Bank of Marin Bancorp — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Bank of Marin Bancorp is a California bank holding company whose wholly owned subsidiary provides commercial banking services. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.
Financial performance and condition
| Metric | Q3 2020 / Sept. 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $7.5 million; diluted EPS $0.55 | Q3 2019: $9.4 million; diluted EPS $0.69 |
| Net interest income | $24.6 million | Q3 2019: $24.2 million |
| Tax-equivalent net interest margin | 3.44% | Q3 2019: 4.04% |
| Provision for loan losses | $1.25 million in Q3; $5.45 million year to date | Q3 2019: $0.40 million; nine months 2019: $0.40 million |
| Total assets | $2,975.2 million | Dec. 31, 2019: $2,707.3 million |
| Loans, net | $2,085.9 million; gross loans were $2,108.0 million | Dec. 31, 2019: $1,826.6 million net |
| Deposits | $2,569.3 million | Dec. 31, 2019: $2,336.5 million |
| Cash, cash equivalents and restricted cash | $213.6 million | Dec. 31, 2019: $183.4 million |
| Stockholders’ equity | $357.6 million | Dec. 31, 2019: $336.8 million |
- For the first nine months, net income was $22.1 million, down from $25.2 million; diluted EPS was $1.62 versus $1.82. Net interest income rose to $73.1 million from $71.8 million, but higher credit provisions and margin compression weighed on earnings.
- Year-to-date operating cash flow was $31.3 million. Investing activities used $222.4 million, principally reflecting net loan growth; financing activities provided $221.3 million, mainly from $232.8 million of deposit growth. Cash increased $30.2 million.
- Borrowings and other obligations were $99,000; the subordinated debenture was $2.76 million. The Bank reported no outstanding FHLB, Federal Reserve or correspondent-bank borrowings. Operating lease liabilities were $27.5 million.
- Allowance for loan losses was $22.1 million, or 1.05% of total loans (1.29% excluding specified acquired loans and SBA PPP loans). Non-accrual loans were $1.4 million, 0.07% of loans. Net charge-offs were $14,000 year to date.
- The Bank’s total risk-based capital ratio was 15.47%; management reported the Bank remained well capitalized. The equity-to-assets ratio was 12.02%, compared with 12.44% at 2019 year-end.
Material changes and management commentary
- Loans increased $264.7 million from year-end, primarily reflecting participation in the SBA Paycheck Protection Program (PPP). Deposits rose $232.8 million; non-interest-bearing deposits increased to 53.9% of deposits from 48.3%.
- Q3 tax-equivalent net interest margin fell 60 basis points year over year. Management attributed the decline to the low-rate environment and PPP loans. Lower deposit costs and higher loan balances supported net interest income.
- Q3 non-interest income declined $931,000 year over year, chiefly because the prior-year quarter included a $562,000 benefit on bank-owned life insurance policies. Q3 non-interest expense increased $1.0 million, including higher charitable contributions, off-balance-sheet commitment provisions, occupancy and FDIC insurance costs.
- Management said it expects the Bank’s liquidity, capital, credit quality and low-cost deposit base to help it manage the pandemic and low-rate environment. No specific earnings or revenue guidance was provided.
- Management estimated that delayed PPP forgiveness and extended payment deferrals could reduce Q4 2020 net interest income by approximately $850,000 through slower recognition of PPP loan fees. Forgiveness-related accelerated fee recognition could partly or fully offset this, but could not be estimated.
- As of October 19, 2020, 20 pandemic-related payment-relief loans totaling $47.2 million had either requested additional relief or had relief periods that had not expired. The Bank had initially approved 264 modifications covering $388.5 million; management expected most remaining affected borrowers to resume normal payments, but gave no assurance.
- The Bank postponed CECL adoption under CARES Act relief and planned adoption as of December 31, 2020. It estimated an initial retained-earnings adjustment of approximately $1.6 million for loan losses and $122,000 for off-balance-sheet commitments, before subsequent pandemic effects. Management did not expect Q4 provision for credit losses to exceed 10% of the September allowance, but noted the outcome depends on economic forecasts and other assumptions.
Risks, contingencies and unusual items
- COVID-19-related risks include borrower deterioration as payment relief expires, declining collateral values, business disruption, deposit outflows and prolonged pressure on margins. The filing notes that government support, including PPP, may not fully offset pandemic impacts.
- Investor-owned commercial real estate loans equaled 323% of capital under the filing’s regulatory concentration measure. Management also cited possible longer-term CRE pressure from remote-work and migration trends.
- The Bank had $567.5 million of undrawn loan commitments and standby letters of credit. Time deposits of $70.7 million were due to mature over the next 12 months; waived early-withdrawal penalties could affect deposit retention.
- Interest-rate simulations estimated that an immediate 100-basis-point increase would reduce net interest income by 1.2% in year one and 0.3% in year two; a 100-basis-point decrease was estimated to reduce it by 0.5% and 0.9%, respectively. The filing cautions that model assumptions limit the predictive value of these scenarios.
- The filing reported no legal proceedings expected to have a material adverse effect. Visa interchange litigation remains ongoing; management considered the probability of a Bank cash loss remote while the Visa litigation escrow remains available.
- The share repurchase program, suspended in March 2020, was reactivated October 23, 2020, with approximately $23.2 million available. The same day, the Board declared a $0.23-per-share dividend payable November 13, 2020.
Key facts for investors to verify
- PPP balances are stated differently in the filing: $301.7 million in one discussion and $308.2 million in another. Confirm the applicable balance and whether the difference reflects presentation or measurement.
- Track PPP application processing, forgiveness, fee accretion and the estimated $850,000 Q4 net-interest-income impact.
- Monitor payment-relief borrowers as deferrals expire, special-mention and non-accrual loans, CRE concentrations, and subsequent allowance and charge-off trends.
- Review the final CECL adoption impact against the preliminary estimates, including the effects of updated unemployment and other economic forecasts.
- Assess liquidity and funding trends, including deposit retention, commitment draws, time-deposit maturities and actual use of available borrowing facilities.
- Compare realized margins, expenses, capital ratios and repurchases with management’s stated priorities and the filing’s interest-rate sensitivities.