BANK OF MARIN BANCORP Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2020 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
Forward-Looking Statements
This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results. Our forward-looking statements include descriptions of plans or objectives of management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may." Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond management's control, could cause future results to vary materially from current management expectations. Such factors include, but are not limited to, general economic conditions and the economic uncertainty inthe United States and abroad, including changes in interest rates, deposit flows, real estate values, and expected future cash flows on loans and securities; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation (including the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020); our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting our operations, pricing, products and services. In addition, events or factors that could cause results or performance to materially differ from those expressed in the forward-looking statements concerning the AMRB acquisition include, but are not limited to: •the businesses of Bancorp and AMRB may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; •expected cost savings from the acquisition may not be fully realized or realized within the expected time frame; •revenues following the merger may be lower than expected; •customer and employee relationships and business operations may be disrupted by the acquisition; and •the ability to obtain required regulatory and shareholder approvals, and the ability to complete the acquisition within the expected timeframe may be more difficult, time-consuming or costly than expected. Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in the Risk Factors section of our 2020 Form 10-K as filed with theSEC , copies of which are available from us at no charge. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. Page-28
--------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
TheSEC requires us to disclose "critical accounting policies" defined as those that are both most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and imprecise. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. There have been no material changes to our critical accounting policies, which include: Allowance for Credit Losses on Loans and Unfunded Commitments, Allowance for Credit Losses onInvestments Securities , Accounting for Income Taxes, and Fair Value Measurements. For a detailed discussion of these accounting policies, refer to Note 1 to the Consolidated Financial Statements included in our 2020 Form 10-K filed with theSEC onMarch 15, 2021 .
Page-29
--------------------------------------------------------------------------------
Executive Summary
OnApril 16, 2021 , Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company ofAmerican River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and intoBank of Marin . We expect the transaction to be accretive to Bancorp's earnings, adding to shareholder value. AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp common stock for each share of AMRB common stock outstanding. Based on Bancorp's closing stock price of$39.06 onApril 16, 2021 , the transaction is valued at$134.5 million (with approximately 3.4 million of additional shares of Bancorp common stock to be issued), or$22.46 per share of AMRB common stock, which includes the value of AMRB options being paid in cash. Such value will fluctuate with changes in Bancorp's stock price. The transaction is expected to close in the third quarter of 2021, and based on information currently available,Bank of Marin will have approximately$4.0 billion in assets and operate 31 branches in ten counties (Alameda ,Amador ,Contra Costa ,Marin ,Napa ,Placer ,Sacramento ,San Francisco ,San Mateo , andSonoma ) upon closing. For other important factors regarding the AMRB acquisition, please see Note 10, Merger Agreement, and the Forward-Looking Statements section of this Form 10-Q. Net income for the first quarter of 2021 totaled$8.9 million , compared to$7.2 million in the first quarter of 2020. Diluted earnings per share were$0.66 in the first quarter of 2021, compared to$0.53 in the same quarter a year ago. First quarter 2021 earnings included a$2.9 million reversal of the allowance for credit losses on loans and$590 thousand reversal of allowance for credit losses on unfunded loan commitments. Additionally, the early redemption of our last subordinated debenture generated$1.3 million accelerated discount accretion in interest expense. The following are highlights of our operating and financial performance for the periods presented: •Loans totaled$2.122 billion atMarch 31, 2021 , compared to$2.089 billion atDecember 31, 2020 , an increase of$33.2 million , or 1.6%. The increase was attributed to a$73.4 million net increase in PPP loans, partially offset by a$40.2 million decrease in non-PPP loans. Non-PPP-related loan originations of$25.3 million were offset by loan payoffs of$34.6 million and a$27.9 million decrease in line utilization. •As ofMarch 31, 2021 , there were 2,513 PPP loans outstanding totaling$365.0 million (net of$8.0 million in unrecognized fees and costs), which included 841 loans totaling$119.5 million funded during the first quarter of 2021 under the second round of the PPP stimulus plan. Approximately 1,940 loans (or 77%) totaling$89.6 million were less than or equal to$150 thousand and had access to streamlined forgiveness processing. As ofMarch 31, 2021 , 142 of the first round PPP loans amounting to$55.6 million had been forgiven and paid off by the SBA. As ofMay 4, 2021 , an additional 866 loans totaling$61.7 million had been forgiven by the SBA and no applications were denied. We expect the forgiveness of the first round of PPP loans to continue to accelerate during the second quarter of 2021. •As ofMay 4, 2021 , 10 borrowing relationships with 16 loans totaling$56.1 million were benefiting from payment relief. We monitor the financial situation of these clients closely and expect the majority to resume payments as the economy reopens. The following table summarizes these loans by industry or collateral type. Payment Relief by Type Outstanding Loan Industry/Collateral Type (dollars in thousands) Balance Weighted Average LTV Education $ 17,076 26 % Health Clubs 13,352 49 % Office and Mixed Use 13,794 42 % Hospitality 7,135 48 % Retail Related CRE 4,760 58 % Payment Relief Totals $ 56,117 41 % Page-30
--------------------------------------------------------------------------------
•Credit quality remains strong, with non-accrual loans representing$9.2 million , or 0.43% of total loans atMarch 31, 2021 , compared to$9.2 million , or 0.44% atDecember 31, 2020 . The ratio of allowance for credit losses to total loans was 0.94% atMarch 31, 2021 and 1.10% atDecember 31, 2020 . Excluding SBA-guaranteed PPP loans, the allowance for credit losses represented 1.14% of total loans as ofMarch 31, 2021 , compared to 1.27% as ofDecember 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure). •Return on average assets ("ROA") and return on average equity ("ROE") were 1.21% and 10.22%, respectively, for the quarter endedMarch 31, 2021 . These reflect meaningful increases as ROA was 1.09% and ROE was 8.54% in the first quarter of 2020. •Our strong capital and liquidity position afforded us the opportunity to eliminate a high cost funding source. OnMarch 15, 2021 we redeemed a$2.8 million subordinated debenture, which carried an effective rate of approximately 5.7%. •The tax-equivalent net interest margin was 3.19% and 3.88% in the first quarters of 2021 and 2020, respectively. The decrease from the same quarter a year ago was primarily attributed to the lower interest rate environment and redemption of the subordinated debenture. While the redemption decreased our net interest margin by 18 basis points in the first quarter of 2021, it will serve to improve net interest margin in the future. •The efficiency ratio was 62.13% for the three months endedMarch 31, 2021 , up from 56.79% in the comparative period a year ago. Without the$1.3 million accelerated discount accretion from the early redemption of the subordinated debenture our efficiency ratio would have been 58.92%. •Total deposits increased$152.0 million in the first three months of 2021 to$2.656 billion atMarch 31, 2021 . The increase was primarily due to increases in PPP borrower-related balances and normal fluctuations in some of our large business accounts. Non-interest bearing deposits represented 54% of total deposits as of the end of the first quarter of 2021, compared to 49% as of the end of the first quarter of 2020. The cost of average deposits was 0.07% in the first quarter of 2021, a decrease of 14 basis points from the same quarter a year ago. •All capital ratios were above well capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.7% atMarch 31, 2021 , compared to 16.0% atDecember 31, 2020 . Tangible common equity to tangible assets was 10.5% atMarch 31, 2021 , compared to 11.3% atDecember 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure). The subordinated debt redemption contributed to the decline in total risk-based capital, and share repurchases were the primary driver of the declines in both total risk-based capital and tangible common equity. The total risk-based capital ratio for the Bank was 14.8% atMarch 31, 2021 , compared to 15.8% atDecember 31, 2020 . •The Board of Directors declared a cash dividend of$0.23 per share onApril 16, 2021 . This represents the 64th consecutive quarterly dividend paid byBank of Marin Bancorp . The dividend is payable onMay 7, 2021 , to shareholders of record at the close of business onApril 30, 2021 .Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve. For the remainder of 2021, we believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics, and low-cost deposit base as well as our acquisition of AMRB should help us navigate the low interest rate environment.
Page-31
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables: (dollars in thousands)
March 31, 2021 December 31, 2020
Selected financial condition data:
Total assets $ 3,058,133 $ 2,911,926
Loans, net 2,101,814 2,065,682
Deposits 2,656,199 2,504,249
Borrowings and other obligations 30 58
Subordinated debenture - 2,777
Stockholders' equity 350,292 358,253
Asset quality ratios:
Allowance for credit losses to total loans 0.94 % 1.10 %
Allowance for credit losses to total loans, excluding SBA PPP loans 1
1.14 % 1.27 %
Allowance for credit losses to non-accrual loans 2.17x 2.48x
Non-accrual loans to total loans 0.43 % 0.44 %
Capital ratios:
Equity to total assets ratio 11.45 % 12.30 %
Tangible common equity to tangible assets 2 10.47 % 11.27 %
Total capital (to risk-weighted assets) 15.68 % 16.03 %
Tier 1 capital (to risk-weighted assets) 14.63 % 14.82 %
Tier 1 capital (to average assets) 10.51 % 10.80 %
Common equity Tier 1 capital (to risk weighted assets) 14.63 % 14.69 %
Three months ended
(dollars in thousands, except per share data) March 31, 2021 March 31, 2020
Selected operating data:
Net interest income $ 22,031 $ 24,119
(Reversal of) provision for credit losses on loans (2,929) 2,200 Non-interest income 1,826 3,120 Non-interest expense 14,822 15,469 Net income 8,947 7,228 Net income per common share: Basic$ 0.67 $ 0.53 Diluted$ 0.66 $ 0.53 Performance and other financial ratios: Return on average assets 1.21 % 1.09 % Return on average equity 10.22 % 8.54 % Tax-equivalent net interest margin 3 3.19 % 3.88 % Cost of deposits 0.07 % 0.21 % Efficiency ratio 62.13 % 56.79 % Cash dividend payout ratio on common stock 4 34.33 %
43.40 %
1 The allowance for credit losses to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses. SBA PPP loans atMarch 31, 2021 andDecember 31, 2020 totaled$365.0 million and$291.6 million , respectively. 2 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of$317 million and$324 million atMarch 31, 2021 andDecember 31, 2020 , respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of$33.8 million and$34.0 million atMarch 31, 2021 andDecember 31, 2020 , respectively. 3 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets. 4 Calculated as dividends on common shares divided by basic net income per common share.
Page-32
--------------------------------------------------------------------------------
Net Interest Income
Net interest income is the interest earned on loans, investment and other interest-earning assets minus the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders' equity.
Average Statements of Condition and Analysis of Net Interest Income
The following table compares interest income, average interest-earning assets,
interest expense, and average interest-bearing liabilities for the periods
presented. The table also presents net interest income, net interest margin and
net interest rate spread for each period reported.
Three months ended Three months ended
March 31, 2021 March 31, 2020
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks 1 $ 165,788 $ 42 0.10 % $ 99,362 $ 332 1.32 %
Investment securities 2, 3 540,970 3,282 2.43 % 556,897 4,266 3.06 %
Loans 1, 3, 4 2,099,847 20,836 3.97 % 1,833,180 21,066 4.55 %
Total interest-earning assets 1 2,806,605 24,160 3.44 % 2,489,439 25,664 4.08 %
Cash and non-interest-bearing due from banks 50,931 40,844
Bank premises and equipment, net 4,777 5,939
Interest receivable and other assets, net 133,693 118,909
Total assets $ 2,996,006 $ 2,655,131 Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 174,135 $ 39 0.09 % $ 138,395 $ 66 0.19 %
Savings accounts 214,049 19 0.04 % 163,439 16 0.04 %
Money market accounts 703,577 286 0.16 % 760,616 971 0.51 %
Time accounts including CDARS 96,349 96 0.40 % 96,157 161 0.67 %
Borrowings and other obligations 1 36 - 1.99 % 358 2 1.81 %
Subordinated debenture 1, 5 2,164 1,361 251.54 % 2,715 49 7.19 %
Total interest-bearing liabilities 1,190,310 1,801 0.61 % 1,161,680 1,265 0.44 %
Demand accounts 1,406,123 1,119,975
Interest payable and other liabilities 44,551 33,045
Stockholders' equity 355,022 340,431
Total liabilities & stockholders' equity $ 2,996,006 $ 2,655,131
Tax-equivalent net interest income/margin 1 $ 22,359 3.19 % $ 24,399 3.88 %
Reported net interest income/margin 1 $ 22,031 3.14 % $ 24,119 3.83 %
Tax-equivalent net interest rate spread 2.83 % 3.64 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest
rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in
fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis
monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal
statutory rate of 21%.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is
included in interest income on loans, representing an adjustment to the yield.
5 First quarter 2021 interest expense includes $1.3 million accelerated discount accretion from the early redemption of our
last subordinated debenture on March 15, 2021 .
Page-33
--------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income
The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the three months endedMarch 31, 2020 . Three
Months Ended
Three Months Ended March 31, 2020
(in thousands) Volume Yield/Rate Mix Total
Interest-earning deposits with banks $ 222 $ (307) $ (205) $ (290)
Investment securities 1 (122) (887) 25 (984)
Loans 1 3,064 (2,674) (620) (230)
Total interest-earning assets 3,164 (3,868) (800) (1,504)
Interest-bearing transaction accounts 17 (35) (9) (27)
Savings accounts 5 (2) - 3
Money market accounts (73) (658) 46 (685)
Time accounts, including CDARS - (64) (1) (65)
Borrowings and other obligations (2) - - (2)
Subordinated debenture (10) 1,677 (355) 1,312
Total interest-bearing liabilities (63) 918 (319) 536
Changes in tax-equivalent net interest income $ 3,227 $ (4,786) $ (481) $ (2,040)
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using
the federal statutory rate of 21%.
First Quarter of 2021 Compared to First Quarter of 2020
Net interest income totaled$22.0 million in the first quarter of 2021, compared to$24.1 million in the same quarter a year ago. The$2.1 million decrease from the first quarter of 2020 was primarily caused by lower yields across all interest earning assets stemming from the low interest rate environment,$1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture, and lower average commercial and home equity loan balances. These negative variances were partially offset by interest and fees on PPP loans and lower rates on interest-bearing liabilities.
The tax-equivalent net interest margin was 3.19% in the first quarter of 2021 compared to 3.88% in the same quarter of the previous year. The decrease in tax-equivalent net interest margin was primarily attributed to the lower interest rate environment. Additionally, the early redemption of our last subordinated debenture reduced the first quarter of 2021 tax-equivalent net interest margin by approximately 18 basis points, but will improve the net interest margin going forward.
SBA PPP loans lowered first quarter 2021 net interest margin by 1 basis point compared to 13 basis points in the fourth quarter 2020 due to higher fee income accretion in the first quarter of 2021 as more PPP loans were forgiven and paid off by the SBA. There were no PPP loans in the first quarter of 2020. We expect the net interest margin to improve in second quarter of 2021 as more PPP loans are forgiven and paid off by the SBA.
Market Interest Rates
Market interest rates are, in part, based on the target federal funds interest
rate (the interest rate banks charge each
other for short-term borrowings) implemented by the Federal Reserve Open Market
Committee ("FOMC").
In response to the evolving risks to economic activity posed by the COVID-19
pandemic, the Federal Reserve Open Market Committee ("FOMC") made two emergency
cuts totaling 150 basis points to the federal funds rate in March 2020 . The
federal funds target rate range has resided between 0.0% and 0.25% since March
15, 2020 , putting downward pressure on our asset yields and net interest margin.
A low interest rate environment will continue to
Page-34
--------------------------------------------------------------------------------
put downward pressure on our asset yields and net interest margin. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.
Provision for Credit Losses on Loans
Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses is increased by provisions charged to expense and loss recoveries and decreased by loans charged off. We recorded a$2.9 million reversal of the provision for credit losses in the first quarter of 2021, compared to a$2.5 million provision for credit losses for the same period in 2020. The reversal of the provision in the first quarter of 2021 was primarily due to improvements in the forecastedCalifornia unemployment rates over the next four quarters and a$40.2 million decrease in non-PPP loan balances. Our allowance model is particularly sensitive to current and forecastedCalifornia unemployment rates, which decreased to 8.2% atMarch 31, 2021 from 9.1% atDecember 31, 2020 . The provision for credit losses for the first quarter of 2020, which was determined under the incurred loss method (prior to the adoption of the excepted credit loss method onDecember 31, 2020 ), was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time. Loans designated special mention, which is not considered adversely classified, decreased by$30.9 million to$56.0 million atMarch 31, 2021 from$86.9 million atDecember 31, 2020 . The decrease was largely due to the upgrading of several borrowing relationships totaling approximately$23.7 million because of their improved financial condition and loan reductions and payoffs totaling approximately$6.7 million . Classified assets (loans with substandard or doubtful risk grades) totaled$26.4 million atMarch 31, 2021 , compared to$25.8 million atDecember 31, 2020 . There were no loans with doubtful risk grades atMarch 31, 2021 orDecember 31, 2020 . The ratio of allowance for credit losses to total loans was 0.94% atMarch 31, 2021 , compared to 1.10% atDecember 31, 2020 . Excluding SBA-guaranteed PPP loans, the ratio of the allowance for credit losses to total loans was 1.14% and 1.27% atMarch 31, 2021 andDecember 31, 2020 , respectively (Refer to footnote 1 on page 32 for a definition and reconciliation of this non-GAAP financial measure). Non-accrual loans totaled$9.2 million , or 0.43% of total loans atMarch 31, 2021 , and remained largely unchanged from$9.2 million , or 0.44% of total loans atDecember 31, 2020 .
For more information, refer to Note 5 to the consolidated financial statements in this Form 10-Q.
Non-interest Income
The following table details the components of non-interest income.
Three months ended Amount Percent
Increase
(dollars in thousands) March 31, 2021 March 31, 2020 (Decrease) Increase (Decrease)
Wealth Management and Trust Services $ 488 $ 504 $ (16) (3.2) %
Debit card interchange fees 366 360 6 1.7 %
Service charges on deposit accounts 281 451 (170) (37.7) %
Earnings on bank-owned life insurance, net 257 275 (18) (6.5) %
Dividends on FHLB stock 149 208 (59) (28.4) %
Merchant interchange fees 57 73 (16) (21.9) %
Gains on sale of investment securities, net - 800 (800) (100.0) %
Other income 228 449 (221) (49.2) %
Total non-interest income $ 1,826 $ 3,120 $ (1,294) (41.5) %
First Quarter of 2021 Compared to First Quarter of 2020
Non-interest income decreased by$1.3 million in the first quarter of 2021 to$1.8 million , compared to$3.1 million in the same quarter a year ago. The decrease was mostly attributed to the absence of gains on sales of investment securities, lower service charges on deposit accounts, and lower fee income from one-way deposit sales to third-party deposit networks in the first quarter of 2021.
Page-35
--------------------------------------------------------------------------------
Non-interest Expense
The following table details the components of non-interest expense.
Three months ended Amount Percent
Increase Increase
(dollars in thousands) March 31, 2021 March 31, 2020 (Decrease) (Decrease)Salaries and related benefits $ 9,208 $ 9,477$ (269) (2.8) % Occupancy and equipment 1,751 1,663 88 5.3 % Professional services 863 544 319 58.6 % Data processing 819 786 33 4.2 % Depreciation and amortization 459 526 (67) (12.7) % Information technology 313 250 63 25.2 % Amortization of core deposit intangible 204 213 (9) (4.2) % Federal Deposit Insurance Corporation insurance 179 2 177 8,850.0 % Directors' expense 175 174 1 0.6 % Charitable contributions 31 167 (136) (81.4) % (Reversal of) provision for credit losses on unfunded loan commitments (590) 102 (692) (678.4) % Other non-interest expense Advertising 239 251 (12) (4.8) % Other expense 1,171 1,314 (143) (10.9) % Total other non-interest expense 1,410 1,565 (155) (9.9) % Total non-interest expense$ 14,822 $ 15,469 $ (647) (4.2) %
First Quarter of 2021 Compared to First Quarter of 2020
Non-interest expense decreased by$647 thousand to$14.8 million , compared to$15.5 million in the same period a year ago. The decrease was primarily attributed to a$590 thousand reversal of allowance for credit losses on unfunded loan commitments versus a$102 thousand provision for credit losses on unfunded loan commitments in the first quarter a year ago. In addition, salaries and related benefits decreased$269 thousand (mostly attributed to$421 thousand additional deferred loan origination costs from funding the second round of SBA PPP loans), charitable contributions decreased$136 thousand , and other expense included several small declines. These positive variances were partially offset by an increase in professional service expenses due to some pandemic related delays in 2020 activities, and the discontinuation ofFederal Deposit Insurance Corporation insurance credits received in 2020.Bank of Marin has been committed to donating at least 1% of net income before tax to nonprofits in our communities each year. In recent years, this has typically been around$500 thousand . In response to the COVID-19 pandemic, we more than doubled our charitable contributions to non-profit organizations in our community to over$1.0 million in 2020. In 2021, we are returning to our typical giving levels of at least$500 thousand with the majority being disbursed in the second quarter of 2021.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax andCalifornia franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The provision for income taxes for the first quarter of 2021 totaled$3.0 million at an effective tax rate of 25.2%, compared to$2.3 million at an effective tax rate of 24.5% in the same quarter last year. The increase in the provision in the first quarter of 2021 as compared to the same quarter a year ago was primarily due to higher pre-tax income and lower discrete tax benefits from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options compared to the first quarter of 2020. The 70 bps increase in effective tax rate in the first quarter of 2021 as compared to the same quarter last year was primarily due to a lower level of tax benefits from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Page-36
--------------------------------------------------------------------------------
We file a consolidated return in theU.S. Federal tax jurisdiction and a combined return in theState of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. AtMarch 31, 2021 , neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.
FINANCIAL CONDITION SUMMARY
AtMarch 31, 2021 , assets totaled$3,058.1 million , an increase of$146.2 million , from$2,911.9 million atDecember 31, 2020 , mainly due to increases in investment securities and loans as we redeploy our excess liquidity from deposit inflows as discussed below. Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were$142.8 million atMarch 31, 2021 , compared to$200.3 million atDecember 31, 2020 . The reduction was mainly due to increases in investment securities and loans as we redeploy our excess liquidity from deposit inflows, some related to new PPP loan funding. Cash and cash equivalents do not include$180.8 million and$173.4 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management atMarch 31, 2021 andDecember 31, 2020 , respectively.
The investment securities portfolio totaled$670.5 million atMarch 31, 2021 , an increase of$169.2 million fromDecember 31, 2020 . The increase was primarily due to purchases of$203.4 million to deploy excess cash into interest earning assets in a more favorable interest rate environment, partially offset by paydowns, calls and maturities of$24.7 million . Additionally, the fair value of available-for-sale securities decreased$9.1 million as a result of the higher interest rate environment in the first quarter of 2021. There were no security sales in the first quarter of 2021.
The following table summarizes our investment in obligations of state and
political subdivisions at
March 31, 2021 December 31, 2020 % of Total State and % of Total State and
Political
(dollars in thousands) Amortized Cost Fair Value Political Subdivisions Amortized Cost Fair Value Subdivisions WithinCalifornia : General obligation bonds $ 3,321$ 3,503 2.8 % $ 3,327$ 3,565 3.1 % Revenue bonds 2,296 2,377 1.9 2,352 2,448 2.2 Tax allocation bonds 1,748 1,779 1.5 2,832 2,876 2.7 Total within California 7,365 7,659 6.2 8,511 8,889 8.0 Outside California: General obligation bonds 91,611 93,957 77.2 78,299 82,100 73.5 Revenue bonds 19,724 20,744 16.6 19,744 21,351 18.5 Total outside California 111,335 114,701 93.8 98,043 103,451 92.0 Total obligations of state and political subdivisions$ 118,700 $ 122,360 100.0 %$ 106,554 $ 112,340 100.0 % The portion of the portfolio outside the state ofCalifornia is distributed among eleven states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside ofCalifornia are inTexas (50.9%),Washington (16.1%) andMaryland (5.7%). Our investment in obligations issued by municipal issuers inTexas are either guaranteed by theAAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have$6.0 million in obligations ofTexas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We have little or no exposure to municipal sectors such as higher education or health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.
Page-37
--------------------------------------------------------------------------------
Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include:
•The soundness of a municipality's budgetary position and stability of its tax revenues •Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer •Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values •For revenue bonds, the source and strength of revenue for municipal authorities including the obligor's financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer's strength and collateral in escrow accounts) •Credit ratings by major credit rating agencies
Loans
During the first three months of 2021, loans increased by$33.2 million and totaled$2,121.8 million atMarch 31, 2021 , primarily due to SBA PPP loans which totaled$365.0 million atMarch 31, 2021 , compared to$291.6 million atDecember 31, 2020 . New non-PPP related loan originations totaled$25.3 million in the first three months of 2021. Payoffs totaled$34.6 million and credit line utilization decreased$27.9 million during the first three months of 2021.
Liabilities
During the first three months of 2021, total liabilities increased by$154.2 million to$2,707.8 million . Deposits increased$152.0 million in the first three months of 2021, primarily driven by a combination of PPP loan proceeds and normal fluctuations in some of our larger commercial accounts. Non-interest bearing deposits increased$90.6 million in the first three months of 2021 to$1,445.3 million , and represented 54.4% of total deposits atMarch 31, 2021 , compared to 54.1% atDecember 31, 2020 . Liabilities as ofMarch 31, 2021 included operating lease liabilities totaling$26.0 million , a decrease of 1.1 million fromDecember 31,2020 .
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank's prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank's ratios exceed the regulatory definition of "well capitalized" under the regulatory framework for prompt corrective action and Bancorp's ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from theFDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as ofMarch 31, 2021 . There are no conditions or events since that notification that management believes have changed the Bank's categories and we expect the Bank to remain well capitalized for prompt corrective action purposes. InAugust 2018 , theBoard of Governors of theFederal Reserve System changed the definition of a "Small Bank Holding Company " by increasing the asset threshold from$1.0 billion to$3.0 billion . As a result, Bancorp was not subject to separate minimum capital requirements as ofDecember 31, 2020 . However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in 2020. The Bancorp's and Bank's capital adequacy ratios as ofMarch 31, 2021 andDecember 31, 2020 are presented in the following tables. As ofDecember 31, 2020 , Bancorp's Tier 1 capital included a subordinated debenture, which was not included at the Bank level. OnMarch 15, 2021 , Bancorp redeemed in full our last subordinated debenture
Page-38
--------------------------------------------------------------------------------
due to NorCal Community Bancorp Trust II. The redemption reduced Bancorp's total risk-based capital ratio by approximately 18 basis points. Capital Ratios for Bancorp
Ratio to be a Well Capitalized
(dollars in thousands) Actual Ratio
Adequately Capitalized Threshold Bank Holding Company
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 331,739 15.68 % ? $ 222,195 ? 10.50 % ? $ 211,614 ? 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 309,592 14.63 % ? $ 179,872 ? 8.50 % ? $ 169,291 ? 8.00 %
Tier 1 Capital (to average assets) $ 309,592 10.51 % ? $ 117,794 ? 4.00 % ? $ 147,242 ? 5.00 %
Common Equity Tier 1 (to risk-weighted
assets) $ 309,592 14.63 % ? $ 148,130 ? 7.00 % ? $ 137,549 ? 6.50 %
December 31, 2020
Total Capital (to risk-weighted assets) $ 339,544 16.03 % ? $ 222,393 ? 10.50 % ? $ 211,802 ? 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 313,891 14.82 % ? $ 180,032 ? 8.50 % ? $ 169,442 ? 8.00 %
Tier 1 Capital (to average assets) $ 313,891 10.80 % ? $ 116,224 ? 4.00 % ? $ 145,280 ? 5.00 %
Common Equity Tier 1 (to risk-weighted
assets) $ 311,114 14.69 % ? $ 148,262 ? 7.00 % ? $ 137,672 ? 6.50 %
Ratio to be Well Capitalized
Capital Ratios for the Bank under Prompt Corrective Action
(dollars in thousands) Actual Ratio Adequately Capitalized Threshold Provisions
March 31, 2021 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 312,649 14.78 % ? $ 222,160 ? 10.50 % ? $ 211,581 ? 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 290,502 13.73 % ? $ 179,844 ? 8.50 % ? $ 169,265 ? 8.00 %
Tier 1 Capital (to average assets) $ 290,502 9.87 % ? $ 117,789 ? 4.00 % ? $ 147,236 ? 5.00 %
Common Equity Tier 1 (to risk-weighted
assets) $ 290,502 13.73 % ? $ 148,107 ? 7.00 % ? $ 137,528 ? 6.50 %
December 31, 2020
Total Capital (to risk-weighted assets) $ 334,686 15.80 % ? $ 222,391 ? 10.50 % ? $ 211,801 ? 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 309,033 14.59 % ? $ 180,031 ? 8.50 % ? $ 169,441 ? 8.00 %
Tier 1 Capital (to average assets) $ 309,033 10.64 % ? $ 116,224 ? 4.00 % ? $ 145,280 ? 5.00 %
Common Equity Tier 1 (to risk-weighted
assets) $ 309,033 14.59 % ? $ 148,261 ? 7.00 % ? $ 137,671 ? 6.50 %
Liquidity
The goal of liquidity management is to provide adequate funds to meet loan
demand and to fund operating activities and deposit withdrawals. We accomplish
this goal by maintaining an appropriate level of liquid assets and formal lines
of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow
funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1
of this report. Our Asset Liability Management Committee ("ALCO"), which is
comprised of independent Bank directors and the Bank's Chief Executive Officer,
is responsible for approving and monitoring our liquidity targets and
strategies. ALCO has adopted a contingency funding plan that provides early
detection of potential liquidity issues in the market or the Bank and institutes
prompt responses that may prevent or alleviate a potential liquidity crisis.
Management monitors liquidity daily and regularly adjusts our position based on
current and future liquidity needs. We also have relationships with third-party
deposit networks and can adjust the placement of our deposits via reciprocal or
one-way sales as part of our cash management strategy.
We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.
The most significant component of our daily liquidity position is customer
deposits. The attraction and retention of new deposits depends upon the variety
and effectiveness of our customer account products, service and convenience,
rates paid to customers, and our financial strength. The cash cycles and unique
business activities of some of our large commercial depositors may cause
short-term fluctuations in their deposit balances held with us.
Page-39
--------------------------------------------------------------------------------
Since 2020, the banking industry experienced abundant liquidity driven by pandemic-related government programs such as PPP and stimulus checks as well as an elevated savings rate system-wide.
The most significant source of liquidity during 2021 was an increase in deposits of$152.0 million . The increase was primarily due to increases in PPP borrower-related accounts and normal fluctuations in some of our large business accounts. Proceeds from paydowns and maturities of securities totaled$24.7 million , and$12.4 million in net cash was provided by operating activities. Significant uses of liquidity during 2021 were$193.4 million in investment securities purchased,$36.5 million in loan originations and advances, net of principal collected,$8.8 million in common stock repurchases,$4.1 million in repayment of a subordinated debenture, and$3.1 million in cash dividends paid on common stock to our shareholders. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base are adequate to fund our operations. Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled$610.8 million atMarch 31, 2021 . We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months,$69.9 million of time deposits will mature. We expect to replace these funds with new deposits. Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base. Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank's retained earnings or the amount of the Bank's net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held$18.9 million of cash atMarch 31, 2021 which is deemed sufficient to cover Bancorp's operational needs, share repurchases, and cash dividends to shareholders through the end of 2021. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.
© Edgar Online, source
