Bank of Marin Bancorp — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. Comparisons are with Q3 or the first nine months of 2020, or with December 31, 2020 for balance-sheet figures.
Business context
Bank of Marin Bancorp completed its acquisition of American River Bankshares (AMRB) on August 6, 2021; American River Bank merged into Bank of Marin the following day. AMRB shareholders received 0.575 Bancorp shares per share, and Bancorp issued approximately 3.44 million shares. The transaction consideration was approximately $124.5 million. Acquired assets and liabilities are recorded at preliminary fair values, subject to measurement-period adjustments for up to one year.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $27.8m | $24.6m | $74.3m | $73.1m |
| Provision for loan credit losses | $1.8m | $1.3m | $(2.0)m reversal | $5.5m |
| Provision/(reversal) for unfunded commitments | — | $0.2m | $(1.2)m reversal | $0.6m |
| Non-interest income | $3.6m | $1.8m | $7.4m | $6.7m |
| Non-interest expense | $22.7m | $15.0m | $53.7m | $44.2m |
| Net income | $5.3m | $7.5m | $23.5m | $22.1m |
| Diluted EPS | $0.35 | $0.55 | $1.69 | $1.62 |
| Tax-equivalent net interest margin | 3.15% | 3.44% | 3.23% | 3.61% |
Q3 non-GAAP comparable net income, excluding merger-related costs after tax, was $9.2 million, or $0.61 per diluted share. For the nine months, comparable net income was $27.6 million, or $1.99 per diluted share. These are company-defined non-GAAP measures; GAAP results include merger costs.
- Revenue and margins: Q3 net interest income rose 13% year over year, reflecting acquired balances, acquired loan yields and PPP income. The margin declined, mainly due to low-yielding cash balances and the low-rate environment. Nine-month net interest income increased modestly, while margin fell to 3.23% from 3.61%.
- Cash flow: Nine-month operating cash flow was $32.3 million; investing cash outflow was $18.9 million; financing cash inflow was $371.0 million. Ending cash, cash equivalents and restricted cash were $584.7 million, up from $200.3 million at year-end 2020. Cash flows reflect the acquisition, deposit growth, securities purchases and loan activity.
- Balance sheet and funding: Total assets were $4.261 billion, up $1.349 billion from year-end, substantially reflecting the merger. Loans were $2.317 billion, up $228.5 million; total deposits were $3.728 billion, up $1.223 billion. Non-interest-bearing deposits were 49.3% of deposits, compared with 54.1% at year-end. Average deposit cost was 0.06% in Q3.
- Debt and liquidity: Borrowings and other obligations were $0.5 million; the $2.8 million book-value subordinated debenture was redeemed in March 2021. The Bank reported no outstanding FHLB, Federal Reserve or correspondent overnight borrowings at quarter-end, with available borrowing capacity disclosed. Management said liquidity and the core deposit base were adequate. Undrawn commitments and standby letters of credit totaled $602.6 million.
- Credit quality: Non-accrual loans were $8.4 million, or 0.36% of loans, versus $9.2 million, or 0.44%, at year-end. The allowance was $22.4 million, equal to 0.97% of loans (1.04% excluding SBA-guaranteed PPP loans). Special Mention loans rose to $103.4 million; classified loans were $19.0 million, down from $25.8 million. The allowance ratio and balances should be considered alongside acquired loans and PPP balances.
- Capital: Bancorp’s total risk-based capital ratio was 14.97%; the Bank’s was 14.35%. Management reported both exceeded applicable well-capitalized requirements. Bancorp tangible common equity to tangible assets was 9.06%, down from 11.27% at year-end.
Material changes and unusual items
- The merger added approximately $898.4 million of assets, including $419.4 million of loans and $790.0 million of deposits, and resulted in $42.6 million of preliminary goodwill. AMRB contributed $3.4 million of net interest income and a $3.0 million net loss from the merger date through September 30, including merger-related and purchase-accounting effects.
- Merger-related one-time and conversion costs were $5.1 million in Q3 and $5.4 million year to date, primarily personnel, professional services and data-processing costs. Q3 total non-interest expense increased 51% year over year.
- Q3 non-interest income included a $1.1 million collection of BOLI death benefits. Year-to-date 2021 interest expense included $1.3 million of accelerated discount accretion from early redemption of the subordinated debenture, making the reported effective rate on that instrument unusually high.
- Available-for-sale securities’ net unrealized position contributed an $8.6 million pre-tax loss to nine-month other comprehensive income, attributed primarily to higher interest rates. No credit-loss allowance was recorded on those securities; management said it did not intend, and was not more likely than not required, to sell them before recovery of amortized cost.
- The company repurchased $35.2 million of stock in the first nine months, including $15.9 million in Q3. The Board later increased the repurchase-program authorization from $25 million to $57 million. A $0.24-per-share dividend was declared after quarter-end.
Outlook, commentary and risks
No quantified earnings or revenue guidance is provided. Management stated that liquidity, capital, credit quality and the AMRB acquisition position the Bank for the remainder of 2021. It expects funding for utilized commitments principally from loan repayments, deposit growth and liquid assets, and expects to replace $99.0 million of time deposits maturing over the next 12 months.
Key disclosed risks include interest-rate changes and continued pressure on asset yields and margins; deposit flows and concentrations among large commercial depositors; borrower performance as COVID-related payment relief expires; real-estate and economic conditions, including California unemployment; and acquisition integration costs, disruption, and realization of expected savings or revenue. Management’s rate simulations estimated that an immediate 100-basis-point increase would raise net interest income by 2.8% in year one and 6.9% in year two, while a 100-basis-point decrease would reduce it by 2.6% and 4.2%, respectively. The filing cautions that these modeled outcomes depend on assumptions and are not forecasts. Other risks include wildfires, earthquakes, cybersecurity and external fraud. The company reported no material change to the risk factors in its 2020 Form 10-K and no known pending legal proceedings expected to materially adversely affect results. Visa-related litigation indemnification exposure was described as uncertain, but future cash payments were not considered probable while the escrow remains available.
Effective October 31, 2021, Tim Myers succeeded Russell Colombo as CEO; Colombo remained on the boards. Management reported disclosure controls were effective and noted that integration of AMRB processes and systems was continuing.
Important facts for investors to verify
- Track integration expenses, preliminary acquisition fair values and goodwill adjustments, and whether expected acquisition benefits materialize.
- Assess underlying earnings apart from merger costs, BOLI death benefits, PPP fee recognition and the one-time debenture discount accretion; compare GAAP results with the company’s non-GAAP reconciliations.
- Monitor net interest margin, cash deployment, deposit mix and cost, and exposure to rate movements as balances and customer behavior change.
- Review loan growth and commercial real-estate concentrations alongside Special Mention/classified balances, payment-relief loans, PPP runoff and allowance coverage.
- Confirm capital and liquidity remain adequate after repurchases, dividends and funding of off-balance-sheet commitments; note that the filing’s interest-rate scenarios are model estimates, not forecasts.