Bank of Marin loan growth helps boost earnings 11% in 4Q, by double in 2018

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The parent company of Bank of Marin on Monday reported earnings more than doubled last year, attributed largely to gains in loans and investments.

Bank of Marin Bancorp (Nasdaq: BMRC) reported net interest income of $91.5 million for calendar year 2018, from $74.9 million the previous year. The Novato-based institution attributed that rise primarily to a $337.7 million increase in average earning assets. Equating for tax changes, net interest margin — a metric for comparing performance between banks — increased to 3.90 percent for 2018 from 3.80 percent in 2017.

Fourth-quarter earnings were $9.66 million, up 11.3 percent from $8.68 million in the third quarter but up dramatically from $1.11 million a year before. Annual net income was $32.6 million, more than double the nearly $16.0 million of 2017. Earnings per diluted share were 69 cents in the fourth quarter and $2.33 for the year, up from 8 cents and $1.27 a year before.

“It was a very good year in many respects,” President and CEO Russell Colombo told the Business Journal. “We had solid loan growth. We have a very low cost of deposits — 49 percent demand deposits. No loan issues to speak of. Earnings were a record. We continued our share-repurchase program and increased our dividend. Those are things most of our investors would be pretty happy with.”

The loan portfolio grew last year to $1.76 billion, up 5.1 percent, or $84.9 million. That growth has been in the mid-single-digit range for the past few years, held down in 2018 by interest-rate increases, Colombo said. But with planned loan turnover of 10 percent annual via payoffs, property sales and workouts, hitting around 5 percent growth calls for total loan growth of 15 percent.

“Our record results for 2018 were powered by a well-executed strategy for growth combined with staying true to our rigorous lending standards,” said Tani Girton, executive vice president and chief financial officer, in a statement.

The ratio of loan loss reserve to loans, including loans picked up in acquisitions such as NorCal Community Bancorp and Bank of Napa, was 0.9 percent at the end of 2018, unchanged from the third quarter or a year before.

Deposits at the end of 2018 were about the same as when the year started: $2.17 billion on Dec. 31, $2.21 billion Sept. 30 and $2.15 billion at the end of 2017. The bank funded loans and investments largely from cash, except for $7.0 million pulled from a credit facility with Federal Home Loan Bank to close a number of year-end deals and fluctuations between accounts, Girton told the Business Journal.

Colombo said the bank’s “significant amount of liquidity” has helped it weather the Great Recession.

“One of the things that caused banks to fail was lack of liquidity,” he said. “If you have a liquidity crisis, you are in deep trouble.”

Though the institution has sizable contingent funding sources, it scales its liquidity base to its customer base, Colombo said. The bank’s loan-to-deposit ratio was 81.1 percent at year-end.

“We have enough deposits, where liquidity is not an issue,” he said.

The bank doesn’t sell loans to or buy them from the secondary market, Colombo said. Exceptions to that are loans that have come in via acquisition of another institution.

For loans where the balance is bigger than desired for the balance sheet, the bank may syndicate the deal through another lender, Girton said. The important part is that all the lenders involved have a direct connection to the borrower to fully understand the deal, she said.

While the bank doesn’t do Section 7a U.S. Small Business Administration loans for business operations, Bank of Marin does fund a number of Section 504 real estate loans.

Another way the bank is managing its risk is in deciding which loans to fund. Real estate makes up 85.3 percent of Bank of Marin’s loan portfolio, and 78.8 percent of the real estate loans are for investor-owned or owner-occupied properties, according to the fourth-quarter report. The real estate portfolio tends to lean more toward industrial and office properties than multifamily and retail, and is largely in the bank’s core markets (Marin, Sonoma, Napa and East Bay counties), with some in the South Bay. Last year, Bank of Marin expanded its reach in the East Bay, opening a commercial banking office in Walnut Creek, and added to its Sonoma County staff.

“In the recession, banks that had difficulty had loans in markets where they weren’t,” Colombo said. “Occasionally, we’ll follow a customer (to lend in other markets), but we try to be smart about the type of lending we do.”

On Jan. 25, the company board declared its 55th consecutive quarterly cash dividend, set at 19 cents per share. That’s up 1.5 cents (or 3 cents with the stock split that took effect in November) from the third quarter.

The bancorp spent $7.0 million repurchasing 171,217 of its common shares last year. The board authorized up to $25.0 million in repurchases through May of this year, but reaching that limit may not happen unless sizable blocks of shares become available, Colombo said.

The price of Bank of Marin shares at the close of trading Monday slipped 1.12 percent, to $41.62.

CORRECTIONS, Jan. 29, 2019: Third- and fourth-quarter earnings were misstated in the original story and headlines. Details on annual net income for 2017 and 2018 were added, as were earnings per share.

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