Bank of Marin Bancorp — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Comparisons are with the same 2017 periods unless noted. Balance-sheet comparisons are with December 31, 2017. Figures are unaudited.
Business context and financial performance
Bank of Marin Bancorp is a California bank holding company. Results include the November 2017 acquisition of Bank of Napa; management attributed higher average earning assets and some increased expenses to the acquisition and integration.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $22.8 million | $18.3 million | $44.7 million | $35.9 million |
| Non-interest income | $2.2 million | $2.1 million | $4.5 million | $4.2 million |
| Non-interest expense | $14.5 million | $12.6 million | $30.6 million | $25.6 million |
| Net income | $7.9 million | $5.2 million | $14.3 million | $9.7 million |
| Diluted EPS | $1.12 | $0.84 | $2.03 | $1.58 |
| Reported net interest margin | 3.87% | 3.71% | 3.83% | 3.69% |
| Tax-equivalent net interest margin | 3.92% | 3.85% | 3.89% | 3.82% |
Q2 pre-tax income rose 36.1%. Higher loan and investment yields, growth in average earning assets, and a lower effective tax rate supported earnings. Q2 effective tax rate was 25.4%, versus 33.2%; first-half rates were 23.3% and 32.8%, respectively, reflecting the federal corporate tax-rate reduction and discrete tax benefits.
For Q2, return on average assets was 1.28% (1.01% in 2017), return on average equity was 10.54% (8.74%), and the efficiency ratio improved to 57.85% from 61.92%. First-half efficiency ratio was 62.16%, versus 63.89%.
Financial condition, funding and credit
- At June 30, total assets were $2.465 billion; net loans were $1.702 billion; deposits were $2.138 billion; stockholders’ equity was $304.2 million. Total assets were nearly flat versus year-end.
- Loans increased $38.6 million from year-end to $1.718 billion. Deposits declined $10.9 million to $2.138 billion. Non-interest-bearing deposits were $1.058 billion, or 49.5% of deposits; annualized first-half total deposit cost was 0.08%.
- Subordinated debentures were $5.8 million on the balance sheet. No FHLB, Federal Reserve, or overnight correspondent borrowings were outstanding at quarter-end; disclosed undrawn borrowing capacity included $627.4 million at FHLB and $59.5 million at the Federal Reserve.
- First-half operating cash flow was $18.8 million. Investing activities used $123.8 million, mainly reflecting securities purchases and net loan growth; financing activities used $14.7 million. Cash and cash equivalents fell $119.7 million to $83.9 million.
- Liquid assets, including cash and unencumbered available-for-sale securities, totaled $420.8 million at quarter-end. Undrawn loan commitments and standby letters of credit were $458.2 million; $92.5 million of time deposits were due to mature over the next 12 months.
- Non-accrual loans were $385,000, or 0.02% of loans. Classified loans declined to $13.9 million from $27.9 million at year-end, largely after two borrower relationships were upgraded. The allowance for loan losses was $15.8 million, or 0.92% of loans; no loan-loss provision was recorded in the first half.
- Bancorp’s total risk-based capital ratio was 15.15%; the Bank’s was 13.49%. Management reported both exceeded well-capitalized regulatory thresholds.
Material changes and notable items
- Q2 and first-half net income increased substantially year over year, while non-interest expense also rose—14.9% in Q2 and 19.3% for the first half. Higher staffing costs, professional services and acquisition-related costs contributed.
- Bank of Napa integration costs were $250,000 in Q2 and $865,000 for the first half. Management said cost savings were meeting expectations, expected them to be fully embedded in Q3 2018, and expected minimal further acquisition expenses for the rest of 2018.
- The available-for-sale securities portfolio had $9.3 million of gross unrealized losses at June 30, versus $2.4 million at year-end; accumulated other comprehensive loss increased to $8.3 million from $2.5 million. Management attributed temporary securities losses primarily to interest-rate movements and reported no other-than-temporary impairment.
- The company transferred $27.4 million of securities from available-for-sale to held-to-maturity in Q2, stating it intended and was able to hold them to maturity.
- A $25 million share-repurchase authorization runs through May 1, 2019. The company repurchased 1,398 shares for $104,000 during the quarter. The board declared a subsequent quarterly dividend of $0.32 per share, up $0.01.
- Visa litigation developments may reduce the conversion rate of the company’s restricted Visa Class B shares. The filing said no significant future cash settlement payments were then known, but the litigation and ultimate effect remained uncertain.
Outlook, risks and contingencies
Management expected rising rates to support net interest income, citing cash, adjustable-rate loans and non-interest-bearing deposits; it identified falling rates as the more vulnerable scenario. Its modeled immediate 100-basis-point rate decline reduced estimated net interest income by 5.8% in year one and 10.1% in year two. These are model estimates, not forecasts, and depend on assumptions about rates, deposit behavior and prepayments. Management gave no specific earnings or revenue guidance.
Key risks cited include deposit-flow volatility, competition, interest-rate changes, real-estate values and loan cash flows, acquisition integration, regulation and accounting changes, natural disasters and cybersecurity threats. The company had $16.5 million of undiscounted operating lease obligations; it planned to adopt the new lease standard in 2019 and was assessing its effects. The expected financial impact of the forthcoming CECL credit-loss standard was not yet known. Management said ordinary-course litigation was not expected to have a material adverse effect; Visa-related litigation remained uncertain.
Important facts for investors to verify
- Whether loan growth and higher asset yields can continue while deposit levels, mix and funding costs remain favorable.
- Whether Bank of Napa integration delivers the expected cost savings and whether elevated professional-services and compensation expenses persist.
- Credit trends, including classified and impaired loans, and the adequacy of the allowance despite no first-half provision.
- Exposure to interest-rate changes, including the filing’s modeled downside under falling rates and the sensitivity of deposit behavior.
- Changes in securities valuations and AOCI, and the assumptions supporting management’s conclusion that unrealized losses are temporary.
- Liquidity and capital effects of commitments, maturing time deposits, dividends and the remaining share-repurchase authorization.
- Potential effects of Visa litigation, lease-standard adoption and CECL implementation.