Bank of Marin Bancorp(BMRC) - 2019 Q4 - Annual Report

PART I Business Bank of Marin Bancorp, operating through its subsidiary, provides commercial and retail banking and wealth management services across six San Francisco Bay Area counties, focusing on relationship-based banking under extensive regulation - The company operates through its subsidiary, Bank of Marin, with 23 offices across six San Francisco Bay Area counties[20] - Its core focus is providing banking services to small to medium-sized businesses, professionals, and non-profit organizations[20] - Key offerings include commercial and retail deposit and lending programs, alongside Wealth Management and Trust Services[21][26] - The bank differentiates itself in a competitive market through personalized relationship banking and deep local market knowledge[30][33] - As of December 31, 2019, the company employed 290 full-time equivalent staff[35] - The company is subject to extensive supervision by the California Department of Business Oversight, FDIC, and the Federal Reserve[36][37][39] Risk Factors The company faces material risks from geographic concentration in the San Francisco Bay Area, interest rate fluctuations, significant credit risk from commercial real estate loans, natural disasters, cybersecurity threats, and regulatory changes - The company's success is highly dependent on the local economic conditions of the San Francisco Bay Area, creating a geographic concentration risk[72] - Earnings are significantly influenced by interest rate risk, as net interest income is the primary driver of profitability, making the business vulnerable to margin compression in a falling or flat rate environment[73] - A significant portion of the loan portfolio is secured by real estate, with Commercial Real Estate (CRE) loans representing 330% of total risk-based capital as of December 31, 2019, exceeding the 300% regulatory guidance threshold for heightened scrutiny[80][82] - The company is exposed to significant credit risk, and the adoption of the Current Expected Credit Loss (CECL) accounting standard on January 1, 2020, will materially change the methodology for estimating the allowance for credit losses[84][88] - The business is located in earthquake and wildfire-prone zones, posing risks from natural disasters and climate change-related events which could impact operations and collateral values[83] - The company faces risks associated with cybersecurity threats, reliance on third-party vendors for critical operations like core processing, and the upcoming phase-out of the LIBOR interest rate benchmark[104][107][118] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[120] Properties The company leases its corporate headquarters in Novato, California, as well as all of its branch and office facilities across its primary market areas - The company leases its corporate headquarters and all branch and office facilities[121] Legal Proceedings The company is not aware of any pending legal proceedings that would have a material adverse effect on its financial condition - Management is not aware of any pending legal proceedings expected to have a material adverse effect on the company[122] - The Bank has a proportionate share of litigation indemnifications for Visa U.S.A. but does not expect to make cash payments due to an escrow account funded by Visa[123] Mine Safety Disclosures This item is not applicable to the company - Not applicable[124] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Bank of Marin Bancorp's common stock trades on Nasdaq under BMRC, outperforming the Russell 2000 Index over five years, with $15.0 million in share repurchases in 2019 and a new $25.0 million program approved for 2020 - Bancorp common stock trades on the Nasdaq Capital Market under the symbol BMRC, with a two-for-one stock split occurring on November 27, 2018[127] Five-Year Stock Performance Comparison (Cumulative Total Return) | Period | Bank of Marin Bancorp (BMRC) | Russell 2000 Index | SNL Bank $1B - $5B Index | | :--- | :--- | :--- | :--- | | 2014 | 100.00 | 100.00 | 100.00 | | 2015 | 103.37 | 95.59 | 111.94 | | 2016 | 137.81 | 115.95 | 161.04 | | 2017 | 136.63 | 132.94 | 171.69 | | 2018 | 168.40 | 118.30 | 150.42 | | 2019 | 187.45 | 148.49 | 182.85 | - In 2019, Bancorp repurchased 356,000 shares for a total of $15.0 million, and a new $25.0 million share repurchase program was approved in January 2020, valid through February 28, 2022[135][136] Selected Financial Data The company's five-year financial data shows total assets growing to $2.71 billion in 2019, with net income reaching $34.2 million and diluted EPS at $2.48, while maintaining strong asset quality with non-performing loans at 0.01% Five-Year Selected Financial Data (2015-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $2,707,280 | $2,520,892 | $2,468,154 | $2,023,493 | $2,031,134 | | Loans, net | $1,826,609 | $1,748,043 | $1,663,246 | $1,471,174 | $1,436,299 | | Deposits | $2,336,489 | $2,174,840 | $2,148,670 | $1,772,700 | $1,728,226 | | Stockholders' equity | $336,788 | $316,407 | $297,025 | $230,563 | $214,473 | | Net interest income | $95,680 | $91,544 | $74,852 | $73,161 | $67,187 | | Net income | $34,241 | $32,622 | $15,976 | $23,134 | $18,441 | | Diluted EPS | $2.48 | $2.33 | $1.27 | $1.89 | $1.52 | | Return on average assets | 1.34% | 1.31% | 0.75% | 1.15% | 0.98% | | Return on average equity | 10.49% | 10.73% | 6.49% | 10.23% | 8.84% | | Non-performing loans to total loans | 0.01% | 0.04% | 0.02% | 0.01% | 0.15% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, net income increased to $34.2 million driven by strong loan and deposit growth, with total assets reaching $2.7 billion, while maintaining excellent credit quality and robust capital levels Executive Summary For 2019, the company reported $34.2 million in net income and $2.48 diluted EPS, driven by 4.5% loan growth and 7.4% deposit growth, with strong credit quality and improved efficiency 2019 Performance Highlights vs. 2018 | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $34.2 million | $32.6 million | | Diluted EPS | $2.48 | $2.33 | | Loan Growth | 4.5% | - | | Deposit Growth | 7.4% | - | | Non-accrual Loans / Total Loans | 0.01% | - | | Efficiency Ratio | 55.3% | 57.3% | | Return on Assets | 1.34% | 1.31% | | Return on Equity | 10.49% | 10.73% | Results of Operations Net interest income rose by $4.2 million to $95.7 million in 2019, while non-interest income decreased due to a prior-year one-time gain, and non-interest expense slightly declined Net Interest Income Analysis (2019 vs 2018) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total interest income | $100,437 | $95,080 | | Total interest expense | $4,757 | $3,536 | | Net interest income | $95,680 | $91,544 | | Tax-equivalent net interest margin | 3.98% | 3.90% | - A provision for loan losses of $0.9 million was recorded in 2019, consistent with loan growth, compared to no provision in 2018[174] - Non-interest income decreased to $9.1 million from $10.1 million in 2018, primarily due to a $0.96 million pre-tax gain on the sale of Visa stock in 2018 that did not recur[176][177] - Non-interest expense decreased by $0.3 million to $58.0 million, mainly due to $1.0 million in consulting expenses in 2018 for core processing contract renegotiations and lower FDIC insurance expenses in 2019[180][181] Financial Condition Total assets increased to $2.71 billion at year-end 2019, driven by deposit and loan growth, with the loan portfolio concentrated in commercial real estate, while maintaining strong credit quality and robust capital - Total assets increased by $186.4 million to $2.71 billion at year-end 2019, primarily due to increases in cash, funded by deposit growth[186] - The investment securities portfolio decreased by $61.8 million (10%) to $561.3 million at amortized cost during 2019[191] Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial loans | $246,687 | $230,739 | | Real estate - Commercial | $1,255,141 | $1,186,687 | | Real estate - Construction | $61,095 | $76,423 | | Real estate - Home equity | $116,024 | $124,696 | | Real estate - Other residential | $136,657 | $117,847 | | Installment and other consumer | $27,682 | $27,472 | | Total loans | $1,843,286 | $1,763,864 | - The allowance for loan losses was $16.7 million, representing 0.90% of total loans, unchanged from year-end 2018, with non-performing assets minimal at $226 thousand[212][223] - Total deposits grew by $161.6 million (7.4%) to $2.34 billion, with non-interest bearing deposits accounting for 48% of total deposits at year-end[231] - Bancorp's total risk-based capital ratio was 15.1% at December 31, 2019, exceeding the well capitalized regulatory requirements[250] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by ALCO, with simulations showing NII sensitivity to rate changes, and interest rate swaps used to mitigate risk on fixed-rate loans - The primary market risk is interest rate risk, managed by the Asset Liability Management Committee (ALCO) to minimize exposure of net interest margin and earnings to rate changes[261] Estimated Impact of Interest Rate Changes on Net Interest Income (NII) | Immediate Change in Rates (bps) | Estimated Change in NII in Year 1 | Estimated Change in NII in Year 2 | | :--- | :--- | :--- | | +400 | (5.0)% | 7.1% | | +300 | (3.6)% | 6.3% | | +200 | (2.2)% | 5.3% | | +100 | (1.0)% | 3.5% | | -100 | (4.5)% | (9.5)% | - The company uses interest rate swap contracts as fair value hedges to mitigate interest rate risk on specified long-term fixed-rate loans[263] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2019 and 2018, including the independent auditor's report, detailing the company's financial position, operations, equity, and cash flows, with comprehensive notes on accounting policies and disclosures Consolidated Statement of Condition Highlights (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,707,280 | $2,520,892 | | Loans, net | $1,826,609 | $1,748,043 | | Total investment securities | $569,673 | $619,670 | | Total Liabilities | $2,370,492 | $2,204,485 | | Total deposits | $2,336,489 | $2,174,840 | | Total Stockholders' Equity | $336,788 | $316,407 | Consolidated Statement of Income Highlights (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net interest income | $95,680 | $91,544 | | Provision for loan losses | $900 | $0 | | Non-interest income | $9,084 | $10,139 | | Non-interest expense | $57,970 | $58,266 | | Net income | $34,241 | $32,622 | Note 1: Summary of Significant Accounting Policies This note outlines key accounting policies, including the adoption of ASC 842 for leases in 2019 and the upcoming CECL model effective January 1, 2020, which is expected to increase the allowance for credit losses by 5% to 15% - The company adopted the new lease accounting standard (ASC 842) on January 1, 2019, resulting in the recognition of $13.4 million in right-of-use assets and $15.4 million in lease liabilities[368][369] - The company will adopt the Current Expected Credit Loss (CECL) model effective January 1, 2020, estimating a 5% to 15% increase to its allowance for credit losses, recorded as an adjustment to retained earnings[372][374] Note 3: Loans and Allowance for Loan Losses The loan portfolio totaled $1.84 billion at year-end 2019, with 88% secured by real estate, maintaining strong credit quality with minimal non-accrual loans and a $16.7 million allowance for loan losses - At December 31, 2019, 88% of the total loan portfolio was secured by real estate, with a significant concentration in commercial real estate[400] Credit Quality Indicators | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Loans | $1,843,286 | $1,763,864 | | Non-accrual loans | $226 | $697 | | Loans 30-89 days past due | $1,481 | $1,121 | | Troubled Debt Restructurings (TDRs) | $11,333 | $14,406 | Allowance for Loan Losses (ALLL) Rollforward (Year ended Dec 31, 2019) | (in thousands) | Amount | | :--- | :--- | | Beginning balance | $15,821 | | Provision | $900 | | Charge-offs | ($78) | | Recoveries | $34 | | Ending balance | $16,677 | Note 15: Regulatory Matters Both Bancorp and its bank subsidiary exceeded all minimum Basel III regulatory capital requirements as of December 31, 2019, with the Bank significantly above 'well capitalized' thresholds Capital Ratios as of December 31, 2019 | Ratio | Bancorp Actual | Bank Actual | Well Capitalized Threshold | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 15.07% | 14.63% | ≥ 10.000% | | Tier 1 Capital (to risk-weighted assets) | 14.24% | 13.79% | ≥ 8.000% | | Common Equity Tier 1 (to risk-weighted assets) | 14.11% | 13.79% | ≥ 6.500% | | Tier 1 Capital (to average assets) | 11.66% | 11.29% | ≥ 5.000% | 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[559] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2019 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[559] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2019[560] - There were no significant changes in internal control over financial reporting during the quarter ended December 31, 2019[564] Other Information The company reports no other information for this item - None[566] PART III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement[566] Executive Compensation The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement[567] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from ITEM 5 of this report, Note 8 to the financial statements, and the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement and other sections of the 10-K[568] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement[569] Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the Proxy Statement[570] PART IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including financial statements and a list of exhibits filed or incorporated by reference - Lists the financial statements filed under ITEM 8 and all exhibits filed with or incorporated by reference into the report[573][574] Form 10-K Summary The company reports no summary for this item - None[576]