Bank of Marin's profit rises 32% from a year earlier on loan growth and a wider margin

Bank of Marin Bancorp reported third-quarter net income of $9.9 million, or $0.62 per diluted share, up from $7.5 million, or $0.47, a year earlier, as wider loan yields and cheaper deposits lifted the tax-equivalent net interest margin to 3.48%. Total loans grew $43.4 million, or 2.07%, to $2.144 billion as of September 30, the Novato, California-based parent of Bank of Marin said in its October 26 release.

Net income rose 7.4% from $9.2 million in the second quarter, and diluted earnings per share climbed to $0.62 from $0.58. Return on average assets was 1.05%, against 0.96% in the prior quarter, return on average equity 9.96% against 9.38%, and return on average tangible common equity 12.26% against 11.55%. The efficiency ratio improved to 58.65% from 63.62% as non-interest expense fell $1.0 million to $20.6 million. Pre-tax pre-provision net income, which excludes credit-loss provisions, was $14.5 million, 17.4% above the second quarter's $12.35 million and 50.9% above the year-earlier $9.61 million.

Margin gains come from loan repricing and cheaper deposits

Net interest income was $31.4 million, up $619,000 from the second quarter. The release attributes $834,000 of the gain to interest on loans, reflecting an 11 basis point rise in average loan yields, and $527,000 to lower interest expense on deposits, offset by $505,000 less income from securities as paydowns shrank the portfolio. Those three items add up to more than the $619,000 net increase, and the release does not identify the item that offsets the difference. The average cost of total deposits fell to 1.24% from 1.28%, and the spot rate was 1.27% at September 30. Noninterest-bearing balances grew $45.0 million and made up 37.8% of total deposits, against 36.7% at June 30. The bank also sold an average of $130.6 million of money market balances to other banks during the quarter, up from $93.7 million in the second, which the release says enhanced non-interest income and the net interest margin. "Active management of deposit costs, growth in fee income, and expense discipline drove a 17% increase in pre-tax pre-provision net income on a sequential quarter basis," Chief Executive Tim Myers said.

A purchased pool supplies most of the loan growth

Loans ended the quarter at $2.144 billion, $43.4 million above June 30. The rollforward in the investor slides starts at $2.101 billion and adds $63.6 million of newly funded loans, a $31.1 million California residential mortgage pool bought with excess liquidity and $2.5 million of higher line-of-credit utilization, then subtracts $31.6 million of payoffs and $22.2 million of amortization, a bridge that foots to the ending balance. New loans were written at 6.65% against a payoff rate of 5.93%, a spread of 0.72%. Deposits rose $25.3 million to $3.395 billion. Non-interest income increased 15.8% to $3.7 million, including $251,000 more in service charges on business deposit accounts after a July 1 pricing change.

One downgraded relationship drives the classified-loan increase

Classified loans rose $15.2 million to $35.0 million, or 1.63% of total loans from 0.95%, chiefly because one $14.1 million owner-occupied commercial real estate relationship was downgraded; the release says the borrower is paying as agreed and that it sees no expected loss potential. Special mention loans fell to $65.1 million from $100.9 million on $17.6 million of downgrades and $18.2 million of upgrades and payoffs. Non-accrual loans rose $1.2 million to $9.7 million, or 0.45% of loans, from $8.5 million and 0.40% at June 30. With loan growth and higher unfunded commitments, the bank booked a $500,000 provision on loans after a $320,000 reversal in the second quarter, plus a $325,000 provision on unfunded commitments; the allowance held at 1.07% of loans.

Unrealized losses cut book value while capital ratios improve

Higher market rates widened the accumulated other comprehensive loss by $24.8 million and cut the tangible common equity ratio to 8.05% from 8.52%. Book value per share fell to $23.37 from $24.51 and tangible book value per share to $18.81 from $19.92. Regulatory ratios still improved: the Tier 1 leverage ratio rose to 9.04% from 8.66% and total risk-based capital to 15.59% from 15.58%. The board declared a $0.25 dividend on October 22, the 86th consecutive quarterly payout, payable November 12 to shareholders of record on November 5. No shares were repurchased in the quarter, leaving $23.9 million available under a $25.0 million authorization.

A rate simulation and a webcast today

Management offers no numeric guidance, and the release's outlook language is qualitative. "The quarterly growth in deposit service charge income, which annualized to $1 million, is an example of the strategic fee income initiatives we are pursuing to diversify our revenue streams," Chief Financial Officer Dave Bonaccorso said, adding that "Continued legacy loan repricing along with new loan originations at higher rates should support modest net interest margin expansion over time." The slides filed with the release quantify rate risk instead: an immediate 400 basis point rise in rates would lower net interest income 1.7% in the first year and raise it 9.4% in the second, while a 100 basis point fall would cut it 2.6%. Myers and Bonaccorso discuss the quarter on a webcast at 8:30 a.m. Pacific on October 26, and the same figures carry into the Form 10-Q that follows the release.