Bank Of Marin Bancorp quarterly report, Q3 FY2023

Bank of Marin Bancorp — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Figures are unaudited; amounts are in U.S. dollars unless stated otherwise.

Business context and financial performance

The company is a California bank holding company whose wholly owned subsidiary, Bank of Marin, operates a commercial bank. Results reflect a higher-rate environment, rising deposit costs and increased funding expense.

Metric	Q3 2023	Prior comparable period
Net interest income	$24.5 million	$24.1 million in Q2 2023; $33.0 million in Q3 2022
Net income	$5.3 million	$4.6 million in Q2 2023; $12.2 million in Q3 2022
Diluted EPS	$0.33	$0.28 in Q2 2023; $0.76 in Q3 2022
Tax-equivalent net interest margin	2.48%	2.45% in Q2 2023; 3.06% for the first nine months of 2022
Non-interest income / expense	$2.6 million / $19.7 million	Q2 2023: $2.7 million / $20.7 million

For the first nine months of 2023, net income was $19.3 million and diluted EPS was $1.20, versus $33.7 million and $2.11 in the same 2022 period. Net interest income declined to $78.5 million from $94.1 million, primarily as funding costs rose. The nine-month tax-equivalent margin fell to 2.66% from 3.06%. Nine-month non-interest expense increased 5.7% to $60.2 million; non-interest income was broadly unchanged at $8.3 million.

Q3 return on average assets was 0.52%, return on average equity was 4.94%, and the efficiency ratio was 72.96%. For the first nine months, those measures were 0.63%, 6.07% and 69.37%, respectively.

Financial position, liquidity and capital

• At September 30, total assets were $4.04 billion, down from $4.15 billion at December 31, 2022. Loans, net of allowance, were $2.06 billion, slightly lower than year-end.
• Deposits were $3.44 billion, down $129.7 million from year-end but up $118.5 million from the prior quarter. Non-interest-bearing deposits were 47.7% of deposits, versus 51.5% at year-end. Average deposit cost rose to 0.94% in Q3 from 0.69% in Q2.
• Short-term borrowings and other obligations were $120.3 million, including $120 million borrowed through the Federal Reserve’s Bank Term Funding Program at 5.42%. Management reported $2.086 billion of net available contingent funding, equal to 211% of estimated uninsured and/or uncollateralized deposits.
• Cash, cash equivalents and restricted cash were $123.1 million, up $77.7 million from year-end. Nine-month operating cash flow was $34.9 million; investing activities provided $176.5 million and financing activities used $133.7 million.
• Stockholders’ equity was $418.6 million. Bancorp’s total risk-based capital ratio was 16.56%; the Bank’s was 16.13%. The reported tangible common equity ratio was 8.6%, or 6.1% after the estimated after-tax effect of unrealized HTM losses.
• Investment securities totaled $1.594 billion. At quarter-end, AFS securities had $96.2 million of gross unrealized losses and HTM securities had $152.2 million of gross unrealized losses; HTM fair value was $783.2 million versus $935.1 million amortized cost. Management said it did not intend, and was not more likely than not required, to sell securities in loss positions at the reporting date.

Material changes, risks and unusual items

• Q3 net interest income increased modestly from Q2 as interest income on cash from securities sales rose and borrowing costs fell; higher deposit expense offset much of the benefit. Management attributed the year-over-year nine-month earnings decline chiefly to higher deposit and borrowing costs.
• The Bank sold $79.8 million of AFS securities during the quarter, recording $2.8 million of gross realized losses, and sold its remaining Visa Class B shares for a $2.8 million gain. In October, it sold another $55 million of AFS securities for a $2.1 million pretax loss; management estimated the after-tax loss would be earned back through higher interest income and margin improvement in less than one year.
• Loans classified substandard or doubtful increased to $39.7 million from $28.1 million at year-end; special-mention loans rose to $112.4 million from $60.2 million. Non-accrual loans increased to $5.7 million, or 0.27% of loans, from $2.4 million, or 0.12%. The allowance for loan losses was $24.3 million, or 1.16% of loans. Management cited qualitative reserve adjustments related partly to adversely graded commercial real estate and construction exposures. It reported no expected credit loss on non-accrual loans, which were collateralized by real estate.
• Non-owner-occupied CRE loans were $1.19 billion. Management highlighted office-sector exposure: San Francisco office loans were 3% of total loans; it described its review of 36 CRE loans totaling $97.4 million that mature or reprice in 2023–2024 as showing manageable refinancing risk. Three unsecured commercial substandard loans totaling about $4.6 million paid off shortly after quarter-end.
• Management reported stable deposit trends since Q1, growth in customer accounts, and no use of brokered deposit markets. It expects current liquidity and contingent funding sources to meet operating needs. It expects approximately $1.4 million of annual pretax savings beginning in 2024 from branch closures.
• No formal earnings or revenue guidance was provided. Management said Q3 loan originations were at rates about 150 basis points above rates on loans paid off, which it expects to benefit future margins. It also said it was evaluating strategies to reduce borrowings.
• Risks emphasized include deposit outflows and confidence effects from banking-sector stress, securities losses if liquidity needs force sales, rising rates and funding costs, CRE values and refinancing, economic deterioration, increased regulatory scrutiny, and cybersecurity, fraud and other operational risks. Management reported no known pending litigation expected to have a material adverse effect; Visa-related indemnification exposure was considered remote at quarter-end.

Important facts for investors to verify

• Whether deposits remain stable and the cost of deposits and borrowings continues to pressure net interest margin.
• How classified, special-mention and non-accrual loans evolve, especially CRE office and construction exposures, and whether the allowance remains adequate.
• Whether further securities sales occur, their realized losses, and progress against management’s estimated less-than-one-year payback for the October sale.
• Whether the reported $2.086 billion of available contingent funding and 211% uninsured-deposit coverage remain available under stress, including after collateral pledges and deposit movements.
• Whether the stated 2024 branch-closure savings materialize and whether planned loan growth translates into improved earnings and margins.