Bank of Marin Bancorp — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Bank of Marin Bancorp is a California bank holding company whose wholly owned subsidiary is Bank of Marin. Financial amounts below are in U.S. dollars; “million” is abbreviated as million.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $17.2 million | $16.5 million | $35.8 million | $33.1 million |
| Net income | $4.8 million | $4.3 million | $10.5 million | $8.7 million |
| Diluted EPS | $0.79 | $0.71 | $1.72 | $1.44 |
| Tax-equivalent net interest margin | 3.77% | 3.86% | 3.90% | 3.93% |
| Non-interest income | $2.4 million | $2.6 million | $4.6 million | $4.8 million |
| Non-interest expense | $12.0 million | $12.3 million | $24.0 million | $24.2 million |
| Return on average assets | 0.99% | 0.93% | 1.07% | 0.96% |
| Return on average equity | 8.68% | 8.33% | 9.52% | 8.62% |
Quarterly net income increased about 13% year over year, while six-month net income increased about 20%. The filing reports no loan-loss provision in either comparison period. The Q2 efficiency ratio was 61.35%, versus 64.62% a year earlier.
| Balance-sheet or liquidity measure | June 30, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $1,950.5 million | $2,031.1 million |
| Loans, net | $1,433.3 million | $1,436.2 million |
| Total deposits | $1,705.6 million | $1,728.2 million |
| Investment securities | $381.9 million | $487.4 million |
| Borrowings, including subordinated debentures | $5.5 million | $72.4 million |
| Stockholders’ equity | $226.5 million | $214.5 million |
| Cash and cash equivalents | $55.4 million | $26.3 million |
Non-interest-bearing deposits were $804.4 million, or 47.2% of deposits; the quarterly cost of total deposits was 0.08%. Management reported $287.5 million of liquid assets, including cash and unencumbered available-for-sale securities after a valuation haircut. The Bank also had substantial borrowing capacity, including $485.9 million available from the FHLB and $40.1 million of Federal Reserve borrowing capacity.
For the first six months, operating cash flow was $10.5 million. Investing activities provided $110.0 million, primarily reflecting securities sales, paydowns and maturities net of purchases. Financing activities used $91.4 million, including repayment of $67.0 million in borrowings and a $22.6 million net decrease in deposits. Cash increased $29.1 million.
At June 30, Bancorp’s total risk-based capital ratio was 14.05%, Tier 1 risk-based ratio 13.10%, and common equity Tier 1 ratio 12.80%. Management stated that capital ratios exceeded applicable requirements and that the Bank was well capitalized.
Material changes and management commentary
- Total assets fell $80.6 million from year-end, principally because investment securities declined $105.6 million. The company sold $68.7 million of available-for-sale securities in the first half, recognizing net gains of approximately $394,000, and used proceeds in part to reduce borrowings.
- Loans were nearly flat, down $2.8 million from year-end. First-half originations of approximately $73.6 million were offset by approximately $77.4 million of payoffs. Deposits declined $22.6 million, which management attributed mainly to normal commercial-customer activity.
- Management said Q2 net interest margin fell 27 basis points from Q1’s 4.04% to 3.77%. The absence of acquired-loan payoff gains reduced margin by 16 basis points, and the $312,000 fee to prepay a fixed-rate FHLB advance reduced it by a further 7 basis points. Management expects the advance prepayment and related securities sale to benefit margin by 4 basis points going forward.
- Quarterly non-interest income was below the prior-year period, partly because Q2 2015 included a special FHLB stock dividend and a one-time settlement. Q2 2016 included $284,000 in gains on securities sales. First-half non-interest expense was slightly lower year over year, with lower occupancy and equipment costs partly offset by higher data-processing costs.
- The company declared a Q2 dividend of $0.25 per share and, on July 22, declared another $0.25 per share, payable August 12, 2016.
Outlook, risks, contingencies and unusual items
- Management said it had liquidity and capital to support organic growth and acquisitions, and that acquisitions remained part of its strategy to expand in the Bay Area. It cited credit quality and expense control as priorities and described loan and deposit pipelines as robust.
- Management warned that net interest margin could continue to compress if market rates do not rise. Early repayments of acquired loans and the resulting impact on accretion and margin are unpredictable; acquired-loan accretion is expected to decline as those loans pay off.
- Credit indicators were generally favorable, but non-accrual loans increased to $2.7 million, or 0.19% of loans, from $2.2 million, or 0.15%, at year-end. Classified loans decreased to $20.4 million from $22.3 million. The allowance was $15.1 million, or 1.04% of loans.
- Off-balance-sheet loan commitments and standby letters of credit totaled $418.2 million, with an associated reserve of $899,000. Time deposits of $115.7 million were due to mature over the next twelve months; management expected replacement with new deposits.
- Visa interchange-fee litigation remains uncertain: an appellate court reversed approval of a proposed $4.0 billion class settlement on June 30, 2016. The company said the effect on member banks and the potential impact on its Visa Class B share conversion rate remain uncertain, but it was not aware of significant future cash settlement payments required of the company.
- The company repaid a $15 million fixed-rate FHLB advance early and incurred a $312,000 prepayment fee in Q2. It also recorded a $150,000 Q2 provision for losses on off-balance-sheet commitments, compared with a $109,000 reversal in Q2 2015.
- Management reported that interest-rate risk was within policy limits. Its simulation projected net interest income down approximately 0.1% in year one and up approximately 5% in year two after an immediate 200-basis-point rate increase.
- Management disclosed no material change in previously reported risk factors, no material adverse expected effect from ordinary-course litigation, and no significant change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether deposit flows and the $115.7 million of upcoming time-deposit maturities develop as management expects, and whether liquidity remains adequate as commitments are drawn.
- Whether loan growth offsets payoffs, and whether non-accrual, impaired, TDR and classified loan balances or the allowance require further adjustment.
- How declining acquired-loan accretion, interest rates and the FHLB prepayment affect net interest margin and earnings in subsequent quarters.
- Whether investment-security gains are repeatable; Q2 and first-half results included realized gains, while the securities portfolio declined substantially from year-end.
- Developments in the Visa litigation and any resulting impact on potential bank obligations or the value/conversion of the company’s Visa Class B shares.