Bank of Marin Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are U.S. dollars; financial statement figures are unaudited. The company is a bank holding company whose principal subsidiary is Bank of Marin.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net interest income | $24.5 million | $24.4 million | $46.6 million | $48.5 million |
| Net income | $9.3 million | $7.4 million | $18.2 million | $14.6 million |
| Diluted EPS | $0.71 | $0.55 | $1.37 | $1.07 |
| Tax-equivalent net interest margin | 3.37% | 3.53% | 3.28% | 3.70% |
| Non-interest income | $2.0 million | $1.8 million | $3.8 million | $4.9 million |
| Non-interest expense | $15.6 million | $13.9 million | $31.0 million | $29.2 million |
- Quarterly net income rose 25% year over year; first-half net income rose 25%. Results benefited from PPP fee recognition and reversals of credit-loss provisions. The first-half comparison also reflects a $1.3 million accelerated discount accretion charge in Q1 related to early redemption of the subordinated debenture.
- Credit-loss provision reversals were $0.9 million in Q2 and $3.8 million in the first half of 2021, versus provisions of $2.0 million and $4.2 million in the comparable 2020 periods. Management attributed the reversals largely to improved California unemployment forecasts and lower non-PPP loan balances.
- PPP fees, net of costs, recognized in income were $2.6 million in Q2 and $4.3 million in the first half. $6.5 million of net PPP fees remained to be recognized in future periods at June 30.
- The margin declined year over year, which management attributed primarily to the low-rate environment. PPP forgiveness and repayments added 12 basis points to Q2 margin and 5 basis points to the first-half margin.
Financial position, liquidity and capital
- Total assets were $3.074 billion at June 30, up $161.9 million from December 31, 2020. Investment securities increased $185.6 million to $687.0 million as excess liquidity was redeployed.
- Loans were $2.003 billion, down $85.8 million, or 4.1%, from year-end. PPP loans declined by $43.3 million; non-PPP originations were more than offset by payoffs and lower line utilization.
- Deposits rose $179.3 million to $2.684 billion. Non-interest-bearing deposits were 54.4% of deposits. Average deposit cost was 0.07% in both Q2 and the first half.
- Cash, cash equivalents and restricted cash were $257.5 million, versus $200.3 million at year-end. First-half operating cash flow was $19.8 million; investing activities used $112.2 million and financing activities provided $149.6 million.
- Debt was low: the $2.8 million book-value subordinated debenture was redeemed in March; $438,000 of borrowings and other obligations remained at quarter-end. The company reported no outstanding FHLB, Federal Reserve or correspondent-bank borrowings and identified available credit lines from those sources.
- Stockholders’ equity was $348.6 million, down from $358.3 million at year-end, including the effects of $19.3 million in first-half share repurchases and lower accumulated other comprehensive income.
- Credit quality indicators included $9.2 million of non-accrual loans (0.46% of loans), broadly unchanged from year-end. The allowance for loan losses was $19.1 million, or 0.95% of loans (1.09% excluding SBA-guaranteed PPP loans); special-mention loans declined to $49.0 million, while classified loans increased to $30.8 million.
- Bancorp’s total risk-based capital ratio was 15.53% and the Bank’s was 15.30%; management reported both above applicable well-capitalized thresholds. Bancorp’s tangible common equity to tangible assets ratio was 10.36%.
Changes, outlook and risks
- Q2 non-interest expense increased 12.1% year over year, primarily from higher salaries (including fewer deferred PPP origination costs), acquisition-related professional services and charitable contributions. Management expected higher American River Bankshares (AMRB) acquisition expenses in the next two quarters.
- First-half non-interest income fell 22.0%, mainly because the prior-year period included $915,000 of investment-security gains and because service-charge and deposit-network fee income declined. Customer fee waivers introduced during the pandemic were reinstituted May 3, 2021.
- On April 16, 2021, Bancorp agreed to acquire AMRB in a stock transaction at a fixed exchange ratio of 0.575 Bancorp shares per AMRB share. The filing valued the transaction at approximately $134.5 million based on the agreement-date share price and expected closing August 6, 2021. AMRB reported $906.1 million of assets, $787.7 million of deposits and $434.2 million of loans at June 30; these figures were subject to fair-value adjustments. The companies’ boards, applicable regulators and shareholders had approved the merger.
- Management said the acquisition was expected to be accretive and to expand the bank’s regional presence. It also identified integration, cost savings, revenue, customer and employee disruption, and timing or completion as risks. The filing provides no quantified earnings guidance.
- Management described liquidity and capital as strong and considered them adequate for operations. A new authorization permits up to $25 million of share repurchases through July 31, 2023; the Board also declared a $0.24-per-share dividend payable August 6, 2021.
- Key risks include continued low interest rates and margin pressure; borrower performance as COVID-related payment relief ends; commercial real estate and other credit exposures; deposit variability; acquisition execution and expenses; and California natural disasters, competition, regulation and cybersecurity threats. Seven borrower relationships with $49.8 million of loans were receiving payment relief at June 30; subsequent to quarter-end, three loans totaling $6.4 million exited relief and resumed normal payments.
- Interest-rate simulations estimated first-year net interest income increases of 2.2% under an immediate 100-basis-point rise and a 1.9% decrease under a 100-basis-point decline. Management cautioned that model assumptions and actual rate, deposit and prepayment behavior could produce different results.
Important facts for investors to verify
- Whether AMRB closed as expected, and subsequent acquisition terms, integration costs, realized synergies and asset fair-value adjustments.
- Whether PPP forgiveness and remaining fee recognition, together with loan payoffs and originations, affect future loan balances and earnings as anticipated.
- Whether credit quality and payment-relief outcomes support the reduced allowance, especially given the increase in classified loans and reliance on economic forecasts.
- Whether deposit growth persists and how the low-rate environment, deposit pricing and asset mix affect net interest margin.
- Use of the new repurchase authorization and the impact of capital returns and the merger on capital ratios and liquidity.