Introduction
In a earlier article, printed in December of final yr, I rated Financial institution of Marin (NASDAQ:BMRC) a promote because the earnings continued to contract and the truthful worth of its portfolio of securities held to maturity was considerably decrease than the e-book worth. The inventory is now down about 20% since that article, and I figured this may be a very good time to inspect my authentic funding thesis to see if it must be up to date.
A glance again at its Q1 outcomes
Within the first quarter of this yr, Financial institution of Marin noticed its curiosity revenue barely lower to $34.1M on a QoQ foundation, however as its curiosity bills barely elevated both, the online curiosity revenue lower remained considerably acceptable. That being stated, the $22.7M in internet curiosity revenue in comparison with $24.3M in This fall 2023 and virtually $30M in Q1 2023 stays very painful to look at.
Moreover, the overall quantity of internet non-interest bills elevated to $18.5M and this resulted in a pre-tax and pre mortgage loss provision revenue of $4.3M. Luckily for Financial institution of Marin, the regional financial institution solely needed to file $0.35M in mortgage loss provisions, leading to a reported pre-tax revenue of $3.9M and a internet revenue of $2.9M. This represented an EPS of $0.18. An enchancment from the $0.04 quarterly EPS it recorded in This fall 2023, however that quarter included a $5.9M loss from the sale of funding securities and excluding that non-recurring merchandise, the pre-tax revenue in This fall 2023 would have been greater than 50% increased than in Q1 2024, regardless of recording a a lot increased mortgage loss provision.
Trying on the steadiness sheet, we see the overall fairness worth was $437M, which incorporates $72.7M in goodwill. The tangible e-book worth was roughly $360M after additionally taking the core deposit intangible belongings into consideration. There are 16.3M shares excellent, leading to a TBVPS of round $22/share.
Whereas that sounds superb, positively in comparison with the present share value of roughly $16.5/share, we shouldn’t overlook this doesn’t embody a $120M discrepancy between the e-book worth of securities held to maturity and the truthful worth. Utilizing the truthful worth of the Securities HTM portfolio would scale back the TBVPS to $14.5/share. Nonetheless not unhealthy, however it could add extra stress on the steadiness sheet ought to this unrealized loss ever must be realized.
The current sale of nearly all of the securities AFS portfolio
In a reasonably shocking transfer, the financial institution introduced in June it had bought off in extra of half of its portfolio of securities accessible on the market. The securities that had been bought had a mean yield of lower than 2% and the financial institution expects the incoming funds to be redeployed at a a lot increased yield.
In fact, offloading securities at a loss may have a really destructive impression on the financial institution’s Q2 outcomes, and Financial institution of Marin’s administration crew anticipates a internet lack of $23M associated to the sale of those securities. Nonetheless, given the power to redeploy the money straight away, it anticipates the payback interval is simply three years. Whereas that is smart from a purely financial perspective, it’s a little little bit of a head scratcher to me. Until the financial institution doesn’t consider rates of interest on the monetary markets are coming down, it makes little sense to promote the securities at a loss to be able to prop up the online curiosity margin and internet curiosity revenue within the subsequent few quarters and years. In any case, trying on the breakdown of the Securities AFS portfolio, virtually half of the portfolio would have matured throughout the subsequent 5 years anyway.
Which means if rates of interest moved down, the securities will see a price improve, and the $66M in unrealized loss would shrink anyway.
I’m pleased to be confirmed unsuitable, however I’m simply questioning to what extent promoting half of the Securities AFS portfolio this late within the rate of interest cycle isn’t simply window dressing. Certain, the earnings will improve, that’s a given. However it’s going to take up three years to make up for that loss, whereas about 40% of the portfolio would have matured between now and year-end 2028 anyway.
As I stated, it’s a little little bit of a head scratcher, however I’ll anticipate Financial institution of Marin to publish its detailed Q2 outcomes, so I can see what kind of the portfolio it has bought. If nearly all of the gross sales got here from the ten yr+ securities, it’s a special sport. However my preliminary impression is that this seems a bit like window dressing
Funding thesis
I’m nonetheless on the sidelines with regards to the Financial institution of Marin. I anticipate the earnings to extend from the present quarter on, however I consider the financial institution will report a really excessive internet loss in its Q2 report. Contemplating the sale of the securities accessible on the market may have a destructive impression of $23M within the second quarter, it could even jeopardize the financial institution’s full-year earnings.
I appreciated the financial institution prior to now, however for now, I’m in a ‘wait and see’ mode to see how briskly its profitability can enhance once more. Moreover, I hope the rates of interest will come down once more because the unrealized loss within the portfolio of securities held to maturity is fairly excessive versus the financial institution’s e-book worth and tangible e-book worth.