know more, I think, when we go forward.

Okay, thank you.

The opportunities as we were looking at things we never would have put into the plan at all, we have to look at facilities and how we might be able to right size, if not move, not out of the facilities, but we have a lot of space, maybe we can reduce our space. These are things that we can do to become more efficient in Napa. So that will happen over the next 6 to 12 months, for sure.

Okay. And just one quick one, and I apologize if I missed it in your comments, I jumped on a little late. But tax rate that you expressed. Since 2018, we have our own guesstimate, curious what you guys think it will shake out at?

Yes, what I shared a little bit earlier was that if you assume about a 10 percentage point decrease in the effective tax rate, that would probably be a conservative estimate.

Got it. Thank you.

Thank you.

And we have further questions on the audio line.

Okay. I want to thank all of you for joining us this morning, and we will talk with all of you again next quarter. Thank you.

Thank you.