Bank of Marin Bancorp(BMRC) - 2018 Q4 - Annual Report

Part I Business Bank of Marin Bancorp operates as a commercial and retail bank in the San Francisco Bay Area, serving small to medium-sized businesses and offering diverse financial services - The company's business is conducted through its subsidiary, Bank of Marin, which operates 23 offices across Marin, Sonoma, San Francisco, Napa, and Alameda counties, focusing on small to medium-sized businesses, professionals, and not-for-profit organizations[19] - A broad range of services are offered, including commercial and real estate loans, consumer lending, various deposit accounts (checking, savings, CDARS, ICS), cash management services, and Wealth Management and Trust Services (WMTS)[20][22][25] - The banking environment is highly competitive, with rivals including large nationwide banks, credit unions, and other regional banks. Bank of Marin differentiates itself through relationship banking and local market knowledge, holding the third-largest deposit market share in Marin County at 10.8% as of June 30, 2018[32][33][34] - As of December 31, 2018, the company employed 290 full-time equivalent staff, none of whom are represented by a union[35] Supervision and Regulation The company is extensively regulated by federal and state authorities, with regulations covering capital adequacy, consumer protection, and community reinvestment - Bancorp is a bank holding company subject to regulation, reporting, and examination by the Federal Reserve and the California DBO. The Bank is regulated by the DBO and the FDIC[37][39] - The company is subject to the Community Reinvestment Act (CRA) and received a 'Satisfactory' rating in its January 2018 examination[47][49] - The company implemented the fully phased-in Basel III capital rules as of January 1, 2019. A proposed rule under the Economic Growth Act could allow the bank to opt into a simpler Community Bank Leverage Ratio (CBLR) framework if its CBLR is greater than 9 percent, which would ease capital requirement calculations[56][59] - The Dodd-Frank Act continues to impact operations, though some provisions were modified by the Economic Growth Act. The ultimate impact remains subject to rulemaking[58][61] Risk Factors The company faces material risks from local economic conditions, interest rate fluctuations, intense competition, and a high concentration in commercial real estate - The company's success is highly dependent on the local economic conditions of the San Francisco Bay Area, impacting loan demand, repayment ability, and collateral values[69] - Earnings are largely dependent on net interest income, which is vulnerable to changes in interest rates controlled by the FOMC[70] - Approximately 88% of the loan portfolio is secured by real estate, with a significant concentration in Commercial Real Estate (CRE). As of December 31, 2018, CRE loans represented 340% of total risk-based capital, exceeding the 300% supervisory criterion, which may warrant greater regulatory scrutiny[80][82] - The company is exposed to cybersecurity risks and relies on key third-party vendors like Fidelity Information Services (FIS) for core processing, making it vulnerable to service interruptions or breaches[102][105] - The planned cessation of LIBOR after 2021 poses a risk, as the company has floating-rate loans, securities, and swaps indexed to LIBOR that mature after this date. The transition to an alternative rate like SOFR could create additional costs and risks[115][116] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[117] Properties The company leases its corporate headquarters and all branch and office facilities across its primary market areas - The company leases its corporate headquarters in Novato, CA, and its branch and office facilities in Marin, Sonoma, Napa, San Francisco, Alameda, and Contra Costa counties[118] Legal Proceedings Management is not aware of any pending legal proceedings that would materially affect the company's financial condition or operations - There are no pending legal proceedings expected to have a material adverse effect on the company's financial condition or results of operations[119] - The Bank is indemnified for certain Visa U.S.A. litigation and does not anticipate making cash payments as Visa has funded a litigation escrow account to cover liabilities[120] Mine Safety Disclosures This item is not applicable to the company - Not applicable[121] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, underwent a two-for-one split, and initiated a share repurchase program - The company's common stock (BMRC) trades on the NASDAQ Capital Market. A two-for-one stock split occurred on November 27, 2018[124] Share Repurchase Program Activity (April 23 - Dec 31, 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining ($ thousands) | | :--- | :--- | :--- | :--- | | April 23-30, 2018 | — | — | 25,000 | | May 1-31, 2018 | 2,796 | $37.03 | 24,896 | | August 1-31, 2018 | 8,888 | $44.43 | 24,501 | | September 1-30, 2018 | 24,202 | $42.99 | 23,460 | | October 1-30, 2018 | 29,890 | $40.68 | 22,244 | | November 1-30, 2018 | 34,754 | $42.10 | 20,779 | | December 1-31, 2018 | 70,687 | $39.44 | 17,988 | | Total | 171,217 | $40.92 | 17,988 | Selected Financial Data This section summarizes key financial data, highlighting $2.52 billion in total assets and $32.6 million net income for 2018 Selected Financial Data (2017-2018) | (in thousands, except per share data) | 2018 | 2017 | | :--- | :--- | :--- | | Financial Condition Data (at year-end) | | | | Total assets | $2,520,892 | $2,468,154 | | Loans, net | $1,748,043 | $1,663,246 | | Deposits | $2,174,840 | $2,148,670 | | Stockholders' equity | $316,407 | $297,025 | | Operating Data (for the year) | | | | Net interest income | $91,544 | $74,852 | | Provision for (reversal of) loan losses | $— | $500 | | Net income | $32,622 | $15,976 | | Diluted EPS | $2.33 | $1.27 | | Performance Ratios | | | | Return on average assets | 1.31% | 0.75% | | Return on average equity | 10.73% | 6.49% | | Efficiency ratio | 57.30% | 64.70% | | Asset Quality Ratios | | | | Non-performing loans to total loans | 0.04% | 0.02% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operating results for 2018 compared to 2017 Executive Summary In 2018, the company achieved strong performance with net income rising to $32.6 million, driven by loan growth and increased net interest income 2018 Performance Highlights vs. 2017 | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $32.6 million | $16.0 million | | Diluted EPS | $2.33 | $1.27 | | Loan Growth | 5.1% | - | | Net Interest Income | $91.5 million | $74.9 million | | Provision for Loan Losses | $0 | $500 thousand | | Efficiency Ratio | 57.3% | 64.7% | - Non-accrual loans were exceptionally low at 0.04% of the total loan portfolio as of year-end 2018[149] - Strategic actions in 2018 included a two-for-one stock split, the repurchase of 171,217 shares for $7.0 million, and an increase in the quarterly dividend[155][156][157] Results of Operations In 2018, net interest income increased 22.2% to $91.5 million, non-interest income grew, and the effective tax rate decreased - Net interest income increased by $16.6 million (22.2%) in 2018, primarily due to a $337.7 million increase in average earning assets and higher yields. The tax-equivalent net interest margin rose 10 basis points to 3.90%[170] - No provision for loan losses was recorded in 2018, compared to a $500 thousand provision in 2017. This was attributed to a decrease in classified loans and continued high credit quality[176] - Non-interest income increased by $1.9 million (22.6%), mainly due to a $956 thousand pre-tax gain on the sale of Visa Inc. Class B stock and a $180 thousand special dividend from the FHLB[180] - Non-interest expense increased by $4.5 million (8.3%), driven by a $3.4 million rise in salaries and benefits from additional personnel and annual merit increases[183] - The provision for income taxes was $10.8 million at an effective tax rate of 24.9%, down from $12.9 million at 44.6% in 2017. The decrease reflects the lower federal corporate tax rate and the absence of a one-time deferred tax asset write-down that occurred in 2017[184] Financial Condition As of December 31, 2018, total assets grew to $2.52 billion, driven by loan and investment portfolio increases, with strong capital levels Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Commercial loans | $230,739 | $235,835 | | Real estate - Commercial investor | $873,410 | $822,984 | | Real estate - Commercial owner-occupied | $313,277 | $300,963 | | Real estate - Construction | $76,423 | $63,828 | | Real estate - Home equity | $124,696 | $132,467 | | Other loans | $145,319 | $122,936 | | Total loans | $1,763,864 | $1,679,013 | - The allowance for loan losses was $15.8 million (0.90% of total loans) at year-end 2018, compared to $15.8 million (0.94% of total loans) at year-end 2017. Net recoveries were $54 thousand in 2018 versus net charge-offs of $175 thousand in 2017[215][222][224] - Total impaired loans decreased to $15.0 million at year-end 2018 from $16.9 million at year-end 2017, primarily due to payoffs and upgrades[225] - Total deposits grew by $26.1 million to $2.17 billion. Non-interest bearing deposits grew by $51.9 million and constituted 49% of total deposits at year-end 2018[230] - Bancorp's total risk-based capital ratio was 14.9% at December 31, 2018, consistent with the prior year and well above the regulatory minimums[249] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed through simulations, with the bank being asset-sensitive to rising rates - The primary market risk is interest rate risk. The company is asset-sensitive and expects net interest income to increase over time in a rising rate environment[260][261] Estimated Change in Net Interest Income (NII) from Immediate Interest Rate Shifts | Immediate Change in Interest Rates (bps) | Estimated Change in NII in Year 1 (%) | Estimated Change in NII in Year 2 (%) | | :--- | :--- | :--- | | +400 | (4.7)% | 3.8% | | +300 | (3.3)% | 3.3% | | +200 | (2.0)% | 2.6% | | +100 | (0.8)% | 2.0% | | -100 | (4.5)% | (8.2)% | | -200 | (8.6)% | (17.1)% | Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2018 and 2017, including the independent auditor's report - The independent auditor, Moss Adams LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2018[272] Consolidated Statement of Condition Highlights (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Total investment securities | $619,670 | $483,499 | | Loans, net | $1,748,043 | $1,663,246 | | Goodwill | $30,140 | $30,140 | | Total Assets | $2,520,892 | $2,468,154 | | Liabilities & Equity | | | | Total deposits | $2,174,840 | $2,148,670 | | Total liabilities | $2,204,485 | $2,171,129 | | Total stockholders' equity | $316,407 | $297,025 | | Total Liabilities & Equity | $2,520,892 | $2,468,154 | Consolidated Statement of Comprehensive Income Highlights (in thousands) | | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net interest income | $91,544 | $74,852 | | Provision for loan losses | $— | $500 | | Non-interest income | $10,139 | $8,268 | | Non-interest expense | $58,266 | $53,782 | | Net income | $32,622 | $15,976 | | Other comprehensive (loss) income, net of tax | $(978) | $807 | | Comprehensive income | $31,644 | $16,783 | Notes to Consolidated Financial Statements The notes provide detailed information on significant accounting policies, financial statement accounts, and key disclosures including credit quality - The company adopted new revenue recognition standards (ASC 606) on January 1, 2018, with no material impact. It is preparing to adopt the new CECL model for credit losses (ASU 2016-13) for the fiscal year beginning after December 15, 2019, which is expected to potentially increase the allowance for loan losses[361][380] - Troubled Debt Restructurings (TDRs) decreased to a carrying amount of $14.4 million as of Dec 31, 2018, from $16.5 million in the prior year[418][421] - On October 22, 2018, a two-for-one stock split was announced and became effective November 27, 2018. All share and per share data have been adjusted[456] - Both Bancorp and the Bank exceeded all regulatory capital requirements to be considered 'well capitalized' as of December 31, 2018. The Bank's total risk-based capital ratio was 13.98%[528][533] - The November 2017 acquisition of Bank of Napa, N.A. resulted in goodwill of $23.7 million and a core deposit intangible of $4.4 million[543][544][545] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[549] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[549] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of December 31, 2018. The independent registered public accounting firm issued an unqualified opinion on the effectiveness of internal control[550][553] Other Information The company reports no other information for this item - None[556] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[556] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[557] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related stockholder matters is incorporated by reference from Item 5, Note 8, and the Proxy Statement - Information is incorporated by reference from ITEM 5, Note 8 of the financial statements, and the Proxy Statement for the 2019 Annual Meeting of Shareholders[558] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[559] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[560] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and all exhibits filed as part of the Form 10-K, either herewith or by reference - This item lists the financial statements filed with the report and all exhibits, which are either filed with this report or incorporated by reference[563][564] Form 10-K Summary This item is not applicable as no Form 10-K summary is provided - None[567]