Bank of Marin Bancorp(US:BMRC)2021-03-14 16:00Part I Business Bank of Marin Bancorp operates as a commercial bank through its subsidiary, serving businesses and professionals in the San Francisco Bay Area - Bank of Marin Bancorp operates through its sole subsidiary, Bank of Marin, with 25 offices across seven Bay Area counties serving small to medium-sized businesses and professionals202123 - The bank offers a comprehensive suite of services including commercial and retail lending, deposit accounts, and Wealth Management and Trust Services2324 - In its primary market of Marin County, the bank holds the third-largest market share of total deposits at 12.3% as of June 30, 202031 - As of December 31, 2020, the company employed 289 full-time equivalent staff31 - In response to the COVID-19 pandemic, the company implemented remote work, enhanced safety protocols, and maintained regular pay for all staff with no layoffs3638 - The company is extensively regulated by federal and state agencies, including the Federal Reserve, FDIC, and California's DFPI394042 Risk Factors The company faces significant risks from the COVID-19 pandemic, credit concentration, interest rate fluctuations, and cybersecurity threats - The COVID-19 pandemic poses a significant risk, potentially leading to increased loan delinquencies and net interest margin compression74 - The company has significant credit risk, with 77% of its loans secured by real estate and a CRE loan concentration of 314% of total risk-based capital, exceeding regulatory guidance9597 - Lending is focused on small to medium-sized businesses, which may have fewer resources to withstand economic downturns92 - Earnings are highly dependent on net interest income and are vulnerable to the prolonged low interest rate environment104106 - The company faces risks related to the planned cessation of LIBOR after 2021, affecting a small number of loans and all interest rate swap agreements115116 - Operational risks include potential cybersecurity breaches, adapting to technological changes, and reliance on third-party vendors for critical functions117120122 Unresolved Staff Comments The company reports no unresolved comments from the staff of the Securities and Exchange Commission - There are no unresolved staff comments126 Properties The company leases all of its physical locations, including its corporate headquarters and branch facilities - The company leases its corporate headquarters and all branch and office facilities126 Legal Proceedings Information regarding legal proceedings is incorporated by reference from the Consolidated Financial Statements - For information on litigation matters, refer to Note 12, Commitment and Contingencies127 Mine Safety Disclosures This item is not applicable to the company - Not applicable128 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, and it maintains an active share repurchase program that was reactivated in late 2020 - The company's common stock is traded on the Nasdaq Capital Market under the symbol BMRC, with 13,359,479 shares outstanding as of February 28, 20218131 - A new Share Repurchase Program was approved in January 2020, allowing for the repurchase of up to $25.0 million of common stock through February 28, 2022137 2020 Share Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value That May yet Be Purchased Under the Program (in thousands) | | :--- | :--- | :--- | :--- | | January 1-31, 2020 | 13,283 | $44.42 | $2,376 | | February 1-28, 2020 | 20,855 | $42.17 | $1,495 | | March 1-31, 2020 | 58,526 | $30.00 | $23,241 | | October 1-30, 2020 | 100 | $30.00 | $23,238 | | November 1-30, 2020 | 44,815 | $34.73 | $21,680 | | December 1-31, 2020 | 66,130 | $36.48 | $19,264 | | Total | 203,709 | $35.33 | $19,264 | Selected Financial Data A five-year summary shows asset growth in 2020, but a decline in net income, EPS, and net interest margin compared to 2019 Selected Financial Highlights (2019 vs. 2020) | Metric (in thousands, except per share data) | 2020 | 2019 | | :--- | :--- | :--- | | Total assets | $2,911,926 | $2,707,280 | | Loans, net | $2,065,682 | $1,826,609 | | Deposits | $2,504,249 | $2,336,489 | | Stockholders' equity | $358,253 | $336,788 | | Net interest income | $96,659 | $95,680 | | Net income | $30,242 | $34,241 | | Diluted EPS | $2.22 | $2.48 | | Return on average assets | 1.04% | 1.34% | | Return on average equity | 8.60% | 10.49% | | Tax-equivalent net interest margin | 3.55% | 3.98% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income declined in 2020 due to a higher credit loss provision and margin compression, despite strong loan and deposit growth Executive Summary Earnings declined in 2020 due to a lower net interest margin and pandemic-related provisions, despite strong loan and deposit growth Key Performance Indicators (2020 vs. 2019) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income | $30.2 million | $34.2 million | | Diluted EPS | $2.22 | $2.48 | | Total Loan Growth | 13% | - | | Deposit Growth | 7% | - | | Net Interest Margin | 3.55% | 3.98% | | Return on Assets | 1.04% | 1.34% | | Return on Equity | 8.60% | 10.49% | - The bank originated over 1,800 PPP loans totaling $291.6 million outstanding at year-end, supporting nearly 28,000 employees161164 - Of the $402.9 million in loans granted payment relief, $71.0 million remained on additional relief programs as of December 31, 2020165166 Results of Operations Net interest income rose slightly, but a compressed margin and a surged credit loss provision drove lower overall profitability in 2020 - Net interest income increased by $1.0 million to $96.7 million, but the tax-equivalent net interest margin decreased 43 basis points to 3.55%175 - The provision for credit losses increased significantly to $4.6 million in 2020 from $900 thousand in 2019, due to the pandemic and CECL adoption182 - Non-interest income decreased by $534 thousand to $8.6 million, primarily due to a $551 thousand decline in waived service charges184 - Non-interest expense increased by $2.1 million to $60.0 million, driven by a $1.4 million provision for unfunded loan commitments and higher charitable contributions190191 Financial Condition Total assets grew to $2.91 billion, driven by PPP loans and deposit growth, while the allowance for credit losses increased due to CECL - The investment securities portfolio decreased by $79.3 million (14%) during 2020 to $482.1 million204 - Total loans increased by $245.3 million (13%) to $2.089 billion, driven by $291.6 million in SBA PPP loans210 - The allowance for credit losses to total loans increased to 1.10% from 0.90% in 2019, reflecting CECL adoption and the pandemic's impact224 - Non-performing assets increased to $9.2 million from $226 thousand in 2019, primarily due to two TDR loans placed on non-accrual status232233 - Total deposits grew by $167.8 million to $2.504 billion, with non-interest bearing deposits constituting 54% of the total242 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulation models indicating an asset-sensitive position benefiting from rising rates - The company's primary market risk is interest rate risk, managed by the Asset Liability Management Committee (ALCO)272273 Estimated Change in Net Interest Income (NII) from Immediate Rate Changes | Rate Change (bps) | Estimated Change in NII (Year 1) | Estimated Change in NII (Year 2) | | :--- | :--- | :--- | | up 400 | 8.9% | 23.3% | | up 300 | 6.7% | 17.6% | | up 200 | 4.4% | 11.3% | | up 100 | 1.8% | 4.6% | | down 100 | (1.2)% | (2.3)% | Financial Statements and Supplementary Data This section includes audited financial statements, with the adoption of the CECL accounting standard noted as a critical audit matter - The independent auditor's report provides an unqualified opinion on the financial statements and internal controls280 - The adoption of the CECL accounting standard (ASC Topic 326) is identified as a Critical Audit Matter due to its subjectivity281289290 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $2,911,926 | $2,707,280 | | Loans, net | $2,065,682 | $1,826,609 | | Total Deposits | $2,504,249 | $2,336,489 | | Total Liabilities | $2,553,673 | $2,370,492 | | Total Stockholders' Equity | $358,253 | $336,788 | Consolidated Income Statement Highlights (in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $96,659 | $95,680 | $91,544 | | Provision for Credit Losses | $4,594 | $900 | $0 | | Non-interest Income | $8,550 | $9,084 | $10,139 | | Non-interest Expense | $60,028 | $57,970 | $58,266 | | Net Income | $30,242 | $34,241 | $32,622 | Note 1: Summary of Significant Accounting Policies The company adopted the CECL standard on December 31, 2020, resulting in a $1.2 million after-tax reduction to retained earnings - The company adopted the CECL standard (ASC 326) effective December 31, 2020, replacing the incurred loss model312313 Impact of CECL Adoption (Pre-Tax) | Item | Cumulative Transition Adjustment (to Retained Earnings) | Impact on Q4 2020 Net Income | | :--- | :--- | :--- | | Allowance for Credit Losses on Loans | ($1,604 thousand) | $856 thousand (reversal of provision) | | Allowance for Unfunded Commitments | ($122 thousand) | ($960 thousand) (provision) | Note 3: Loans and Allowance for Credit Losses The loan portfolio grew to $2.09 billion driven by PPP loans, while the allowance for credit losses increased to $22.9 million - The increase in commercial and industrial loans was primarily due to $291.6 million in PPP loans originated under the CARES Act418419422 - The allowance for credit losses rollforward shows a beginning balance of $16.7 million, a $1.6 million CECL adjustment, a $4.6 million provision, and an ending balance of $22.9 million449 - Total Troubled Debt Restructurings (TDRs) were $12.5 million at year-end, with $71.0 million in loans remaining on pandemic-related payment relief443445 Note 8: Stockholders' Equity and Stock Plans The company paid $12.5 million in dividends and repurchased $7.2 million of stock under its authorized program in 2020 - The company has several equity compensation plans, including the 2017 Equity Plan, 2020 Director Stock Plan, and an Employee Stock Purchase Plan (ESPP)472473474 - Dividend payments from the Bank to the Bancorp are restricted, with $30.6 million available for dividend payment as of December 31, 2020488 - In 2020, the company repurchased 203,709 shares for a total of $7.2 million under its share repurchase program496 Cash Dividends Paid | Year | Total (in thousands) | Per Common Share | | :--- | :--- | :--- | | 2020 | $12,506 | $0.92 | | 2019 | $10,958 | $0.80 | | 2018 | $8,860 | $0.64 | Note 15: Regulatory Matters The company and its bank subsidiary exceeded all minimum capital requirements to be considered "well capitalized" as of year-end 2020 - Both the Bancorp and the Bank were categorized as well capitalized under the regulatory framework as of December 31, 2020547 Bank Capital Ratios as of December 31, 2020 | Capital Ratio | Actual Ratio | Well Capitalized Threshold | | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 15.80% | ≥ 10.00% | | Tier 1 Capital (to risk-weighted assets) | 14.59% | ≥ 8.00% | | Tier 1 Capital (to average assets) | 10.64% | ≥ 5.00% | | Common Equity Tier 1 (to risk-weighted assets) | 14.59% | ≥ 6.50% | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accountants on any matter of accounting or financial disclosure - None reported563 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020 - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period564 - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2020565 - During the fourth quarter of 2020, new and modified controls were implemented as part of the adoption of the CECL accounting standard569 Other Information The company reported no other information for this item - None571 Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders571 Executive Compensation Required information regarding executive compensation is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders572 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from this report and the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders573 Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders574 Principal Accountant Fees and Services Required information regarding accountant fees is incorporated by reference from the company's 2021 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2021 Annual Meeting of Shareholders575 Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K report - Lists the financial statements filed under Item 8 and specifies that all financial statement schedules have been omitted578579 - Provides a list of exhibits filed with the report or incorporated by reference, including corporate governance documents and SEC certifications582 Form 10-K Summary The company indicates that no Form 10-K summary is provided - None583