Bank of Marin Bancorp Reports Second Quarter Earnings of $8.2 Million; Increases Quarterly Dividend Ten Percent

Bank of Marin Bancorp, "Bancorp" (NASDAQ: BMRC), parent company of Bank of Marin, "Bank," announced earnings of $8.2 million in the second quarter of 2019, compared to $7.5 million in the first quarter of 2019 and $7.9 million in the second quarter of 2018. Diluted earnings per share were $0.60 in the second quarter of 2019 compared to $0.54 in the prior quarter and $0.56 in the same quarter last year (adjusted for stock-split). Earnings for the first six months of 2019 totaled $15.7 million compared to $14.3 million in the same period last year. Diluted earnings per share were $1.13 and $1.02 (adjusted for stock-split) in the first six months of 2019 and 2018, respectively.

"We delivered another strong quarter for our shareholders," said Russell A. Colombo, President and Chief Executive Officer. "In this competitive environment, we've maintained our low cost, stable deposit base and disciplined underwriting standards, and our credit quality remains excellent. We're well-positioned to meet the steady loan demand we're seeing across our markets."

Bancorp also provided the following highlights from the second quarter of 2019:

• Loans totaled $1,764.9 million at June 30, 2019, compared to $1,772.5 million at March 31, 2019. New loan originations of $42.2 million in the second quarter were distributed across Commercial Banking and Consumer Banking. Payoffs of $43.3 million in the second quarter included the successful completion of a large construction project.
• While total deposits decreased $76.6 million in the second quarter to $2,102.0 million, non-interest bearing deposits declined only $19.7 million. Non-interest bearing deposits represented 50% of total deposits versus 49% last quarter, and have been at or near this level since the beginning of last year. The cost of average deposits increased to 0.20% in the second quarter compared to 0.18% in the first quarter of 2019.
• Strong credit quality remains a cornerstone of the Bank's consistent performance. Non-accrual loans represented only 0.03% of the Bank's loan portfolio at June 30, 2019. There were no provisions for loan losses or off-balance sheet commitments recorded in the second quarter of 2019.
• All capital ratios were above regulatory requirements. The total risk-based capital ratio for Bancorp was 15.2% at June 30, 2019, compared to 14.9% at March 31, 2019. Tangible common equity to tangible assets was 12.0% at June 30, 2019, compared to 11.4% at March 31, 2019 (refer to footnote 3 in Financial Highlights table for a definition of this non-GAAP financial measure).
• Based on the size of the market and reduced branch foot traffic driven by digital banking offerings, we have decided to close the Petaluma Downtown Branch on August 9, 2019. We will focus our resources on growing our two remaining branches in Petaluma, where most Downtown customers have already moved their business. Our commitment to the Petaluma community remains strong, and employees have accepted positions in other Bank of Marin branches.
• On June 17, 2019, we upgraded to a new digital banking platform that offers our customers enhanced features and additional functionality for an improved online and mobile banking experience. The conversion is substantially complete, and the implementation and operations teams are working closely with our customers to make their transition to the new platform as smooth as possible.
• The Board of Directors declared a cash dividend of $0.21 per share on July 19, 2019. This represents the 57th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August 9, 2019, to shareholders of record at the close of business on August 2, 2019.
• As a result of her expanded responsibilities, Cecilia Situ, First Vice President, has been named Treasurer of the Bank. David A. Merck, Vice President and Financial Reporting Manager, has assumed the position of Principal Accounting Officer that was previously occupied by Ms. Situ.

Loans and Credit Quality

Loans decreased by $7.6 million in the second quarter and totaled $1,764.9 million at June 30, 2019. For the second quarter and first six months of 2019, new loan originations of $42.2 million and $76.1 million, respectively, were below 2018 loan originations of $75.8 million and $113.2 million for the same periods. Loan payoffs of $43.3 million in the second quarter and $69.3 million in the first six months of 2019, moderately exceeded $37.3 million and $68.8 million in the respective 2018 periods, and included the successful completion of a large construction project.

Non-accrual loans totaled $574 thousand, or 0.03% of the loan portfolio at June 30, 2019, compared to $719 thousand, or 0.04% at March 31, 2019, and $385 thousand, or 0.02% a year ago. Classified loans totaled $10.3 million at June 30, 2019, compared to $14.8 million at March 31, 2019 and $13.9 million at June 30, 2018. The $4.5 million decrease in the second quarter of 2019 was primarily due to a $2.2 million paydown received in April 2019 on a $2.7 million substandard classified loan (the remaining balance was upgraded to a Pass risk rating). Additionally, there were upgrades on loan balances of approximately $1.6 million with improvements in credit quality and a payoff of $188 thousand on a substandard classified loan. There were no loans classified doubtful at June 30, 2019 or March 31, 2019. Accruing loans past due 30 to 89 days totaled $343 thousand at June 30, 2019, compared to $2.2 million at March 31, 2019 and $88 thousand a year ago.

There was no provision for loan losses recorded in the second quarter of 2019, consistent with last quarter and the same quarter a year ago. Recoveries were $18 thousand in the second quarter of 2019, compared to net charge-offs of $4 thousand for the prior quarter and net recoveries of $42 thousand in the second quarter a year ago. The ratio of loan loss reserves to loans, including acquired loans, was 0.90% at June 30, 2019, 0.89% at March 31, 2019, and 0.92% at June 30, 2018.

Investments

The investment securities portfolio totaled $527.0 million at June 30, 2019, compared to $595.7 million at March 31, 2019. The decrease from the prior quarter was primarily attributed to sales of $61.8 million in lower yielding shorter term securities to manage our interest rate spread and cash position.

Deposits

Total deposits were $2,102.0 million at June 30, 2019, compared to $2,178.6 million at March 31, 2019. The $76.6 million decrease during the second quarter primarily resulted from normal cash fluctuations in some of our large business accounts and a $16.1 million increase in one-way deposit sales to third party deposit networks. The average cost of deposits in the second quarter of 2019 was 0.20%, an increase of 2 basis points from the prior quarter.

Earnings

"Bank of Marin's commitment to our markets and our customers is yielding great results," said Tani Girton, EVP and Chief Financial Officer. "With a return on assets of 1.26% and efficiency ratio of 58.91% year-to-date, and an increase in tax-equivalent net interest margin of 14 basis points year-over-year, we are seeing what can be achieved when you combine consistent credit and expense management with a focus on relationship banking."

Net interest income totaled $23.8 million in both the first and second quarters of 2019 and $22.8 million in the second quarter of 2018. The $947 thousand increase from the comparative quarter a year ago was reflective of higher average loan balances and higher yields across earning asset categories, partially offset by higher rates on deposits.

Net interest income totaled $47.6 million in the first six months of 2019, compared to $44.7 million for the same period in 2018. The $2.9 million increase primarily relates to higher average loan and investment securities balances and higher yields across earning asset categories, partially offset by higher rates on deposits.

The tax-equivalent net interest margin was 4.04% in the second quarter of 2019, compared to 4.02% in the prior quarter and 3.92% in the same quarter a year ago. The 2 basis point increase from the prior quarter was primarily due to a more favorable mix of interest-earning assets toward higher yielding loans. The 12 basis point increase from the same quarter a year ago was primarily due to higher interest rates.

The tax-equivalent net interest margin was 4.03% in the first six months of 2019, compared to 3.89% for the same period in 2018. The 14 basis point increase from the same period a year ago was mostly attributed to growth in earning assets and higher interest rates.

Loans obtained through the acquisition of other banks are classified as either purchased credit impaired ("PCI") or non-PCI loans and are recorded at fair value at acquisition date. For acquired loans not considered credit impaired, the level of accretion varies due to maturities and early payoffs. Accretion on PCI loans fluctuates based on changes in cash flows expected to be collected. Gains on payoffs of PCI loans are recorded as interest income when the payoff amounts exceed the recorded investment. PCI loans totaled $2.1 million at June 30, 2019, March 31, 2019 and June 30, 2018.

As our acquired loans from prior acquisitions continue to pay off, we expect the accretion on these loans to continue to decline. Accretion and gains on payoffs of purchased loans recorded to interest income were as follows:

Non-interest income totaled $2.3 million in the second quarter of 2019, $1.8 million in the prior quarter, and $2.2 million in the same quarter a year ago. The increase of $503 thousand from the prior quarter was due to $283 thousand non-refundable costs for underwriting two new bank-owned life insurance policies purchased in the first quarter and gains on the sale of investment securities in the second quarter. The $36 thousand increase from the same quarter a year ago was attributed to fee income and gains on the sale of investment securities, partially offset by a decrease in deposit network income.

Non-interest income decreased $435 thousand to $4.0 million in the first six months of 2019, compared to $4.5 million in 2018, primarily due to the underwriting costs of new bank-owned life insurance policies and the decrease in deposit network income.

Non-interest expense decreased $612 thousand to $14.9 million in the second quarter of 2019, from $15.5 million in the prior quarter. The decrease was primarily due to lower salaries and benefits as the first quarter included $498 thousand due to participants meeting stock-based compensation retirement eligibility requirements and $239 thousand more in 401K contributions that are typical in the first quarter. The higher expenses were partially offset by a $372 thousand bonus reversal, also in the first quarter of 2019. Additionally, the first quarter included a $129 thousand provision for losses on off-balance sheet commitments.

Non-interest expense increased $407 thousand from $14.5 million in the second quarter of 2018. The increase primarily related to $655 thousand more in salaries (due to five additional full-time equivalent staff and annual merit increases), partially offset by $268 thousand less in professional fees (mostly attributed to core processing contract negotiations in 2018).

Non-interest expense totaled $30.4 million in the first half of 2019, compared to $30.6 million in the first half of 2018. The $146 thousand decrease was primarily attributed to fewer professional fees and data processing expenses (mostly related to Bank of Napa acquisition expenses in 2018), partially offset by the higher expenses in the first half of 2019 mentioned above.

Share Repurchase Program

Bancorp's Board of Directors approved the extension of the $25.0 million Stock Repurchase Program to February 28, 2020. Bancorp repurchased 134,620 shares totaling $5.6 million in the second quarter of 2019 for a cumulative total of 419,741 shares and $17.5 million as of June 30, 2019.

Earnings Call and Webcast Information

Bank of Marin Bancorp will present its second quarter earnings call via webcast on Monday, July 22, 2019 at 8:30 a.m. PT/11:30 a.m. ET. Investors will have the opportunity to listen to the webcast online through Bank of Marin's website at https://www.bankofmarin.com under "Investor Relations." To listen to the webcast live, please go to the website at least 15 minutes early to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will be available at the same website location shortly after the call.

About Bank of Marin Bancorp

Founded in 1990 and headquartered in Novato, Bank of Marin is the wholly owned subsidiary of Bank of Marin Bancorp (NASDAQ: BMRC). A leading business and community bank in the San Francisco Bay Area, with assets of $2.5 billion, Bank of Marin has 23 retail branches, 5 commercial banking offices and 1 loan production office located across the North Bay, San Francisco and East Bay regions. Bank of Marin provides commercial banking, personal banking, and wealth management and trust services. Specializing in providing legendary service to its customers and investing in its local communities, Bank of Marin has consistently been ranked one of the "Top Corporate Philanthropists" by the San Francisco Business Times and one of the "Best Places to Work" by the North Bay Business Journal. Bank of Marin Bancorp is included in the Russell 2000 Small-Cap Index and NASDAQ ABA Community Bank Index. For more information, go to www.bankofmarin.com.

Forward-Looking Statements

This release may contain certain forward-looking statements that are based on management's current expectations regarding economic, legislative, and regulatory issues that may impact Bancorp's earnings in future periods. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Factors that could cause future results to vary materially from current management expectations include, but are not limited to, general economic conditions, economic uncertainty in the United States and abroad, changes in interest rates, deposit flows, real estate values, costs or effects of acquisitions, competition, changes in accounting principles, policies or guidelines, legislation or regulation (including the Tax Cuts & Jobs Act of 2017), and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cyber-security threats) affecting Bancorp's operations, pricing, products and services. These and other important factors are detailed in various securities law filings made periodically by Bancorp, copies of which are available from Bancorp without charge. Bancorp undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.