Bank of Marin Bancorp(BMRC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, including condition, income, equity, and cash flows, along with detailed explanatory notes ITEM 1. Financial Statements This section presents the unaudited consolidated financial statements of Bank of Marin Bancorp and its subsidiary, including the Statements of Condition, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with detailed notes explaining the basis of presentation, accounting standards, fair value measurements, investment securities, loans, borrowings, stockholders' equity, commitments, and derivative instruments Consolidated Statements of Condition This statement provides a snapshot of the company's financial position, detailing its assets, liabilities, and stockholders' equity at specific reporting dates | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | $2,592,071 | $2,520,892 | | Total Liabilities | $2,259,006 | $2,204,485 | | Total Stockholders' Equity | $333,065 | $316,407 | | Loans, net | $1,782,450 | $1,748,043 | | Total Deposits | $2,224,524 | $2,174,840 | Consolidated Statements of Comprehensive Income This statement reports the company's net income and other comprehensive income, reflecting overall financial performance over specific periods | Metric | Three months ended Sep 30, 2019 (in thousands) | Three months ended Sep 30, 2018 (in thousands) | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income | $9,448 | $8,680 | $25,162 | $22,960 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Comprehensive Income | $10,194 | $7,340 | $35,110 | $16,466 | Consolidated Statements of Changes in Stockholders' Equity This statement outlines the changes in each component of stockholders' equity, including net income, other comprehensive income, and stock repurchases | Metric | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Balance at January 1 | $316,407 | $297,025 | | Net income | $25,162 | $22,960 | | Other comprehensive income (loss) | $9,948 | $(6,494) | | Stock repurchased, net of commissions | $(13,170) | $(1,539) | | Balance at September 30 | $333,065 | $308,603 | Consolidated Statements of Cash Flows This statement details the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity (9 months ended Sep 30) | 2019 (in thousands) | 2018 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $31,201 | $31,284 | | Net cash provided by (used in) investing activities | $95,475 | $(149,088) | | Net cash provided by financing activities | $21,589 | $56,977 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $148,265 | $(60,827) | | Cash, cash equivalents and restricted cash at end of period | $182,486 | $142,718 | Notes to Consolidated Financial Statements These notes provide essential details and explanations supporting the consolidated financial statements, covering accounting policies, fair value, and specific financial instruments Note 1: Basis of Presentation The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin, prepared in accordance with SEC rules and GAAP. The NorCal Community Bancorp Trusts I and II are not consolidated, with subordinated debentures shown as liabilities and Bancorp's investment accounted for under the equity method - The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin[19] - NorCal Community Bancorp Trusts I and II are not consolidated; subordinated debentures are shown as liabilities, and Bancorp's investment is accounted for under the equity method[20] Weighted Average Shares Outstanding and EPS | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average basic shares outstanding (thousands) | 13,571 | 13,900 | 13,654 | 13,872 | | Weighted average diluted shares outstanding (thousands) | 13,735 | 14,110 | 13,825 | 14,062 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | Note 2: Recently Adopted and Issued Accounting Standards The company adopted new accounting standards in 2019, including ASU 2016-02 (Leases), which resulted in recording operating and finance lease right-of-use assets and liabilities. Other adopted ASUs (2018-07, 2018-16) had no material impact. Future standards, notably CECL (ASU 2016-13), are expected to increase the allowance for credit losses with a one-time adjustment to retained earnings upon adoption in 2020 - Adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, resulted in recording $13.4 million in operating and finance lease right-of-use assets and $15.4 million in operating and finance lease liabilities, with no cumulative-effect adjustments to retained earnings[25] - ASU 2016-13, Financial Instruments - Credit Losses (CECL model), effective for fiscal years beginning after December 15, 2019, is expected to increase the allowance for credit losses, resulting in a one-time cumulative-effect adjustment to retained earnings at adoption. The primary methodology will be a discounted cash flow approach[30][31] - ASU 2018-07 (Stock Compensation) and ASU 2018-16 (Derivatives and Hedging) were adopted effective January 1, 2019, with no impact on financial condition or results of operations[26][27] Note 3: Fair Value of Assets and Liabilities The company categorizes fair value measurements into a three-level hierarchy. As of September 30, 2019, all recurring fair value measurements for available-for-sale securities and derivative financial instruments were classified as Level 2, with no Level 1 or Level 3 securities. No transfers between levels occurred in 2019 or 2018 - Fair value hierarchy categorizes assets and liabilities into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[38][39][40] - As of September 30, 2019, all available-for-sale securities and derivative financial instruments measured at fair value on a recurring basis were classified as Level 2, with no Level 1 or Level 3 securities[42][44] Fair Value of Financial Instruments | Financial Instrument | September 30, 2019 (Carrying Amount, in thousands) | September 30, 2019 (Fair Value, in thousands) | Fair Value Hierarchy | | :--------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------- | | Cash and cash equivalents | $182,486 | $182,486 | Level 1 | | Investment securities held-to-maturity | $142,213 | $145,118 | Level 2 | | Loans, net | $1,782,450 | $1,792,192 | Level 3 | | Time deposits | $98,077 | $97,150 | Level 2 | | Subordinated debentures | $2,691 | $3,094 | Level 3 | Note 4: Investment Securities The investment portfolio comprises held-to-maturity and available-for-sale securities, primarily government-sponsored enterprise securities and obligations of state and political subdivisions. As of September 30, 2019, total investment securities were $500.9 million, with a significant portion in unrealized gains. The company held non-marketable FHLB stock and Visa Inc. Class B common stock, with the latter having a zero carrying value due to resale restrictions and conversion rate uncertainty Investment Securities by Type | Investment Securities | September 30, 2019 (Fair Value, in thousands) | December 31, 2018 (Fair Value, in thousands) | | :--------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Total held-to-maturity | $145,118 | $153,894 | | Total available-for-sale | $358,724 | $462,464 | | Total investment securities | $503,842 | $616,358 | Pledged Investment Securities | Pledged Investment Securities | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total investment securities pledged to the State of California | $85,319 | $126,430 | | Collateral for Wealth Management and Trust Services checking account | $625 | $2,000 | - As of September 30, 2019, 37 securities were in unrealized loss positions, with 25 in continuous loss for twelve months or more. Management determined that these were not other-than-temporarily impaired, as there was no intent to sell and recovery of amortized cost was more likely than not[61][64] - The company held $11.7 million in FHLB stock (recorded at cost) and 10,439 shares of Visa Inc. Class B common stock with a zero carrying value due to resale restrictions and conversion rate uncertainty. The converted value of Visa Class B shares was $2.9 million at September 30, 2019[65][67] Note 5: Loans and Allowance for Loan Losses Total loans increased to $1.799 billion at September 30, 2019. The company maintains a risk rating system for credit quality, with 'Pass,' 'Watch,' 'Special Mention,' 'Substandard,' and 'Doubtful' categories. Troubled Debt Restructurings (TDRs) decreased, and impaired loans totaled $12.4 million. The Allowance for Loan Losses (ALLL) was $16.2 million, with a ratio of 0.90% to total loans Loan Portfolio Summary | Loan Class | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total loans | $1,798,690 | $1,763,864 | | Total past due | $780 | $1,121 | | Non-accrual loans | $422 | $697 | Loans by Risk Grade (September 30, 2019) | Risk Grade (September 30, 2019) | Commercial and industrial (in thousands) | Commercial real estate, owner-occupied (in thousands) | Commercial real estate, investor (in thousands) | Construction (in thousands) | Home equity (in thousands) | Other residential (in thousands) | Installment and other consumer (in thousands) | Purchased credit-impaired (in thousands) | Total (in thousands) | | :--------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------------- | :------------------------- | :------------------------------- | :------------------------------------ | :--------------------------------------- | :------------------- | | Pass | $219,346 | $290,074 | $893,574 | $50,254 | $120,400 | $130,781 | $28,313 | $2,059 | $1,734,801 | | Special Mention | $41,092 | $10,198 | $1,664 | — | $1,000 | — | — | — | $53,954 | | Substandard | $386 | $9,061 | — | — | $340 | — | $148 | — | $9,935 | | Total loans | $260,824 | $309,333 | $895,238 | $50,254 | $121,740 | $130,781 | $28,461 | $2,059 | $1,798,690 | Loan Loss Metrics | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Recorded Investment in Troubled Debt Restructurings | $12,162 | $14,406 | | Total recorded investment in impaired loans | $12,351 | $15,038 | | Specific allowance for impaired loans | $389 | $778 | | Ending Allowance for Loan Losses (ALLL) | $16,240 | $15,821 | | Ratio of ALLL to total loans | 0.90% | 0.90% | - Pledged loans to FHLB totaled $1.083 billion and to FRB (TIC loans) totaled $111.5 million at September 30, 2019[109] - Related party loans decreased to $9.0 million at September 30, 2019, from $10.6 million at December 31, 2018[111] Note 6: Borrowings and Other Obligations The company maintains unsecured lines of credit with correspondent banks and FHLB, and a line of credit with the FRBSF, with no outstanding overnight borrowings at September 30, 2019. Subordinated debentures from an acquisition are recorded at fair value and accreted into interest expense, with Bancorp guaranteeing payments on trust preferred securities - No overnight borrowings were outstanding under federal funds purchased lines of credit ($92.0 million capacity) or FHLB lines of credit ($615.9 million capacity) at September 30, 2019[112][113] - The Federal Reserve line of credit had a borrowing capacity of $76.5 million with no outstanding borrowings at September 30, 2019[114] - Subordinated debentures due to NorCal Community Bancorp Trust II (maturing March 15, 2036) had an interest rate of 3.52% at September 30, 2019. Accretion on these debentures totaled $51 thousand for the nine months ended September 30, 2019[115] Note 7: Stockholders' Equity Bancorp declared a $0.21 per share cash dividend payable in November 2019. Share-based payments, including stock options and restricted stock, are expensed over the service period. The company adopted ASU 2018-02, reclassifying $638 thousand from AOCI to retained earnings. A share repurchase program, extended to February 28, 2020, saw $13.2 million in repurchases during the first nine months of 2019 - A cash dividend of $0.21 per share was declared on October 18, 2019, payable November 8, 2019[117] - Share-based compensation expense is recorded for stock options and restricted stock awards over their service period. During the nine months ended September 30, 2019, 7,795 shares totaling $326 thousand were withheld for cashless exercises[119][123] - ASU 2018-02 was adopted in Q1 2018, reclassifying $638 thousand from Accumulated Other Comprehensive Income (AOCI) to retained earnings[124] - The Share Repurchase Program, approved for up to $25.0 million, was extended through February 28, 2020. During the nine months ended September 30, 2019, 313,651 shares were repurchased for $13.2 million[125][129] Note 8: Commitments and Contingencies The company extends credit through loan commitments and standby letters of credit, with an allowance for losses on these off-balance sheet commitments totaling $1.1 million. Operating and finance leases are recognized on the balance sheet, with future minimum payments detailed. Legal proceedings, particularly related to Visa's Covered Litigation, are not expected to have a material adverse effect, as the company's indemnification liability is covered by an escrow account Commitments and Standby Letters of Credit | Commitments and Standby Letters of Credit | September 30, 2019 (in thousands) | | :---------------------------------------- | :-------------------------------- | | Commercial lines of credit | $239,465 | | Revolving home equity lines | $190,230 | | Undisbursed construction loans | $40,101 | | Personal and other lines of credit | $9,888 | | Standby letters of credit | $2,014 | | Total commitments and standby letters of credit | $481,698 | | Allowance for losses on off-balance sheet commitments | $1,100 | Lease Balances (September 30, 2019) | Lease Balances (September 30, 2019) | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Operating lease right-of-use assets | $11,934 | | Operating lease liabilities | $13,665 | | Finance lease right-of-use assets, net | $252 | | Finance lease liabilities | $255 | - The company is responsible for a proportionate share of Visa U.S.A.'s Covered Litigation indemnifications. Visa deposited an additional $300 million into the litigation escrow account on September 27, 2019, which is expected to cover settlement obligations. The probability of losses requiring future cash settlement payments from member banks is considered remote[143][144][145] Note 9: Derivative Financial Instruments and Hedging Activities The company uses interest rate swap agreements as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate payments to floating-rate. As of September 30, 2019, there were five such agreements, with a total fair value liability of $1.6 million - Interest rate swap agreements are used as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate interest payments to floating-rate[146][148] Derivative Financial Instruments Summary | Derivative Financial Instruments | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Interest rate contracts notional amount | $17,199 | $9,016 | | Interest rate contracts fair value (liability) | $1,603 | $375 | - Net losses on fair value hedging relationships recognized in interest income were $(89) thousand for the nine months ended September 30, 2019, compared to $(123) thousand for the same period in 2018[150] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the company's financial performance, including increased earnings and diluted EPS for both the third quarter and first nine months of 2019. Key drivers include loan growth, strong credit quality, and deposit increases. The company maintains robust capital ratios and liquidity, supporting organic growth and potential acquisitions. No material changes to critical accounting policies or risk factors were noted Forward-Looking Statements This section contains forward-looking statements regarding future operations, products, services, revenues, and earnings, identified by words like 'believe,' 'expect,' or 'intend.' These statements are based on current management expectations but are subject to various risks, including economic conditions, interest rate changes, and regulatory factors, as detailed in the Risk Factors section - Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues, but future results may vary materially due to factors beyond management's control[159][160] - The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date they are made[162] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements - No material changes have occurred to the critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements[163] Executive Summary The company reported increased earnings and diluted EPS for Q3 and the first nine months of 2019, driven by loan growth, strong credit quality, and deposit increases. Capital ratios remain strong, exceeding regulatory requirements, and a $0.21 cash dividend was declared. The company emphasizes relationship banking, disciplined fundamentals, and community commitment for future success Earnings and EPS Summary | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--------------------------------- | :------ | :------ | :------ | :------ | | Earnings (in millions) | $9.4 | $8.7 | $25.2 | $23.0 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | - Loans totaled $1.799 billion at September 30, 2019, a net increase of $34.8 million from December 31, 2018, driven by $156.1 million in new originations[166] - Non-accrual loans decreased to $422 thousand (0.02% of loan portfolio) at September 30, 2019, from $697 thousand (0.04%) at December 31, 2018, reflecting strong credit quality[166] - Total deposits increased $49.7 million in the first nine months of 2019 to $2.225 billion, with non-interest bearing deposits representing 50% of the total[166] - All capital ratios exceeded regulatory 'well-capitalized' requirements, with a total risk-based capital ratio for Bancorp of 15.3% at September 30, 2019[166] RESULTS OF OPERATIONS This section analyzes the company's financial performance, focusing on net interest income, loan loss provisions, non-interest income, and expenses Net Interest Income Net interest income increased by $612 thousand to $24.2 million in Q3 2019 and by $3.5 million to $71.8 million in the first nine months of 2019, primarily due to higher average loan balances and increased yields on earning assets, partially offset by higher deposit rates. The net interest margin also improved to 4.00% in Q3 2019 and 3.99% for the first nine months Net Interest Income and Margin | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net interest income | $24,151 | $23,539 | $71,786 | $68,272 | | Reported net interest margin | 4.00% | 3.91% | 3.99% | 3.86% | - The increase in net interest income was driven by higher average loan balances and higher yields across earning asset categories, partially offset by increased rates on deposit accounts[183][185] - The FOMC lowered the federal funds rate by 0.25% in July, September, and October 2019, to a range of 1.50% to 1.75%, which could put pressure on the net interest margin as the Bank is asset sensitive[187][188] Provision for Loan Losses A $400 thousand provision for loan losses was recorded in Q3 2019, consistent with loan growth, compared to no provision in the prior year. Impaired loans and classified assets decreased, while special mention loans increased due to unique circumstances, though not indicative of deteriorating credit quality - A $400 thousand provision for loan losses was recorded in the quarter ended September 30, 2019, consistent with loan growth. No provision for loan losses was recorded in the three and nine months ended September 30, 2018[192] - Impaired loan balances totaled $12.4 million at September 30, 2019, down from $15.0 million at December 31, 2018[191] - Classified assets (loans with substandard or doubtful risk grades) decreased to $9.9 million at September 30, 2019, from $12.6 million at December 31, 2018, primarily due to a paydown and upgrade of a land development loan[191] - Special mention loans increased to $54.0 million at September 30, 2019, from $17.3 million at December 31, 2018, due to four new loans with unique circumstances, not indicative of deteriorating credit quality[191] - The ratio of loan loss reserves to total loans was 0.90% at both September 30, 2019, and December 31, 2018[193] Non-interest Income Non-interest income increased by $485 thousand to $2.7 million in Q3 2019, primarily driven by a $562 thousand benefit collected on bank-owned life insurance (BOLI) policies. For the first nine months, non-interest income increased by $50 thousand to $6.8 million, also benefiting from BOLI income and net gains on investment securities, despite decreases in wealth management and other fee income Non-interest Income (Q3) | Non-interest Income Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $2,721 | $2,236 | $485 | 21.7% | | Earnings on bank-owned life insurance, net | $795 | $227 | $568 | 250.2% | | Other income | $305 | $439 | $(134) | (30.5)% | Non-interest Income (9M) | Non-interest Income Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $6,766 | $6,716 | $50 | 0.7% | | Earnings on bank-owned life insurance, net | $970 | $685 | $285 | 41.6% | | Gains (losses) on investment securities, net | $55 | $(79) | $134 | NM | | Wealth Management and Trust Services | $1,406 | $1,493 | $(87) | (5.8)% | - The increase in BOLI earnings in Q3 2019 was primarily due to a $562 thousand benefit collected on BOLI policies. For the nine months, this was partially offset by $283 thousand in non-refundable underwriting costs for new policies[198][199] Non-interest Expense Non-interest expense increased slightly by $229 thousand to $14.2 million in Q3 2019, mainly due to higher salaries and benefits, partially offset by a reversal of FDIC insurance expense. For the first nine months, the increase was $83 thousand to $44.6 million, with higher salaries and benefits and a provision for off-balance sheet commitments offsetting lower data processing and professional services costs from prior year acquisition-related expenses Non-interest Expense (Q3) | Non-interest Expense Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $14,200 | $13,971 | $229 | 1.6% | | Salaries and related benefits | $8,412 | $8,069 | $343 | 4.3% | | Federal Deposit Insurance Corporation insurance | $1 | $186 | $(185) | (99.5)% | | Professional services | $580 | $727 | $(147) | (20.2)% | Non-interest Expense (9M) | Non-interest Expense Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $44,644 | $44,561 | $83 | 0.2% | | Salaries and related benefits | $26,426 | $25,402 | $1,024 | 4.0% | | Data processing | $2,942 | $3,354 | $(412) | (12.3)% | | Professional services | $1,701 | $2,836 | $(1,135) | (40.0)% | | Provision for losses on off-balance sheet commitments | $129 | — | $129 | 100.0% | - The increase in salaries and related benefits was due to additional full-time equivalent (FTE) staff and annual merit increases. The decrease in FDIC insurance expense was due to a reversal when the Deposit Insurance Fund reserve exceeded its billing threshold[203] Provision for Income Taxes The provision for income taxes decreased to $2.8 million in Q3 2019, with an effective tax rate of 23.0%, due to higher tax-exempt BOLI income and a deferred tax liability true-up adjustment. For the first nine months, the provision increased to $8.3 million, with an effective tax rate of 24.9%, reflecting higher pre-tax income and lower discrete tax benefits compared to the prior year Income Tax Provision and Effective Tax Rate | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $2,824 | $3,124 | $8,346 | $7,467 | | Effective tax rate | 23.0% | 26.5% | 24.9% | 24.5% | - The decrease in the Q3 2019 provision was due to higher tax-exempt BOLI income from death benefits and a $327 thousand deferred tax liability true-up adjustment[207] - The increase in the 9M 2019 provision and effective tax rate was primarily due to higher pre-tax income and lower discrete tax benefits from stock option exercises and restricted stock vesting compared to 2018[208] FINANCIAL CONDITION SUMMARY This section provides an overview of the company's financial position, including investment securities, loans, liabilities, capital adequacy, and liquidity Investment Securities The investment securities portfolio decreased by $118.7 million to $500.9 million at September 30, 2019, primarily due to calls, paydowns, maturities, and sales, partially offset by new purchases and an increase in fair value of available-for-sale securities. The company sold $66 million in lower-yielding, shorter-term securities to manage interest rate spread and cash - The investment securities portfolio decreased by $118.7 million to $500.9 million at September 30, 2019, from December 31, 2018[211] - The decrease was primarily due to $150.5 million in calls, paydowns, maturities, and sales, partially offset by $18.9 million in purchases and an increase in the fair value of available-for-sale securities[211] - The company sold $66 million in lower yielding, shorter term securities in early 2019 to manage its interest rate spread and cash position[211] Obligations of State and Political Subdivisions | Obligations of State and Political Subdivisions | September 30, 2019 (Fair Value, in thousands) | % of Total | | :---------------------------------------------- | :-------------------------------------------- | :--------- | | Within California | $11,786 | 20.3% | | Outside California | $45,581 | 79.7% | | Total | $57,367 | 100.0% | Loans Total loans increased by $34.8 million to $1.799 billion at September 30, 2019. New loan originations of $156.1 million in the first nine months of 2019, distributed across Commercial and Consumer Banking, outpaced payoffs of $107.8 million - Loans increased by $34.8 million to $1.799 billion at September 30, 2019[216] - New loan originations totaled $156.1 million in the first nine months of 2019, distributed across Commercial Banking and Consumer Banking[216] - Loan payoffs totaled $107.8 million in the first nine months of 2019, primarily reflecting asset sales and completed construction projects[216] Liabilities Total liabilities increased by $54.5 million to $2.259 billion in the first nine months of 2019, driven by a $49.7 million increase in deposits. Non-interest bearing deposits grew by $35.2 million and represented 49.5% of total deposits. The company also repaid a $7.0 million FHLB overnight borrowing and recorded $13.7 million in operating lease liabilities due to new accounting standards - Total liabilities increased by $54.5 million to $2.259 billion during the first nine months of 2019[217] - Deposits increased $49.7 million in the first nine months of 2019. Non-interest bearing deposits increased $35.2 million to $1.101 billion, representing 49.5% of total deposits at September 30, 2019[217] - The company repaid a $7.0 million overnight borrowing from FHLB and recorded $13.7 million in operating lease liabilities in 2019 due to the adoption of the new lease accounting standard[217] Capital Adequacy The company consistently exceeds all regulatory 'well capitalized' requirements under Basel III, with Bancorp's total risk-based capital ratio at 15.31% and the Bank's at 14.60% as of September 30, 2019. Bancorp is no longer subject to separate minimum capital requirements due to an increased asset threshold for 'Small Bank Holding Company' definition - Both Bancorp and the Bank's capital ratios exceed the regulatory definition of 'well capitalized' for all periods presented[221] - Basel III capital rules, fully phased in on January 1, 2019, require minimum ratios for Tier 1 capital (8.5%) and Common Equity Tier 1 (7.0%), including a 2.50% capital conservation buffer[222] Capital Ratios (September 30, 2019) | Capital Ratios (September 30, 2019) | Bancorp Actual Ratio | Bank Actual Ratio | | :---------------------------------- | :------------------- | :---------------- | | Total Capital (to risk-weighted assets) | 15.31% | 14.60% | | Tier 1 Capital (to risk-weighted assets) | 14.46% | 13.75% | | Tier 1 Capital (to average assets) | 11.92% | 11.33% | | Common Equity Tier 1 (to risk-weighted assets) | 14.33% | 13.75% | - Bancorp is no longer subject to separate minimum capital requirements due to the increase in the 'Small Bank Holding Company' asset threshold from $1.0 billion to $3.0 billion[222] Liquidity The company maintains strong liquidity through liquid assets, formal lines of credit, and a stable core deposit base, managed by its ALCO. Liquid assets increased to $471.0 million at September 30, 2019. Key liquidity sources include investment security paydowns and deposit inflows, while uses include loan originations, security purchases, and stock repurchases. Bancorp's cash position is sufficient to cover operational needs and dividends through mid-2020 - Liquid assets, including unencumbered available-for-sale securities and cash, totaled $471.0 million at September 30, 2019, an increase of $37.8 million from December 31, 2018[231] - Cash and cash equivalents increased $148.3 million from December 31, 2018[231] - Significant liquidity sources in the first nine months of 2019 included $150.5 million from investment security paydowns/maturities/sales, $49.7 million in deposit increases, and $30.6 million net cash from operating activities[231] - Significant liquidity uses included $32.9 million in net loan originations, $18.9 million in investment securities purchases, $13.3 million in common stock repurchases, and $8.1 million in cash dividends[231] - Bancorp held $14.3 million of cash at September 30, 2019, deemed sufficient to cover operational needs, share repurchases, and cash dividends through mid-2020[235] Performance Metrics | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $9,448 | $8,680 | $25,162 | $22,960 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Return on average assets | 1.49% | 1.38% | 1.33% | 1.24% | | Return on average equity | 11.34% | 11.20% | 10.40% | 10.17% | Financial Condition Data | Financial Condition Data | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total assets | $2,592,071 | $2,520,892 | | Loans, net | $1,782,450 | $1,748,043 | | Deposits | $2,224,524 | $2,174,840 | | Non-accrual loans to total loans | 0.02% | 0.04% | | Total capital (to risk-weighted assets) | 15.31% | 14.93% | - The Board of Directors declared a cash dividend of $0.21 per share on October 18, 2019, representing a 30% payout ratio[166] ITEM 3. Quantitative and Qualitative Disclosure about Market Risk The company manages interest rate risk, a significant form of market risk, to minimize its impact on net interest margin, earnings, and capital. Interest rate swap contracts are used as fair value hedges. The Asset Liability Management Committee (ALCO) and Board of Directors regularly review exposure using simulation models, and as of September 30, 2019, interest rate risk was within policy guidelines - Market risk, primarily interest rate risk, is managed to minimize exposure to net interest margin, earnings, and capital[236] - Interest rate swap contracts are used as fair value hedges to mitigate changes in the fair value of long-term fixed-rate loans[238] - The Asset Liability Management Committee (ALCO) and Board of Directors review interest rate risk at least quarterly using simulation models. As of September 30, 2019, interest rate risk was within policy guidelines[239] Estimated Change in Net Interest Income | Immediate Changes in Interest Rates (in basis points) | Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income | | :---------------------------------------------------- | :--------------------------------------------------------------------------------- | | up 400 | (1.7)% | | up 300 | (1.0)% | | up 200 | (0.4)% | | up 100 | —% | | down 100 | (4.2)% | | down 200 | (7.9)% | ITEM 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019. There were no significant changes to internal control over financial reporting during the quarter ended September 30, 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[245] - There were no significant changes that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting during the quarter ended September 30, 2019[246] PART II. OTHER INFORMATION This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other miscellaneous information not covered in the financial statements ITEM 1. Legal Proceedings The company refers to Note 8 of the Consolidated Financial Statements for information on legal proceedings, which indicates no material adverse effects are expected from ongoing litigation, including Visa's Covered Litigation - Refer to Note 8 to the Consolidated Financial Statements for details on legal proceedings[247] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2018 Form 10-K - There have been no material changes from the risk factors previously disclosed in the company's 2018 Form 10-K[248] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds The Board of Directors extended the Share Repurchase Program, allowing for repurchases of up to $25.0 million of common stock through February 28, 2020. During Q3 2019, 65,127 shares were repurchased for $2.7 million - The Share Repurchase Program, approved for up to $25.0 million, was extended through February 28, 2020[250] Share Repurchases (Q3 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :------------------------------- | :--------------------------- | | July 1-31, 2019 | 19,070 | $42.62 | | August 1-31, 2019 | 26,019 | $41.21 | | September 1-30, 2019 | 20,038 | $41.76 | | Total (Q3 2019) | 65,127 | $41.79 | - During the three months ended September 30, 2019, Bancorp repurchased 65,127 shares for a total cost of $2.7 million[251] ITEM 3. Defaults Upon Senior Securities This section confirms that no defaults upon senior securities occurred during the reported period - No defaults upon senior securities were reported[252] ITEM 4. Mine Safety Disclosures This item is not applicable to the company's operations and therefore contains no disclosures - This item is not applicable[253] ITEM 5. Other Information This section confirms that no other material information is required to be reported under this item - No other information is reported[254] ITEM 6. Exhibits This section lists all exhibits filed as part of the report or incorporated by reference, including various agreements, plans, and certifications - The section lists exhibits filed as part of the report or incorporated by reference, including merger agreements, articles of incorporation, bylaws, stock plans, and certifications[256][257] SIGNATURES The report is duly signed on behalf of Bank of Marin Bancorp by its President & Chief Executive Officer, Chief Financial Officer, and Vice President & Financial Reporting Manager on November 8, 2019 - The report was signed on November 8, 2019, by Russell A. Colombo (President & Chief Executive Officer), Tani Girton (Executive Vice President & Chief Financial Officer), and David A. Merck (Vice President & Financial Reporting Manager)[258][259]