2023-08-31 11:24:03 ET
Summary
- Bank of Marin Bancorp's share price has not recovered from the industry-wide drop earlier this year, making it unappealing for investors.
- The company's dividend profile is intriguing, with a yield of over 5% and approaching historical averages for return on equity.
- BMRC's solid deposit growth and strong financial liquidity position support its ability to maintain a growing dividend.
Introduction
It seems that the lack of recovery in the share price for Bank of Marin Bancorp ( BMRC ) following the meltdown the regional bank industry saw is warranted as the company continues to trade quite high in comparison to the sector. The company is quite small, with a market cap of just over $300 million. This paired with a decent amount of volatility is making it tough to say BMRC is a buy by any means. The dividend profile though for the company is intriguing and holding shares and gathering up the over 5% yield it currently has seems good enough. Deposits increased in the most recent quarter by 2% and BMRC is approaching its historical averages for ROE, which should add some fuel to the dividend. My stance on BMRC is quite neutral, and I will therefore be issuing a hold rating for it right now.
Company Structure
As we have covered, BMRC is included in the regional bank industry which has faced a lot of turmoil so far this year and I think there are some companies whose valuation dropped and should remain in that new range, one of them being BMRC. The operations of the business revolve around offering a range of financial services, which are mostly aimed at small to medium-sized companies and businesses.
Besides that, though, the company is also offering both personal and business checking and savings accounts. Loans are also issued to those seeking them for real estate planning and funding, but loans aren't only for this purpose, they also cover basic consumer loans and construction financings as well. A diversified set of converge has been a pivotal point for BMRC to grow its portfolio and margins efficiently over the years.
One of the highlights from the last quarter was the growing deposits for the company, which helped it immensely in justifying the current price. I fear that if depositors didn't grow and margins weren't retained, BMRC would drop to an FWD P/E range of around 10 - 11 instead, indicating a steep drop from current levels.
As we know, the company has a solid dividend yield currently, and supporting the fact the company can finance this and maintain a sound financial liquidity position is the FCF margins the company generated from its securities portfolio right now. The average yield for the HTM securities portfolio is 2.49% right now, with an approximate average duration of 5.8. This is providing BMRC with a solid base to grow from and should be a leading factor for a growing dividend going forward.
Earnings Transcript
In the last earnings call by the company, CEO Tim Myers shared some good comments about the performance and where he sees the company heading in the coming quarters.
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"New balances, net of normal customer activity and some continued outflow, largely to money markets accounts, drove deposit growth of $75 million in the second quarter. Importantly, those new deposits and investment cash flows enabled us to reduce our short-term borrowings at the FHLB by [$113.2] ((PH)) million or 28% during the second quarter. Deposit growth has continued post quarter-end and included seasonal DDA growth we had anticipated. From quarter end to July 18, we added $116 million to total deposits, which are now within $50 million of pre-bank failure levels in early March 2023".
This comment highlights very well, in my opinion, the fact that BMRC is making the most of the customer growth they are seeing, and leveraging the inflows of capital is aiding them in paying down short-term borrowings. For the coming quarter, I think a key point to watch will be the deposit growth and whether or not it's able to be sustained or not. If it is, then the current multiple might be possible to continue staying at, if results surprise a surge in the share price might very well happen. As we know, the company doesn't have a lot of traded volumes each day and such a surprise could trigger an upswing for the share price.
Valuation & Comparison
Looking at the model above here, I think it becomes clear that BMRC right now doesn't offer the necessary incentives to warrant a buy. But given the solid dividend growth history, it has and the required return I have set, the company still justifies a hold rating in my opinion. A terminal dividend growth rate of 7% seems reasonable given the historical performance and how BMRC is also seeing some growth, which I think can be leveraged into better earnings for the company. This ultimately trickles down to the shareholders as both the dividend and buybacks can continue. Where I would consider BMRC a buy based on this model would be when the share price has at least a 10% discount to the target price in 2023, which would be at $18 per share right now.
Risk Associated
BMRC is navigating a dynamic landscape marked by intensified market fluctuations. As the persistent elevation of interest rates lingers, the company finds itself contending with heightened risks and challenges that stem from this economic backdrop. The consequences of ongoing interest rate hikes have already made their mark on the company's performance.
One notable aspect of BMRC's trajectory has been its ability to sustain interest income growth. However, in the context of the past year, it's evident that the rate of sequential increase in interest income has exhibited a notable deceleration. This phenomenon serves as a reminder of the intricate balance that financial institutions like BMRC must strike between maximizing revenue generation and adapting to changing market conditions.
If interest rates remain elevated it will most likely decrease the activity and inflows for BMRC and that in turn slows down asset and portfolio growth for the business. A lower multiple should then be applied, and that will result in a lower share price, hurting the investment for anyone who bought shares. Given the p/e sitting around 41% above the rest of the sector based on FWD estimates, the possible downside should BMRC fail to capitalize on growth be quite large. I think a drop of 10 - 15% at least is not out of the realm of possibilities.
Investor Takeaway
Growth continues for BMRC, but the price is currently still quite unappealing, and I don't think the company warrants a buy. It hasn't recovered in the share price after the industry-wide drop that happened earlier on in the year. For investors that want to take advantage of the dividend yield though, BMRC still offers some potential and I will therefore be issuing a hold rating for the company.
For further details see:
Bank of Marin Bancorp: Despite The Cut In Valuation, It Still Seems Expensive