Bank of Marin Bancorp — Q3 2018 Form 10-Q
Business context and reporting period. Bank of Marin Bancorp is a bank holding company whose wholly owned subsidiary is a California commercial bank. This unaudited report covers the quarter and nine months ended September 30, 2018. Comparisons are with the corresponding 2017 periods; balance-sheet comparisons are with December 31, 2017. The 2017 Bank of Napa acquisition contributed to year-over-year growth.
Financial performance and condition
| Metric | Q3 2018 / September 30, 2018 | Prior comparable period / December 31, 2017 |
|---|---|---|
| Net income | $8.7 million for quarter; $23.0 million for nine months | $5.1 million and $14.9 million, respectively, in 2017 |
| Diluted earnings per share | $1.23 for quarter; $3.27 for nine months | $0.83 and $2.41, respectively, in 2017 |
| Net interest income | $23.5 million for quarter; $68.3 million for nine months | $18.8 million and $54.7 million, respectively, in 2017 |
| Reported net interest margin | 3.91% for quarter; 3.86% for nine months | 3.63% and 3.67%, respectively, in 2017 |
| Non-interest income / expense | $2.2 million / $14.0 million for quarter; $6.7 million / $44.6 million for nine months | Quarter: $2.1 million / $13.0 million; nine months: $6.3 million / $38.7 million |
| Total assets | $2.546 billion | $2.468 billion |
| Loans / deposits | $1.729 billion / $2.213 billion | $1.679 billion / $2.149 billion |
| Cash and cash equivalents | $142.7 million | $203.5 million |
| Stockholders’ equity | $308.6 million | $297.0 million |
- Quarterly net income rose about 69%; nine-month net income rose about 54%. Management attributed stronger net interest income chiefly to higher average earning-asset balances and higher yields.
- Return on average assets and equity were 1.38% and 11.20% for Q3, versus 0.95% and 8.37% a year earlier. The efficiency ratio improved to 54.20% from 62.51%.
- For the first nine months, operating cash flow was $31.3 million; investing activities used $149.1 million, largely reflecting securities purchases; financing activities provided $57.0 million. Cash decreased $60.8 million over the period.
- Reported allowance for loan losses was $15.8 million, or 0.91% of loans, versus 0.94% at year-end 2017. There was no loan-loss provision in the nine-month period. Non-accrual loans were $386,000, or 0.02% of loans; classified loans were $12.4 million, down from $27.9 million.
- Non-interest-bearing deposits were $1.110 billion, or 50.2% of deposits. The annualized cost of total deposits for the first nine months was 0.09%. Liquid assets, including cash and unencumbered available-for-sale securities, totaled $496.4 million.
- Subordinated debentures were carried at $5.8 million at quarter-end. Bancorp redeemed one debenture on October 5, 2018; the accelerated $916,000 discount accretion is expected to boost Q4 net interest income once, with no material capital-ratio impact.
- Capital remained above well-capitalized thresholds: Bancorp’s total risk-based capital ratio was 15.29% and the Bank’s was 13.72% at September 30.
Material changes, outlook, and risks
- Year-to-date loan balances grew $49.9 million and deposits grew $64.2 million. Non-interest-bearing deposits increased $95.8 million from year-end. The company said deposit changes partly reflected large commercial customers’ operating cash flows.
- Non-interest expense increased 15.2% year over year for the nine months, reflecting added Bank of Napa staff and branches, compensation, technology and professional-service costs, core-deposit-intangible amortization, and $954,000 of acquisition expenses. Professional services included $1.1 million of consulting costs related to core-processing contract negotiations.
- The effective tax rate declined to 26.5% for Q3 and 24.5% for nine months, versus 34.4% and 33.4% in 2017, primarily following the federal corporate tax-rate reduction. Management said the nine-month rate was expected to indicate the full-year rate, excluding discrete items.
- Management gave no specific earnings or revenue guidance. It expected rising rates to support net interest income, citing cash earning the federal funds rate, adjustable-rate loans, and non-interest-bearing deposits; it identified falling rates as the more vulnerable scenario. The filing’s modeled rate shock showed net interest income down 6.0% in year one and 10.1% in year two under an immediate 100-basis-point decline. Actual results may differ because of model assumptions and customer behavior.
- Risks include deposit-flow volatility, competition, economic and real-estate conditions, loan and securities cash flows, interest-rate changes, acquisition integration, regulation, natural disasters, fraud, and cybersecurity. The $483.3 million of undrawn credit commitments and standby letters of credit may create funding needs; $83.2 million of time deposits mature within 12 months.
- Available-for-sale securities had $11.2 million of gross unrealized losses at quarter-end; total securities’ accumulated unrealized losses contributed to a $6.5 million nine-month other comprehensive loss, net of tax. Management attributed losses primarily to market rates and liquidity spreads, and said it did not intend, nor expect to be required, to sell the securities before recovery.
- Visa interchange litigation remains unresolved; the ultimate conversion value of the company’s restricted Visa Class B shares is uncertain. The filing says no indemnification liability was recorded and no future cash settlement is required unless the related escrow is depleted. Separately, the company agreed after quarter-end to sell 6,500 Visa shares, estimating a $955,000 pretax gain.
- Other notable actions: a $25 million share-repurchase authorization through May 1, 2019, of which $1.5 million had been used by September 30; a 2-for-1 stock split announced October 22; and a $0.35-per-share dividend declared for November 2018. Management reported effective disclosure controls and no material change in internal control during the quarter.
- CECL implementation was in progress and its financial impact was not known. The company expected no material impact from adopting lease accounting in 2019, although $15.4 million of undiscounted operating lease commitments were then off balance sheet.
Most important facts for investors to verify
- Whether loan growth, deposit stability, and the unusually low deposit cost persist as rates and customer cash flows change.
- Whether net interest margin and earnings hold up under falling rates, loan prepayments, and declining acquired-loan accretion.
- Whether credit quality and the allowance remain adequate as loans grow, particularly in commercial real estate and construction; review the $15.2 million of troubled debt restructurings and $483.3 million of off-balance-sheet commitments.
- The eventual CECL adoption impact, lease-accounting balance-sheet effect, and completion and benefits of core-processing negotiations and Bank of Napa integration.
- The effect of the Visa litigation and share sale, debenture redemption, share repurchases, stock split, and dividend on future reported per-share results and capital.