2023-09-05 03:20:06 ET
Summary
- Bank of Marin Bancorp is an interesting bank that has a nice track record of growth.
- The bank has a diverse stream of income and assets, with a focus on catering to businesses.
- Profitability has declined in 2023, but shares look fundamentally cheap, and the bank has significant liquidity.
Sometimes, you really need to focus on some of the smallest companies out there in order to capture true value. Although I would posit that the banking sector is flush with opportunities right now, one of the smaller players in the space that does seem to offer attractive upside is Bank of Marin Bancorp ( BMRC ). The company has significantly improved its overall financial standing over the first two quarters of the 2023 fiscal year. It is true that profitability has declined during this time. However, shares of the business do look fundamentally cheap and, with one notable exception, the major risk areas that I look at in the banking sector suggest that this is a solid candidate for value-oriented investors to consider.
A small bank with nice upside
Founded in my birth year, 1989, Bank of Marin Bancorp is a rather small player in the banking industry. In fact, as of this writing, the firm has a market capitalization of just under $300 million. Even though it is small, it offers customers a wide array of services. As of the end of the most recent completed fiscal year, the institution had 31 different branches on the retail side and 8 commercial banking offices, all spread across 10 different counties in California. The list of counties is like a who's who of the best places in California to typically be in. They include San Francisco, Sacramento, Alameda, Napa, and more.
The services that the bank offers customers include, but are not limited to, loans for small and medium sized businesses, not-for-profit organizations, commercial real estate investors, and more. In fact, the company does have a special emphasis on catering to businesses as opposed to consumers. Approximately 60% of its deposits at the end of 2022 belonged to businesses, with the remaining 40% falling under the consumer category. Naturally, this means that the company also provides consumer offerings, such as various loans, home equity lines of credit, and more. It even engages in merchant and payroll services by partnering up with third party vendors and it offers a commercial equipment leasing program and credit cards for its customers as well.
Truth be told, I could write an entire article dedicated only to the various products and services that Bank of Marin Bancorp makes available to the public. Other examples would include access to its ATM network and various wealth management and trust services. But you get the idea. What we have is a small bank with a diverse stream of income and assets flowing into it.
Over the past few years, the management team at Bank of Marin Bancorp had done a pretty good job growing the company's top and bottom lines. Net interest income, for instance, grew from $90.5 million in 2020 to $127.9 million in 2022. Non-interest income inched up from $8.6 million to $10.9 million. Both of these, combined, allowed for net income to expand from $30.2 million to $46.6 million. For such a small bank, that is a rather meaningful growth rate.
The downside, however, is that this year has proven to be a bit difficult. During the first half of the 2023 fiscal year, net interest income fell from $61.9 million to $53.5 million. Nearly all of this decline came in the second quarter alone, with the metric dropping from $31.2 million to $23.8 million. This decline, based on the data provided, was really driven by an increase in the cost of deposits and higher average borrowing balances. The latter of these is easy to see when you look at the company's balance sheet. It had $112.4 million of debt at the end of 2022. By the end of the second quarter, that number had shot up to $292.6 million. The increase in the cost of deposits is a bit more nuanced. But basically, high interest rates have resulted in many banks experiencing deposit outflows as consumers look for more profitable places to put their capital. So they have had to ratchet up interest rates that they reward on deposits in order to keep funds in house. This was not made easier by the fact that deposits happen on the decline.
You see, between 2020 and 2022, the deposits at the bank were quite volatile. They shot up from $2.50 billion in 2020 to $3.81 billion in 2021. But by the end of 2022, they had dipped to $3.57 billion. This number dropped to $3.25 billion by the end of the first quarter of this year before recovering slightly to $3.33 billion by the end of the second quarter. This makes a great deal of sense and it largely involved significant amounts of uninsured deposits flowing off the bank's books. At the end of 2022, 44.3% of the deposits in the bank were uninsured. This number dropped to 32.8% by the end of the first quarter before falling further to 29% at the end of the second quarter . This decline, it should be noted, seems to have been largely the result of the banking crisis that occurred earlier this year. And since this financial institution is based in California, which was basically viewed as ground zero for the crisis, it is not surprising to see this development.
As part of our analysis, we should also look at the loans on the company's books. Loan amounts remained virtually unchanged at about $2.09 billion from 2020 to 2022. However, this is because a larger share of the deposits the company brought in ended up being allocated toward investment securities. The total value of investment securities shot up from $501.4 million in 2020 to $1.77 billion in 2022. By the end of the second quarter, loans totaled about $2.08 billion, while investment securities stayed at pretty lofty levels totaling $1.72 billion. Of course, the value of securities matters, but the composition is also important. As of the end of the most recent quarter, about 57% of the value of loans on Bank of Marin Bancorp’s books were in the form of non-owner occupied commercial real estate. And about 31% of that figure , or $372 million, were in the form of office property loans. That works out to about 17.9% of total loans and 9.8% of the sum of loans and investment securities. For context, the investment securities on the company's books are almost entirely government securities, so the risk for shareholders of non-performance on that front is incredibly low.
Given the recent drop that we have seen in profitability, it's difficult to know what shares might look like on a forward basis. If we simply annualize the results experienced so far for the year, we would end up with net income for 2023 of $30.3 million. That would translate to a price to earnings multiple of 9.9. Although cheap from an objective standpoint, it is a bit higher than what I would like to see for a bank. But it's certainly not unreasonable. If we instead use the results from 2022, this multiple drops to a rather low 6.4. Meanwhile, the company is trading at only 71.9% of its book value per share, so it does look attractive on that front as well.
Takeaway
This year has not been pleasant for shareholders of Bank of Marin Bancorp. If we measure from the end of February until shares bottomed out during the crisis, maximum downside was approximately 55.6%. The bank has seen a partial recovery during that time, but shares are still down 34.8% from where they ended February at. Although painful for existing shareholders, it does seem to offer some nice upside for investors who are coming in. Shares look fairly attractive and uninsured deposits have declined in relation to total deposits. The company has significant amounts of liquidity, about $1.99 billion as of this writing. And the only real negative that I can see is that it has a bit more exposure to the office category when it comes to loans than I would like. But that's not a deal breaker for me. Given all of these facts combined, I would say that a soft ‘buy’ rating makes sense right now.
For further details see:
Bank Of Marin Bancorp Has Room To Run