3 Reasons Bank of Marin Is on the Rise

With the prospect of higher interest rates from the Fed, potential financial deregulation, and a promise of more infrastructure spending from Trump in 2017, the banking sector is on the rise. I’ve been watchingBank of Marin (NASDAQ: BMRC), a California-based, small-cap bank that’s up more than most of its peers. Here’s three reasons why it’s doing better than others and why it’s a safe bet for 2017.

Continue Reading Below

BMRC data by YCharts

The Bay Area is growing rapidly

Bank of Marinis a small commercial and retail bank in the San Francisco Bay Area. With $2 billion in assets, it mostly serves small- and medium-sized businesses in Marin, San Francisco, and Alameda counties. These business clients are reliant on the health of the Bay Area economy, which is quite good.

Small regional banks succeed or fail based on the economy in their area. Even an extremely well-run bank will have problems if the area where their loans are located is doing poorly. Luckily for BMRC, the San Francisco Bay Area is home to two powerhouse centers of economic growth: San Francisco and San Jose. It is the only region of the country to have two regions in the top twenty, based on local GDP:

Continue Reading Below

Table 1. Current-Dollar Gross Domestic Product (GDP) by Metropolitan Area

Millions of dollars
2015 Rank*
2010
2011
2012
2013
2014
2015*
New York-Newark-Jersey City, NY-NJ-PA
1,340,859
1,365,795
1,440,989
1,478,671
1,537,140
1,602,705
1
Los Angeles-Long Beach-Anaheim, CA
762,565
779,241
805,023
843,758
879,960
930,817
2
Chicago-Naperville-Elgin, IL-IN-WI
533,825
551,739
581,924
587,130
608,710
640,656
3
Houston-The Woodlands-Sugar Land, TX
401,087
441,158
469,925
504,708
522,028
503,311
4
Washington-Arlington-Alexandria, DC-VA-MD-WV
432,364
445,207
454,109
460,375
474,375
491,042
5
Dallas-Fort Worth-Arlington, TX
377,500
403,367
430,194
452,668
478,572
485,683
6
San Francisco-Oakland-Hayward, CA
333,830
345,058
372,610
384,375
408,067
431,704
7
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD
348,749
357,654
371,295
381,662
397,137
411,161
8
Boston-Cambridge-Newton, MA-NH
330,024
341,980
358,303
363,001
378,983
396,549
9
Atlanta-Sandy Springs-Roswell, GA
274,874
282,682
294,083
305,311
322,054
339,203
10
Miami-Fort Lauderdale-West Palm Beach, FL
250,639
255,010
269,820
285,149
300,027
317,986
11
Seattle-Tacoma-Bellevue, WA
248,203
257,062
271,982
281,977
298,084
313,654
12
Minneapolis-St. Paul-Bloomington, MN-WI
199,606
209,358
217,269
225,837
237,643
248,779
13
Detroit-Warren-Dearborn, MI
197,973
207,286
218,538
224,786
233,201
245,607
14
San Jose-Sunnyvale-Santa Clara, CA
163,836
176,173
185,048
195,906
213,014
235,222
15
San Diego-Carlsbad, CA
175,903
183,149
192,533
202,227
210,387
220,573
16
Phoenix-Mesa-Scottsdale, AZ
182,494
189,685
199,609
202,642
211,137
219,968
17
Denver-Aurora-Lakewood, CO
155,598
160,968
169,201
177,134
188,174
193,172
18
Baltimore-Columbia-Towson, MD
152,820
157,619
163,034
167,457
174,437
181,419
19
Portland-Vancouver-Hillsboro, OR-WA
141,233
149,515
145,415
145,128
149,095
158,770
20

Source: Bureau of Economic Analysis

Incredibly, average five year growth is at 5.3% in San Francisco and 7.5% in San Jose. All US Metro areas together average only 3.8% since 2010:

Author created chart. Data source: Bureau of Economic Analysis

Because of this higher than average regional growth, Bank of Marin is uniquely advantaged among small community banks. They’ve been able to grow their assets while keeping loan standards high over the past five years:

BMRC Gross Loans (Quarterly) data by YCharts

Excellent asset quality

Prior to the recession, Bank of Marin had an excellent loan approval process. This resulted in an extremely low percentage ofnon-performing loans, or NPLs, even during the financial crisis. As I recently explained in an article on Sierra Bancorp, another small California bank, NPL percentage can be used to judge a bank’s asset quality. Low percentages of NPLs indicate high-quality assets, and, by extension, a good loan approval process. Bank of Marin has that in spades:

Author created chart. Data source: Company 10-Ks and 10-Qs

During and after the recession, NPLs did increase, but stayed below the 2% mark — well below the national average of 5.3% at the height of the crisis in 2010. I’ve added a line at 1% since you generally expect well-managed banks to stay below that benchmark. Bank of Marin never strayed far above 1%, and is now quite far below it. The current level is due partially to the success of the local economy, but only the best-run banks can reach levels this low with mature loans. Bank of Marin has clearly done a good job in this area.

This excellent loan quality makes Bank of Marin a potential takeover target for larger banks or private equity firms. A good balance sheet minimizes the due diligence risk to the deal. It also increases the chance of an acquisition performing well as a part of the new company.

No doubt this excellent performance also makes BMRC a safer than average bank to hold onto, especially if you want some exposure to Bay Area real estate while benefiting from rising interest rates.

Insulation from tech volatility

The Bay Area economy mainly revolves around the technology industry. This has made for a bumpy ride for the region over the years. The SP Technology ETF shows this:

XLK data by YCharts

However, Bank of Marin’s main operational area is much more low-tech. Because the bank lends mainly to local businesses like furniture makers, wineries, and construction companies, it is insulated from much of the boom-and-bust cycle of the tech industry. Most of its loans are concentrated in counties that have few tech companies:

Author created chart. Data source: BMRC 2015 Annual Report

Marin county is one of the richest counties in the United States. It is mainly a bedroom community halfway between urban San Francisco and California’s wine country in Napa and Sonoma counties. Alameda county is a similar bedroom community nearby, containing the cities of Oakland and Berkeley, and other smaller towns. Only 14% of their Commercial RE loans are for property in San Francisco and a tiny 2% are in San Mateo county (where many tech companies are headquartered). There is no significant concentration in Santa Clara county, the center of Silicon Valley.

This geographic diversification seems to avoid the areas of maximum volatility, but it is mostly just an accident of their founding in Marin county. Because of this fortuitous fact, Bank of Marin is able to benefit from larger than average growth in the Bay Area. At the same time, they are positioned to avoid the brunt of the largest local risk factor: another tech crash.

So, is it a buy?

The expectation of financial deregulation and an increase in infrastructure spending during the Trump presidency has bolstered banks’ share prices in general — an effect Bank of Marin has also enjoyed. This, combined with excellent long-term risk management, performance, and strategy, has caused investors to see Bank of Marin for what it always was: a relatively safe play on a vibrant local economy with acquisition possibilities. This growth is predicted to continue for the near future, but is not without risks.

The tech and start-up economy that drive its regional growth can be quite volatile, and a downward movement could have an effect on the local economy. Specifically, start-up growth may be leveling off. There appears to be a connection between venture capital funding and property values in the San Francisco Bay Area. Any drop in that could drive down valuations of local banks in the coming year.

The last two tech bubbles didn’t kill off the Bay Area economy, and the next one won’t either. Bank of Marin is well positioned to benefit from this growth, as it has done this year.

Christopher Flens-Batina owns shares of Bank of Marin. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Article source: http://www.foxbusiness.com/markets/2016/12/11/3-reasons-bank-marin-is-on-rise.html?cmpid=prn_seekingalpha

This entry was posted in SF Bay Area News and tagged . Bookmark the permalink.

Comments are closed.