form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended September 30, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from __________________ to __________________
Commission
File Number 001-33572
Bank
of Marin Bancorp
6(Exact
name of Registrant as
specified in its charter)
California
|
|
20-8859754
|
(State
or other jurisdiction of incorporation)
|
|
(IRS
Employer Identification No.)
|
504
Redwood Blvd., Suite 100, Novato, CA
|
|
94947
|
(Address
of principal executive office)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (415)
763-4520
(Former
name or former address, if changes since last report)
Indicate
by check mark whether the registrant (1) has filed all reports to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past
90
days. Yes x No o
(See Explanatory
Note.)
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark if the registrant is a shell company, in Rule 12b(2) of the
Exchange Act. Yes o No
x
As
of
October 31, 2007 there were 5,174,147 shares of common stock
outstanding.
Explanatory
Note
Bank
of
Marin Bancorp is the successor registrant to Bank of Marin pursuant to an 8-K
filed with the SEC on June 29, 2007.
On
July
1, 2007 (the “Effective Date”), a bank holding company reorganization was
completed whereby Bank of Marin Bancorp became the parent holding company for
Bank of Marin. On the Effective Date, each outstanding share of Bank
of Marin common stock was converted into one share of Bank of Marin Bancorp
common stock and Bank of Marin became a wholly-owned subsidiary of the holding
company. Bancorp assumed the ticker symbol BMRC, which was formerly
used by Bank of Marin. Prior to the Effective Date, Bank of Marin filed reports
and proxy statements with the Federal Deposit Insurance Corporation (“FDIC”)
pursuant to Sections 12 of the Securities Exchange Act of 1934 (the “’34
Act”).
The
financial statements and discussion thereof contained in this report for periods
subsequent to the reorganization relate to consolidated Bank of Marin
Bancorp. Periods prior to the reorganization relate to Bank of Marin
only. The information is comparable as the sole subsidiary of Bank of
Marin Bancorp is the Bank of Marin.
This
report refers to previous filings made by Bank of Marin with the FDIC pursuant
to the ’34 Act. Copies of these filing are available by
requesting them in writing or by phone from:
Corporate
Secretary
Bank
of
Marin
504
Redwood Blvd., Suite 100
Novato,
CA 94947
415-763-4523
Copies
of
such filings are also available on Bancorp’s website at www.bankofmarin.com.
This website address is for information only and is not intended to be an active
link, or to incorporate any website information into this document.
Bank
of Marin Bancorp
PART I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
|
|
4
|
|
|
5
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
|
Item
2 |
|
18
|
|
|
|
Item
3
|
|
32
|
|
|
|
Item
4
|
|
32
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1
|
|
33
|
|
|
|
Item
1A
|
|
33
|
|
|
|
Item
2
|
|
33
|
|
|
|
Item
3
|
|
34
|
|
|
|
Item
4
|
|
34
|
|
|
|
Item
5
|
|
34
|
|
|
|
Item
6
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
Bank
of Marin Bancorp
CONDENSED
CONSOLIDATED STATEMENT OF
CONDITION
|
|
at
September 30, 2007 and December 31, 2006
|
|
|
|
|
|
|
|
|
(in
thousands, except share data - 2007 unaudited)
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
25,245
|
|
|
$ |
37,283
|
|
Fed
funds sold
|
|
|
70,200
|
|
|
|
1,500
|
|
Other
short-term investments
|
|
|
15,000
|
|
|
|
---
|
|
Cash
and cash equivalents
|
|
|
110,445
|
|
|
|
38,783
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Held
to maturity, at amortized cost
|
|
|
13,544
|
|
|
|
14,159
|
|
Available
for sale (at fair market value, amortized cost $85,591 at 9/30/07
and
$76,231 at 12/31/06)
|
|
|
85,076
|
|
|
|
75,214
|
|
Total
investment securities
|
|
|
98,620
|
|
|
|
89,373
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of allowance for loan losses of $7,227 at
9/30/07 and $8,023 at 12/31/06
|
|
|
678,748
|
|
|
|
711,755
|
|
Bank
premises and equipment, net
|
|
|
8,019
|
|
|
|
8,446
|
|
Interest
receivable and other assets
|
|
|
28,212
|
|
|
|
28,221
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
924,044
|
|
|
$ |
876,578
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
201,896
|
|
|
$ |
206,201
|
|
Interest
bearing
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
|
78,782
|
|
|
|
75,993
|
|
Savings
and money market
|
|
|
446,865
|
|
|
|
365,850
|
|
Time
|
|
|
81,871
|
|
|
|
88,653
|
|
Total
deposits
|
|
|
809,414
|
|
|
|
736,697
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased and Federal Home Loan Bank borrowings
|
|
|
15,300
|
|
|
|
39,400
|
|
Subordinated
debenture
|
|
|
5,000
|
|
|
|
5,000
|
|
Interest
payable and other liabilities
|
|
|
7,755
|
|
|
|
5,956
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
837,469
|
|
|
|
787,053
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock, no par value
|
|
|
|
|
|
|
|
|
Authorized
- 15,000,000 shares
|
|
|
|
|
|
|
|
|
Issued
and outstanding - 5,174,147 shares at 9/30/07 and 5,366,416 at
12/31/06
|
|
|
52,476
|
|
|
|
61,355
|
|
Retained
earnings
|
|
|
34,397
|
|
|
|
28,760
|
|
Accumulated
other comprehensive loss, net
|
|
|
(298 |
) |
|
|
(590 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
86,575
|
|
|
|
89,525
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
924,044
|
|
|
$ |
876,578
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Bank
of Marin Bancorp
CONDENSED
CONSOLIDATED STATEMENT OF
OPERATIONS
|
|
for
the nine months ended September 30, 2007 and September 30,
2006
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data - unaudited)
|
|
September
30, 2007
|
|
|
September
30, 2006
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
Interest
and fees on loans held in portfolio
|
|
$ |
39,006
|
|
|
$ |
39,352
|
|
Interest
on auto loans held for sale
|
|
|
2,062
|
|
|
|
---
|
|
Interest
on investment securities
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
8
|
|
|
|
60
|
|
Securities
of U.S. Government agencies
|
|
|
2,714
|
|
|
|
2,741
|
|
Obligations
of state and political subdivisions (tax exempt)
|
|
|
358
|
|
|
|
435
|
|
Corporate
debt securities and other
|
|
|
329
|
|
|
|
215
|
|
Interest
on Federal funds sold and other short-term investments
|
|
|
1,664
|
|
|
|
218
|
|
Total
interest income
|
|
|
46,141
|
|
|
|
43,021
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Interest
on interest bearing transaction accounts
|
|
|
225
|
|
|
|
222
|
|
Interest
on savings and money market deposits
|
|
|
11,052
|
|
|
|
7,650
|
|
Interest
on time deposits
|
|
|
2,628
|
|
|
|
2,921
|
|
Interest
on borrowed funds
|
|
|
973
|
|
|
|
1,060
|
|
Total
interest expense
|
|
|
14,878
|
|
|
|
11,853
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
31,263
|
|
|
|
31,168
|
|
Provision
for loan losses
|
|
|
340
|
|
|
|
789
|
|
Net
interest income after provision for loan losses
|
|
|
30,923
|
|
|
|
30,379
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
894
|
|
|
|
757
|
|
Wealth
Management Services
|
|
|
904
|
|
|
|
794
|
|
Net
gain on indirect auto and Visa portfolios
|
|
|
1,097
|
|
|
|
---
|
|
Other
income
|
|
|
1,592
|
|
|
|
1,384
|
|
Total
non-interest income
|
|
|
4,487
|
|
|
|
2,935
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
12,064
|
|
|
|
11,756
|
|
Occupancy
and equipment
|
|
|
2,155
|
|
|
|
1,912
|
|
Depreciation
and amortization
|
|
|
929
|
|
|
|
704
|
|
Data
processing
|
|
|
1,254
|
|
|
|
1,139
|
|
Professional
services
|
|
|
1,239
|
|
|
|
873
|
|
Other
expense
|
|
|
3,004
|
|
|
|
3,036
|
|
Total
non-interest expense
|
|
|
20,645
|
|
|
|
19,420
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
14,765
|
|
|
|
13,894
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
5,699
|
|
|
|
5,238
|
|
Net
income
|
|
$ |
9,066
|
|
|
$ |
8,656
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.74
|
|
|
$ |
1.62
|
|
Diluted
|
|
$ |
1.70
|
|
|
$ |
1.55
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income per common
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,197
|
|
|
|
5,335
|
|
Diluted
|
|
|
5,347
|
|
|
|
5,602
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.38
|
|
|
$ |
0.34
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Bank
of Marin Bancorp
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
for
the three months ended September 30, 2007, June 30, 2007 and
September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share data - unaudited)
|
|
September 30, 2007
|
|
|
June 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans held in portfolio
|
|
$ |
13,283
|
|
|
$ |
13,027
|
|
|
$ |
13,618
|
|
Interest
on auto loans held for sale
|
|
|
---
|
|
|
|
954
|
|
|
|
---
|
|
Interest
on investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
---
|
|
|
|
---
|
|
|
|
17
|
|
Securities
of U.S. Government agencies
|
|
|
1,063
|
|
|
|
809
|
|
|
|
921
|
|
Obligations
of state and political subdivisions (tax exempt)
|
|
|
129
|
|
|
|
111
|
|
|
|
118
|
|
Corporate
debt securities and other
|
|
|
108
|
|
|
|
123
|
|
|
|
75
|
|
Interest
on Federal funds sold and other short-term investments
|
|
|
1,247
|
|
|
|
415
|
|
|
|
126
|
|
Total
interest income
|
|
|
15,830
|
|
|
|
15,439
|
|
|
|
14,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on interest bearing transaction accounts
|
|
|
74
|
|
|
|
74
|
|
|
|
70
|
|
Interest
on savings and money market deposits
|
|
|
3,882
|
|
|
|
3,778
|
|
|
|
3,151
|
|
Interest
on time deposits
|
|
|
877
|
|
|
|
882
|
|
|
|
976
|
|
Interest
on borrowed funds
|
|
|
209
|
|
|
|
227
|
|
|
|
260
|
|
Total
interest expense
|
|
|
5,042
|
|
|
|
4,961
|
|
|
|
4,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
10,788
|
|
|
|
10,478
|
|
|
|
10,418
|
|
Provision
for loan losses
|
|
|
200
|
|
|
|
75
|
|
|
|
287
|
|
Net
interest income after provision for loan losses
|
|
|
10,588
|
|
|
|
10,403
|
|
|
|
10,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
325
|
|
|
|
321
|
|
|
|
259
|
|
Wealth
Management Services
|
|
|
331
|
|
|
|
298
|
|
|
|
271
|
|
Net
gain on indirect auto and Visa portfolios
|
|
|
387
|
|
|
|
190
|
|
|
|
---
|
|
Other
income
|
|
|
543
|
|
|
|
584
|
|
|
|
466
|
|
Total
non-interest income
|
|
|
1,586
|
|
|
|
1,393
|
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
3,938
|
|
|
|
4,163
|
|
|
|
3,732
|
|
Occupancy
and equipment
|
|
|
716
|
|
|
|
729
|
|
|
|
741
|
|
Depreciation
and amortization
|
|
|
318
|
|
|
|
310
|
|
|
|
261
|
|
Data
processing
|
|
|
411
|
|
|
|
425
|
|
|
|
422
|
|
Professional
Services
|
|
|
536
|
|
|
|
384
|
|
|
|
343
|
|
Other
expense
|
|
|
1,007
|
|
|
|
1,019
|
|
|
|
1,086
|
|
Total
non-interest expense
|
|
|
6,926
|
|
|
|
7,030
|
|
|
|
6,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
5,248
|
|
|
|
4,766
|
|
|
|
4,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
2,059
|
|
|
|
1,863
|
|
|
|
1,437
|
|
Net
income
|
|
$ |
3,189
|
|
|
$ |
2,903
|
|
|
$ |
3,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.62
|
|
|
$ |
0.56
|
|
|
$ |
0.57
|
|
Diluted
|
|
$ |
0.60
|
|
|
$ |
0.54
|
|
|
$ |
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,172
|
|
|
|
5,187
|
|
|
|
5,430
|
|
Diluted
|
|
|
5,301
|
|
|
|
5,329
|
|
|
|
5,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.13
|
|
|
$ |
0.13
|
|
|
$ |
0.12
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Bank
of Marin Bancorp
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
|
|
for
the year ended December 31, 2006 and the nine months ended September
30,
2007
|
|
|
|
Common
Stock
|
|
|
Retained
|
|
|
Accumulated
Other
Comprehensive
Gain
(Loss),
|
|
|
|
|
(dollar
amounts in thousands - 2007 unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Net
of Taxes
|
|
|
Total
|
|
Balance
at December 31, 2005
|
|
|
4,960,248
|
|
|
$ |
50,957
|
|
|
$ |
28,030
|
|
|
$ |
(766 |
) |
|
$ |
78,221
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
|
---
|
|
|
|
11,883
|
|
|
|
---
|
|
|
|
11,883
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized loss on available for sale securities (net of
tax
liability of $128)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
176
|
|
|
|
176
|
|
Comprehensive
income
|
|
|
---
|
|
|
|
---
|
|
|
|
11,883
|
|
|
|
176
|
|
|
|
12,059
|
|
Stock
options exercised
|
|
|
258,207
|
|
|
|
3,307
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3,307
|
|
Tax
benefit from exercised stock options
|
|
|
---
|
|
|
|
1,394
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,394
|
|
Stock
repurchased, including commission costs
|
|
|
(115,625 |
) |
|
|
(3,968 |
) |
|
|
---
|
|
|
|
---
|
|
|
|
(3,968 |
) |
Stock-based
compensation
|
|
|
---
|
|
|
|
555
|
|
|
|
---
|
|
|
|
---
|
|
|
|
555
|
|
Stock
issued on 5% dividend declared on April 13
|
|
|
250,658
|
|
|
|
8,678
|
|
|
|
(8,705 |
) |
|
|
---
|
|
|
|
(27 |
) |
Cash
dividends paid
|
|
|
---
|
|
|
|
---
|
|
|
|
(2,448 |
) |
|
|
---
|
|
|
|
(2,448 |
) |
Stock
issued in payment of director fees
|
|
|
12,928
|
|
|
|
432
|
|
|
|
---
|
|
|
|
---
|
|
|
|
432
|
|
Balance
at December 31, 2006
|
|
|
5,366,416
|
|
|
$ |
61,355
|
|
|
$ |
28,760
|
|
|
$ |
(590 |
) |
|
$ |
89,525
|
|
Cumulative-effect
adjustment of adoption of SFAS No.159
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,452 |
) |
|
|
---
|
|
|
|
(1,452 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
---
|
|
|
|
---
|
|
|
|
9,066
|
|
|
|
---
|
|
|
|
9,066
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized loss on available for sale securities (net of
tax
liability of $211)
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
292
|
|
|
|
292
|
|
Comprehensive
income
|
|
|
---
|
|
|
|
---
|
|
|
|
9,066
|
|
|
|
292
|
|
|
|
9,358
|
|
Stock
options exercised
|
|
|
112,128
|
|
|
|
1,614
|
|
|
|
---
|
|
|
|
---
|
|
|
|
1,614
|
|
Tax
benefit from exercised stock options
|
|
|
---
|
|
|
|
728
|
|
|
|
---
|
|
|
|
---
|
|
|
|
728
|
|
Stock
repurchased, including commission costs
|
|
|
(314,091 |
) |
|
|
(11,931 |
) |
|
|
---
|
|
|
|
---
|
|
|
|
(11,931 |
) |
Stock
issued under employee stock purchase plan
|
|
|
104
|
|
|
|
3
|
|
|
|
---
|
|
|
|
---
|
|
|
|
3
|
|
Stock-based
compensation
|
|
|
---
|
|
|
|
379
|
|
|
|
|
|
|
|
|
|
|
|
379
|
|
Cash
dividends paid
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,977 |
) |
|
|
---
|
|
|
|
(1,977 |
) |
Stock
issued in payment of director fees
|
|
|
9,590
|
|
|
|
328
|
|
|
|
---
|
|
|
|
---
|
|
|
|
328
|
|
Balance
at September 30, 2007
|
|
|
5,174,147
|
|
|
$ |
52,476
|
|
|
$ |
34,397
|
|
|
$ |
(298 |
) |
|
$ |
86,575
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Bank
of Marin Bancorp
CONDENSED
CONSOLIDATED STATEMENT OF CASH
FLOWS
|
|
for
the nine months ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
(in
thousands - unaudited)
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,066
|
|
|
$ |
8,656
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
340
|
|
|
|
789
|
|
Compensation
payable in common stock
|
|
|
193
|
|
|
|
353
|
|
Stock-based
compensation expense
|
|
|
379
|
|
|
|
428
|
|
Excess
tax benefits from exercised stock options
|
|
|
(534 |
) |
|
|
(1,137 |
) |
Amortization
and accretion of investment security premiums, net
|
|
|
142
|
|
|
|
448
|
|
Depreciation
and amortization
|
|
|
929
|
|
|
|
704
|
|
Net
gain on indirect auto and Visa portfolios
|
|
|
(1,097 |
) |
|
|
---
|
|
Gain
on sale of equipment
|
|
|
---
|
|
|
|
(8 |
) |
Net
change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
139
|
|
|
|
129
|
|
Interest
payable
|
|
|
125
|
|
|
|
181
|
|
Deferred
rent and other rent-related expenses
|
|
|
83
|
|
|
|
135
|
|
Other
assets
|
|
|
707
|
|
|
|
(2,408 |
) |
Other
liabilities
|
|
|
2,454
|
|
|
|
826
|
|
Total
adjustments
|
|
|
3,860
|
|
|
|
440
|
|
Net
cash provided by operating activities
|
|
|
12,926
|
|
|
|
9,096
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of securities held-to-maturity
|
|
|
(2,056 |
) |
|
|
(1,087 |
) |
Purchase
of securities available-for-sale
|
|
|
(24,445 |
) |
|
|
(7,976 |
) |
Proceeds
from paydowns/maturity of:
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity
|
|
|
2,590
|
|
|
|
6,570
|
|
Securities
available-for-sale
|
|
|
15,024
|
|
|
|
11,708
|
|
Proceeds
from sale of indirect auto and Visa loans
|
|
|
78,599
|
|
|
|
---
|
|
Loans
originated and principal collected, net
|
|
|
(47,334 |
) |
|
|
(26,364 |
) |
Purchase
of bank owned life insurance policies
|
|
|
---
|
|
|
|
(1,159 |
) |
Proceeds
from disposition of assets
|
|
|
---
|
|
|
|
12
|
|
Additions
to premises and equipment
|
|
|
(502 |
) |
|
|
(2,265 |
) |
Net
cash provided by (used in) investing activities
|
|
|
21,876
|
|
|
|
(20,561 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
72,717
|
|
|
|
21,046
|
|
Proceeds
from stock options exercised
|
|
|
1,614
|
|
|
|
2,964
|
|
Net
decrease in Federal Funds purchased and Federal Home Loan Bank
borrowings
|
|
|
(24,100 |
) |
|
|
(800 |
) |
Common
stock repurchased
|
|
|
(11,931 |
) |
|
|
---
|
|
Dividends
paid in cash
|
|
|
(1,977 |
) |
|
|
(1,796 |
) |
Stock
issued under employee stock purchase plan
|
|
|
3
|
|
|
|
---
|
|
Cash
paid for fractional shares
|
|
|
---
|
|
|
|
(27 |
) |
Excess
tax benefits from exercised stock options
|
|
|
534
|
|
|
|
1,137
|
|
Net
cash provided by financing activities
|
|
|
36,860
|
|
|
|
22,524
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
71,662
|
|
|
|
11,059
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
38,783
|
|
|
|
22,262
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
110,445
|
|
|
$ |
33,321
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
14,751
|
|
|
$ |
12,477
|
|
Cash
paid for income taxes
|
|
$ |
2,418
|
|
|
$ |
4,145
|
|
Non-Cash
Transactions: The nine months ended September 30, 2007 reflected a
cumulative-effect adjustment of the adoption of SFAS No. 159, which included
non-cash decreases to net loans of $2.5 million and retained earnings of $1.5
million, and a non-cash increase to other assets of $1.0 million. The nine
months ended September 30, 2006 included non-cash increases to both fixed assets
and other liabilities representing tenant improvements paid for by the landlord
for the Bank's administrative facility totaling $617 thousand. This amount
is
amortized over the fifteen-year term of the lease.
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Bank
of Marin Bancorp
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note
1: Basis of Presentation
On
July
1, 2007 (the “Effective Date”), a bank holding company reorganization was
completed whereby Bank of Marin Bancorp (Bancorp) became the parent holding
company for Bank of Marin ( the “Bank”). On the Effective Date, each
outstanding share of the Bank was converted into one share of Bank of Marin
Bancorp and the Bank became a wholly-owned subsidiary of the holding company.
The information contained in the financial statements and accompanying footnotes
for periods subsequent to the reorganization relate to consolidated Bank of
Marin Bancorp. Periods prior to the reorganization relate to Bank of Marin
only.
The information is comparable for all periods as the sole subsidiary of Bancorp
is the Bank.
The
condensed consolidated financial statements include the accounts of Bancorp
and
its wholly-owned bank subsidiary. All material intercompany transactions have
been eliminated. In the opinion of Management, the unaudited interim
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations, changes in stockholders'
equity and cash flows. All adjustments are of a normal, recurring
nature.
Effective
January 1, 2007, the Bank elected early adoption of SFAS No.159, The Fair
Value Option for Financial Assets and Financial Liabilities and SFAS No.
157, Fair Value Measurements. SFAS No. 159 generally permits the
measurement of selected eligible financial instruments at fair value at
specified election dates. Upon adoption of SFAS No. 159, the Bank selected
the
fair value option for its auto loan portfolio, which was subsequently sold
on
June 5, 2007. For further information on the financial effect of SFAS Nos.
159
and 157 see Notes 2 and 3 below.
Certain
information and footnote disclosures presented in the annual financial
statements are not included in the interim consolidated financial
statements. Accordingly, the accompanying unaudited interim condensed
consolidated financial statements should be read in conjunction with the Bank's
2006 Annual Report to Stockholders, which is incorporated by reference in the
Bank's 2006 Annual Report on Form 10-K. The results of operations for
the nine months ended September 30, 2007 are not necessarily indicative of
the
operating results for the full year.
The
following table shows weighted average basic shares, potential common shares
related to stock options, and weighted average diluted shares used in
calculating earnings per share. Basic earnings per share are based
upon the weighted average number of common shares outstanding during each
period. Diluted earnings per share are based upon the weighted
average number of common shares and potential common shares outstanding during
each period.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
(in
thousands)
|
|
Sept.
30, 2007
|
|
|
June
30, 2007
|
|
|
Sept.
30, 2006
|
|
|
Sept.
30, 2007
|
|
|
Sept.
30, 2006
|
|
Weighted
average basic shares outstanding
|
|
|
5,172
|
|
|
|
5,187
|
|
|
|
5,430
|
|
|
|
5,197
|
|
|
|
5,335
|
|
Add:
Potential common shares related to stock options
|
|
|
129
|
|
|
|
142
|
|
|
|
200
|
|
|
|
150
|
|
|
|
267
|
|
Weighted
average diluted shares outstanding
|
|
|
5,301
|
|
|
|
5,329
|
|
|
|
5,630
|
|
|
|
5,347
|
|
|
|
5,602
|
|
Anti-dilutive
shares not included in the calculation of diluted earnings per
share
|
|
|
187
|
|
|
|
67
|
|
|
|
150
|
|
|
|
60
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,189
|
|
|
$ |
2,903
|
|
|
$ |
3,105
|
|
|
$ |
9,066
|
|
|
$ |
8,656
|
|
Earnings
per share (basic)
|
|
$ |
0.62
|
|
|
$ |
0.56
|
|
|
$ |
0.57
|
|
|
$ |
1.74
|
|
|
$ |
1.62
|
|
Earnings
per share (diluted)
|
|
$ |
0.60
|
|
|
$ |
0.54
|
|
|
$ |
0.55
|
|
|
$ |
1.70
|
|
|
$ |
1.55
|
|
Note
2: Recently Issued Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, which clarifies the definition
of
fair value, describes methods used to appropriately measure fair value in
accordance with generally accepted accounting principles and expands fair value
disclosure requirements. This statement applies whenever other
accounting pronouncements require or permit fair value measurements and is
effective for fiscal years beginning after November 15, 2007, with early
adoption allowed effective January 1, 2007 in conjunction with the early
adoption of SFAS No. 159. The adoption of SFAS No. 157 effective January 1,
2007
did not impact financial position or results of operations.
On
February 15, 2007, the FASB released SFAS No. 159, which permits entities to
choose to measure eligible financial instruments at fair value at specified
election dates. Under SFAS No. 159 an entity records unrealized gains and losses
in earnings on items for which the fair value option has been elected at each
subsequent reporting date. The objective is to mitigate volatility in
reported earnings without having to apply complex hedge accounting provisions.
The provisions of SFAS No. 159 are effective for fiscal years ending on or
after
November 15, 2007, with early adoption allowed effective January 1,
2007.
Bank
of Marin Bancorp
Effective
January 1, 2007, the Bank elected early adoption of SFAS No. 159. Upon adoption,
the Bank selected the fair value option for its auto loan portfolio, which
was
subsequently sold on June 5, 2007. For further information on the financial
effect of SFAS No. 159 see Note 3 below.
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109,”
which clarifies the accounting for uncertainty in income taxes recognized in
an
enterprise’s financial statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.” FIN 48 establishes a
“more-likely-than-not” recognition threshold that must be met before a tax
benefit can be recognized in the financial statements. For tax positions that
meet the more-likely-than-not threshold, an enterprise may recognize only the
largest amount of tax benefit that is greater than fifty percent likely of
being
realized upon ultimate settlement with the taxing authority. The cumulative
effect of applying the provisions of FIN 48 would be recognized as an adjustment
to the beginning balance of retained earnings. FIN 48 was adopted January 1,
2007 and has not had a material impact on financial condition or results of
operations.
In
September 2006, the Emerging Issues Task Force (EITF) reached a final consensus
on Issue No. 064-4 (EITF 06-4), “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” EITF 06-4 requires employers to recognize a liability for
future benefits provided through endorsement split-dollar life insurance
arrangements that extend into postretirement periods in accordance with SFAS
No.
106, Employers’ Accounting for Postretirement Benefits Other Than Pensions
or APB Opinion No. 12, Omnibus Opinion-1967. The
provisions of EITF 06-4 become effective on January 1, 2008 and are to be
applied as a change in accounting principle either through a cumulative-effect
adjustment to retained earnings or other components of equity or net assets
in
the statement of financial position as of the beginning of the year of adoption,
or through retrospective application to all prior periods. The Bank’s
split-dollar life insurance benefits are limited to the employee’s active
service period. Therefore it is expected that EITF 06-4 will have no
impact on financial condition or results of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and OtherPostretirement Plans, an amendment of
FASB Statements Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires
employers to recognize the underfunded or overfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in the funded status in the year in which
the
changes occur through accumulated other comprehensive
income. Additionally, SFAS No. 158 requires employers to measure the
funded status of a plan as of the date of its year-end statement of financial
position. The new reporting requirements and related new footnote
disclosure rules of SFAS No. 158 are effective for fiscal years ending after
December 15, 2006. The new measurement date requirement applies for
fiscal years ending after December 15, 2008. As the Bank has no pension or
other
post-retirement benefit plans, it is expected that SFAS No. 158 will have no
impact on financial condition or results of operations.
Note
3: Fair Value Measurement
Effective
January 1, 2007, the Bank adopted SFAS 157, Fair Value Measurements,
concurrent with its early adoption of SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities. SFAS No. 157
clarifies the definition of fair value, describes methods used to appropriately
measure fair value in accordance with generally accepted accounting principles
and expands fair value disclosure requirements. This statement applies whenever
other accounting pronouncements require or permit fair value measurements.
SFAS
No. 159 generally permits the measurement of selected eligible financial
instruments at fair value on specified election dates.
Bank
of Marin Bancorp
The
Bank
performs fair-market valuations on certain assets as a result of the application
of accounting guidelines that were in effect prior to the adoption of SFAS
No.
157. In addition, in conjunction with the Bank’s decision to sell its auto
portfolio, on January 1, 2007 the Bank elected the fair value measurement option
for its indirect auto loan portfolio under the early adoption provisions of
SFAS
No. 159. The sale of the indirect auto portfolio was concluded on June 5, 2007.
The following table summarizes the Bank’s financial instruments that were
measured at fair value on a recurring basis at September 30, 2007.
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
of Financial Instruments
|
|
Sept.
30, 2007
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$ |
85,076
|
|
|
$ |
85,076
|
|
|
$ |
---
|
|
|
$ |
---
|
|
Derivative
financial instruments (assets)
|
|
|
174
|
|
|
|
---
|
|
|
|
174
|
|
|
|
---
|
|
Total
assets
|
|
$ |
85,250
|
|
|
$ |
85,076
|
|
|
$ |
174
|
|
|
$ |
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments (liabilities)
|
|
$ |
265
|
|
|
$ |
---
|
|
|
$ |
265
|
|
|
$ |
---
|
|
Securities
available for sale are valued based upon open-market quotes obtained from
reputable third-party brokers. Market pricing is based upon specific CUSIP
identification for each individual security. Changes in fair market value are
recorded in other comprehensive income.
The
fair
value of derivative financial instruments is based on the present value of
future expected cash flows. The variable rates and discount rates are
derived from LIBOR cash and swap rates. LIBOR, rather than risk free
rates, are used to adjust for the inherent credit risk associated with high
quality counterparties. The fair value of derivative financial instruments
is
provided by a third party. Changes in fair market value are recorded in other
non-interest income for fair value hedges using short-cut hedge accounting
treatment and are recorded in interest income for fair value hedges not
qualifying for short-cut hedge accounting treatment.
The
following table presents a computation of the net change to retained earnings
at
the initial adoption of SFAS No. 159 for the Bank’s auto loan
portfolio.
|
|
January 1, 2007
|
|
|
Net Gain (Loss)
|
|
|
|
January 1, 2007
|
|
(Dollars
in thousands)
|
|
Prior to Adoption
|
|
|
Upon Adoption
|
|
|
|
After Adoption
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Auto
loans, net
|
|
$ |
83,327
|
|
|
$ |
(2,499 |
) |
(a)
|
|
$ |
80,828
|
|
Pre-tax
cumulative effect of adoption of the fair value option
|
|
|
|
|
|
|
(2,499 |
) |
|
|
|
|
|
Increase
in deferred tax asset
|
|
|
|
|
|
|
1,047
|
|
|
|
|
|
|
Cumulative
effect of adoption of the fair value option (charged
to retained earnings)
|
|
|
|
|
|
$ |
(1,452 |
) |
|
|
|
|
|
(a)
The
$2.5 million loss on loans that was recorded as part of the cumulative-effect
adjustment to retained earnings upon initial adoption of SFAS No. 159 is net
of
$1.0 million that was removed from the allowance for loan losses.
Pre-tax
non-recurring net gains of $190 thousand and $520 thousand were recorded in
the
second and first quarters of 2007, respectively. The gain on the indirect auto
portfolio in the first quarter of 2007 represents the change in fair value
of
the portfolio during the period. The portion of this change attributable to
changes in credit risk is not significant. The fair values at January 1, 2007
and at March 31, 2007 were calculated by a professional valuation firm using
fair value hierarchy level two, “Significant Observable Inputs,” based on the
weighted averages for the following criteria: original term of the underlying
loans, remaining term, interest rate, FICO credit score and vehicle year. Also
included was the vehicle mix (new/used). Cash flows for the remaining term
of
the loans were discounted using Treasury rates plus a spread above the Treasury
rates that was applied based upon recent sales of similar assets. The gain
in
the second quarter of 2007 represents the pre-tax gain on sale based on actual
proceeds net of selling expenses.
Bank
of Marin Bancorp
Note
4: Allowance for Loan Losses and Non Accrual
Loans
The
allowance for loan losses is maintained at levels considered adequate by
management to provide for probable loan losses inherent in the portfolio. The
allowance is based on management's assessment of various factors affecting
the
loan portfolio, including problem loans, economic conditions and loan loss
experience, and an overall evaluation of the quality of the underlying
collateral.
Activity
in the allowance for loan losses follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
(in
thousands - unaudited)
|
|
Sept. 30, 2007
|
|
|
June 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
Beginning
balance
|
|
$ |
7,053
|
|
|
$ |
7,042
|
|
|
$ |
7,519
|
|
|
$ |
8,023
|
|
|
$ |
7,115
|
|
Cumulative-effect
adjustment of adoption of SFAS No. 159
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
(1,048 |
) |
|
|
---
|
|
Provision
for loan loss charged to expense
|
|
|
200
|
|
|
|
75
|
|
|
|
287
|
|
|
|
340
|
|
|
|
789
|
|
Loans
charged off
|
|
|
(33 |
) |
|
|
(77 |
) |
|
|
(150 |
) |
|
|
(111 |
) |
|
|
(316 |
) |
Loan
loss recoveries
|
|
|
7
|
|
|
|
13
|
|
|
|
74
|
|
|
|
23
|
|
|
|
142
|
|
Ending
balance
|
|
$ |
7,227
|
|
|
$ |
7,053
|
|
|
$ |
7,730
|
|
|
$ |
7,227
|
|
|
$ |
7,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans held in portfolio at end of period, before deducting allowance
for
loan losses
|
|
$ |
685,975
|
|
|
$ |
653,924
|
|
|
$ |
712,851
|
|
|
$ |
685,975
|
|
|
$ |
712,851
|
|
Ratio
of allowance for loan losses to loans held in portfolio
|
|
|
1.05 |
% |
|
|
1.08 |
% |
|
|
1.08 |
% |
|
|
1.05 |
% |
|
|
1.08 |
% |
Nonaccrual
loans at period end
|
|
$ |
150
|
|
|
$ |
5
|
|
|
$ |
4,374
|
|
|
$ |
150
|
|
|
$ |
4,374
|
|
At
December 31, 2006, non-accrual loans totaled $49 thousand. At
September 30, 2006, non-accrual loans totaled $4.4 million, including one
commercial loan for $2.3 million which was sold in the fourth quarter of 2006,
and one commercial real estate loan for $2.0 million for which the principal
and
related interest were fully paid in the fourth quarter of 2006.
The
gross
interest income that would have been recorded, had non-accrual loans been
current, totaled $3 thousand for the third quarter of 2007. The amount was
less
than $1 thousand for the second quarter of 2007, and totaled $116 thousand
for
the third quarter of 2006. The uncollected interest income was $8 thousand
for
the nine months ended September 30, 2007 and $261 thousand for the nine months
ended September 30, 2006.
Note
5: Stockholders’ Equity
On
the
Effective Date, the bank holding company reorganization was completed and the
Bank repurchased a total of 24,399 common shares of the Bank for $876 thousand
from six shareholders who dissented to the exchange of these shares for Bancorp
common stock.
Upon
the
adoption of SFAS No. 159 for its indirect auto loan portfolio, the Bank recorded
a cumulative-effect adjustment as a charge to retained earnings totaling $1.5
million effective January 1, 2007. See Note3.
In
October 2006, the Bank received approval from the California Department of
Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC) to buy back up to 10%, or up to 545,884 of the Bank’s 5,458,838
then-outstanding shares, not to exceed $15 million. The repurchase
program allowed the Bank to purchase common shares for a period of twelve months
from the approval date in the open market or in privately negotiated
transactions. In 2006, the Bank purchased 115,625 shares at prices ranging
from
$32.43 to $36.25 for a total cost of $4.0 million. In the first
quarter of 2007, the Bank purchased an additional 289,692 shares at prices
ranging from $36.05 to $39.10 for a total cost of $11.1 million, thereby
completing the share repurchase under the approved program. The Bank
executed these transactions pursuant to the Securities and Exchange Commission’s
Rule 10b-18. All shares repurchased were made in open market
transactions and were part of the publicly announced repurchase
program.
Bank
of Marin Bancorp
A
summary
of cash dividends paid to shareholders, which are recorded as a reduction of
retained earnings, is presented below.
|
|
Three months ended
|
|
|
Nine months ended
|
|
(in
thousands except per share data - unaudited)
|
|
Sept. 30, 2007
|
|
|
June 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
Cash
dividends
|
|
$ |
672
|
|
|
$ |
680
|
|
|
$ |
655
|
|
|
$ |
1,977
|
|
|
$ |
1,796
|
|
Cash
dividends per share
|
|
$ |
0.13
|
|
|
$ |
0.13
|
|
|
$ |
0.12
|
|
|
$ |
0.38
|
|
|
$ |
0.34
|
|
Included
in cash dividends during the second quarter of 2007 is $5 thousand paid to
shareholders in connection with the redemption of all the preferred share
purchase rights issued pursuant to the Bank’s Rights Agreement of August 11,
2003. Each right entitled the registered holder to purchase from Bank one
one-hundredth of a share of Series A Junior Participating Preferred stock,
no
par value of Bank at a price of $125 per one one-hundredth of a preferred share,
subject to adjustments. The redemption, in anticipation of the formation of
a
bank holding company, was effective June 14, 2007 at a redemption price of
$0.001 per right. On that same day, Bank of Marin Bancorp’s Board of Directors
executed a Rights Agreement substantially similar to the Bank’s agreement and
has issued replacement rights to purchase shares of Bancorp under the new Rights
Agreement to shareholders of record as of July 23, 2007. The Bank of Marin
Bancorp Rights Agreement is designed to discourage takeovers that involve
abusive tactics or do not provide fair value to shareholders.
Under
SFAS No. 123R which was implemented in January 2006, the fair value of stock
options on the grant date is recorded as an expense on the income statement
over
the service period with a corresponding increase in common stock. In
addition, the Bank records tax benefits on the exercise of non-qualified stock
options and on the disqualifying disposition of incentive stock options, which
are accounted for as an addition to common stock with a corresponding decrease
in accrued taxes payable. See Note 6 for further information on accounting
for
stock options and share-based payments.
Stock-based
compensation also includes compensation expense related to the Employee Stock
Purchase Plan, which was implemented in the third quarter of 2007, whereby
employees may purchase common shares of Bancorp at a five percent
discount. The discount amount is recorded as an expense at the time
of the purchase, with a corresponding increase in common stock.
Stock-based
compensation and tax benefits on exercised options are shown below.
|
|
Three months ended
|
|
|
Nine months ended
|
|
(in
thousands - unaudited)
|
|
Sept. 30, 2007
|
|
|
June 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
Stock-based
compensation
|
|
$ |
124
|
|
|
$ |
133
|
|
|
$ |
145
|
|
|
$ |
379
|
|
|
$ |
428
|
|
Tax
benefits on exercised options
|
|
$ |
4
|
|
|
$ |
126
|
|
|
$ |
181
|
|
|
$ |
728
|
|
|
$ |
1,137
|
|
Note
6: Stock Option and Repurchase Plans
Effective
July 1, 2007, Bank of Marin Bancorp adopted an Employee Stock Purchase Plan
whereby employees of Bancorp and its subsidiary may purchase Bancorp common
shares through payroll deductions of between one percent and fifteen percent
of
pay in each pay period. Shares are purchased quarterly at a five
percent discount from the closing market price on the last day of the
quarter. The plan calls for 200,000 common shares to be set aside for
employee purchases.
On
January 1, 2006 the Bank adopted the provisions of Statement of Financial
Accounting Standard No. 123R (SFAS No. 123R), Share-Based Payment,
which requires that all share-based payments to employees, including
stock
options, be recognized as an expense in the income statement based on the grant
date fair value of the award with a corresponding increase in common
stock. The fair value, as defined in SFAS No. 123R, is amortized over
the implied service period, which is generally the vesting period.
As
of May
8, 2007, the 2007 Equity Plan was approved by shareholders. The 2007 Equity
Plan
was subsequently adopted by Bank of Marin Bancorp as part of the holding company
formation described in Note 1. Awards under the 2007 Equity Plan now
relate to shares of common stock of Bank of Marin Bancorp. All new stock-based
compensation awards from the approval date forward are granted through the
2007
Equity Plan.
The
2007
Equity plan provides financial incentives for selected employees, advisors
and
non-employee directors. Terms of the plan provide for the issuance of up to
500,000 shares of common stock for these employees, advisors and non-employee
directors. The Compensation Committee of the Board of Directors has the
authority in its discretion to determine those employees, advisors and
non-employee directors who will receive an award, the timing of awards, the
vesting schedule for each award, the type of award to be granted, the number
of
shares of Bancorp stock to be subject to each option and restricted stock award,
and all other terms and conditions of any award.
Bank
of Marin Bancorp
The
Bank
has two additional stock option plans, the 1999 Stock Option Plan and the 1989
Stock Option Plan for full-time, salaried officers and employees who have
substantial responsibility for the successful operation of the
Bank. Upon approval of the 1999 Stock Option Plan, no new awards were
granted under the 1989 Stock Option Plan. Upon approval of the 2007 Equity
Plan,
no new awards were granted under the 1999 Stock Option Plan.
Terms
of
the 1999 Stock Option Plan and the 1989 Stock Option Plan provided for the
issuance of up to 1,115,629 and 975,189 shares, respectively, of common stock
for these officers and employees. Terms of the 1999 Stock Option and the 1989
Stock Option plans also provided for the issuance of up to 190,965 and 192,113
shares, respectively, for non-employee directors.
Stock
options granted pursuant to the 1989 and 1999 Stock Option Plans were
subsequently adopted by Bank of Marin Bancorp as part of the holding company
formation described in Note 1. Stock options under these plans now
relate to shares of common stock of Bank of Marin Bancorp.
Options
are issued at the fair market value of the stock at the date of
grant. Options to officers and employees granted prior to January 1,
2006 vested 20% immediately and 20% on each anniversary of the grant for four
years. Options granted subsequent to January 1, 2006 vested 20% on each
anniversary of the grant for five years. All officer and employee
options expire ten years from the grant date. Options granted to non-employee
directors vest 20% immediately and 20% on each anniversary of the grant for
four
years. Director options expire seven years from the grant date.
A
summary
of activity for the Bank’s options for the first three quarters of 2007 is
presented below.
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
|
|
|
Weighted
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Number
of
|
|
|
Average
|
|
|
Value
|
|
|
Term
|
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
(in
thousands)
|
|
|
(in
years)
|
|
For
the quarter ending March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2006
|
|
|
546,265
|
|
|
$
|
20.69
|
|
|
|
---
|
|
|
|
---
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Cancelled/forfeited
|
|
|
(2,443 |
) |
|
|
28.60
|
|
|
|
---
|
|
|
|
---
|
|
Exercised
|
|
|
(83,582 |
) |
|
|
14.88
|
|
|
$
|
1,895
|
|
|
|
---
|
|
Options
outstanding at March 31, 2007
|
|
|
460,240
|
|
|
|
21.70
|
|
|
$
|
6,379
|
|
|
|
5.5
|
|
Exercisable
(vested) at March 31, 2007
|
|
|
308,035
|
|
|
$
|
16.93
|
|
|
$
|
5,739
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the quarter ending June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at March 31, 2007
|
|
|
460,240
|
|
|
$
|
21.70
|
|
|
|
---
|
|
|
|
---
|
|
Granted
|
|
|
54,551
|
|
|
|
34.87
|
|
|
|
---
|
|
|
|
---
|
|
Cancelled/forfeited
|
|
|
(1,442 |
) |
|
|
30.31
|
|
|
|
---
|
|
|
|
---
|
|
Exercised
|
|
|
(24,934 |
) |
|
|
12.65
|
|
|
$
|
572
|
|
|
|
---
|
|
Options
outstanding at June 30, 2007
|
|
|
488,415
|
|
|
|
23.61
|
|
|
$
|
4,415
|
|
|
|
6.0
|
|
Exercisable
(vested) at June 30, 2007
|
|
|
312,494
|
|
|
$
|
18.38
|
|
|
$
|
4,459
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the quarter ending September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at June 30, 2007
|
|
|
488,415
|
|
|
$
|
23.61
|
|
|
|
---
|
|
|
|
---
|
|
Granted
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Cancelled/forfeited
|
|
|
(2,460 |
) |
|
|
31.66
|
|
|
|
---
|
|
|
|
---
|
|
Exercised
|
|
|
(3,612 |
) |
|
|
15.19
|
|
|
$
|
60
|
|
|
|
---
|
|
Options
outstanding at September 30, 2007
|
|
|
482,343
|
|
|
|
|
|
|
$
|
4,429
|
|
|
|
5.7
|
|
Exercisable
(vested) at September 30, 2007
|
|
|
321,740
|
|
|
$
|
18.86
|
|
|
$
|
4,346
|
|
|
|
4.4
|
|
Bank
of Marin Bancorp
As
of
September 30, 2007 there was $1.1 million of total unrecognized compensation
related to non-vested stock options. This cost is expected to be
recognized over a weighted average period of approximately 15.1
months.
The
Bank
determines fair value at grant date using the Black-Scholes pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected dividend yield and the risk-free interest rate over the expected life
of the option. The Black-Scholes model requires the input of highly subjective
assumptions including the expected life of the stock-based award and stock
price
volatility. The estimates used in the model involve inherent
uncertainties and the application of management judgment. As a
result, if other assumptions had been used, the Bank’s recorded stock-based
compensation expense could have been materially different from that reflected
in
these financial statements. In addition, the Bank is required to
estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. If the Bank’s actual forfeiture rate is
materially different from the estimate, the share-based compensation expense
could be materially different.
Assumptions
used in the Bank’s pricing model are shown below.
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
Risk-free
interest rate
|
|
4.64%
|
|
|
5.06%
|
Expected
dividend yield
|
|
1.38%
|
|
|
1.37%
|
|
Expected
life in years
|
|
7
|
|
|
7
|
|
Expected
price volatility
|
|
12.30%
|
|
|
12.53%
|
|
Note
7: Financial Instruments with Off-Balance Sheet Risk
The
Bank
makes commitments to extend credit in the normal course of business to meet
the
financing needs of its customers. These financial instruments include
commitments to extend credit in the form of loans or through standby letters
of
credit. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements.
The
Bank
is exposed to credit loss in the contract amount of the commitment in the event
of non-performance by the borrower. The Bank uses the same credit policies
in
making commitments as it does for on-balance sheet instruments and evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and real
property.
The
contract amount of loan commitments not reflected on the statement of condition
was $225.8 million at September 30, 2007. This amount included $129.2
million under commercial lines of credit (these commitments are contingent
upon
customers maintaining specific credit standards), $59.4 million under revolving
home equity lines and $29.8 million under undisbursed construction
loans. The Bank has set aside an allowance for losses in the amount
of $452 thousand for these commitments, which is recorded in "interest payable
and other liabilities."
The
contract amount of loan commitments not reflected on the statement of condition
was $218.8 million at December 31, 2006. This amount included $106.4
million under commercial lines of credit, $58.9 million under revolving home
equity lines and $38.0 million under undisbursed construction
loans. As of December 31, 2006 the Bank had set aside an allowance
for loan losses of $438 thousand for these commitments.
Note
8: Derivative Financial Instruments and Hedging Activities
The
Bank
has entered into interest-rate swaps, primarily as an asset/liability management
strategy, in order to hedge the change in the fair value of both long-term
fixed-rate loans and firm commitments to enter into long-term fixed-rate loans
due to changes in interest rates. Such hedges allow the Bank to offer
long-term fixed rate loans to customers without assuming the interest rate
risk
of a long-term asset by swapping the Bank's fixed-rate interest stream for
a
floating-rate interest stream tied to one-month LIBOR. Such
modification of the interest characteristics of the loan protects the Bank
against an adverse effect on earnings and the net interest margin due to
fluctuating interest rates.
Bank
of Marin Bancorp
During
the third quarter of 2007, the Bank’s forward swap was designated to offset the
change in fair value of a loan originated during the period. The fair
value of the related yield maintenance agreement totaling $69 thousand at the
date of designation is being amortized to interest income using the effective
yield method over the life of the loan.
The
two
interest rate swaps held by the Bank are scheduled to mature in June of 2020
and
June of 2022. Information on the Bank’s hedges follows:
|
|
Fair
Value
|
|
|
Fair
Value
|
|
|
|
|
|
|
Swap
|
|
|
Swap
|
|
|
|
|
(in
thousands)
|
|
(Shortcut
Accounting Treatment)
|
|
|
(Non-shortcut
Accounting Treatment)
|
|
|
Yield Maintenance
Agreement
|
|
At
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
Notional
or contractual amount
|
|
$ |
7,289
|
|
|
$ |
8,300
|
|
|
$ |
---
|
|
Credit
risk amount (1)
|
|
|
174
|
|
|
|
---
|
|
|
|
---
|
|
Estimated
net fair value
|
|
|
174
|
|
|
|
(265 |
) |
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
or contractual amount
|
|
$ |
7,513
|
|
|
$ |
8,300
|
|
|
$ |
8,300
|
|
Credit
risk amount (1)
|
|
|
220
|
|
|
|
---
|
|
|
|
295
|
|
Estimated
net fair value
|
|
|
220
|
|
|
|
(295 |
) |
|
|
295
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
Sept. 30, 2007
|
|
|
June 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
Fair
Value Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
Weighted
average receive rate
|
|
|
5.47 |
% |
|
|
5.32 |
% |
|
|
5.35 |
% |
|
|
5.37 |
% |
|
|
4.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Non-Shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
5.54 |
% |
|
|
5.54 |
% |
|
|
5.54 |
% |
|
|
5.54 |
% |
|
|
5.54 |
% |
Weighted
average receive rate
|
|
|
5.44 |
% |
|
|
5.32 |
% |
|
|
5.35 |
% |
|
|
5.41 |
% |
|
|
4.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
maintenance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average receive rate (2)
|
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
gain on designated and undesignated interest rate
contracts
|
|
$ |
(500 |
) |
|
$ |
482
|
|
|
$ |
(630 |
) |
|
$ |
(16 |
) |
|
$ |
(201 |
) |
Increase
(decrease) in value of designated loans and yield maintenance agreement
qualifying as derivatives
|
|
|
491
|
|
|
|
(483 |
) |
|
|
630
|
|
|
|
6
|
|
|
|
201
|
|
Net
(loss) gain on derivatives used to hedge loans recorded in
income
|
|
$ |
(9 |
) |
|
$ |
(1 |
) |
|
$ |
---
|
|
|
$ |
(10 |
) |
|
$ |
---
|
|
1
|
Credit
risk represents the amount of unrealized gain included in derivative
assets which is subject to counterparty credit risk. It reflects
the
effect of master netting agreements and includes credit risk
on virtual derivatives.
|
2
|
Tax
equivalent yield equals 8.26%.
|
Ineffectiveness
of ($9) thousand and ($10) thousand was recorded in interest income during
the
three and nine months ended September
30, 2007. The full change in value of swaps was included in the
assessment of hedge effectiveness.
Bank
of Marin Bancorp
Note
9: Condensed Bank of Marin Bancorp Unconsolidated Financial
Statements
Presented
below is financial information for Bank of Marin Bancorp, holding company only,
subsequent to its formation on July 1, 2007. See Note 1.
CONDENSED
UNCONSOLIDATED STATEMENT OF CONDITION
|
|
at
September 30, 2007
|
|
|
|
|
|
(in
thousands - unaudited)
|
|
September
30, 2007
|
|
|
|
|
|
Assets
|
|
|
|
Cash
and due from Bank of Marin
|
|
$ |
1,091
|
|
Investment
in subsidiary
|
|
|
85,380
|
|
Other
assets
|
|
|
125
|
|
Total
assets
|
|
$ |
86,596
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
Accrued
expenses payable
|
|
$ |
20
|
|
Intercompany
payable
|
|
|
1
|
|
Total
liabilities
|
|
|
21
|
|
Stockholders'
equity
|
|
|
86,575
|
|
Total
liabilities and stockholders' equity
|
|
$ |
86,596
|
|
CONDENSED
UNCONSOLIDATED STATEMENT OF OPERATIONS
|
|
for
the three months ended September 30, 2007
|
|
|
|
|
|
(in
thousands - unaudited)
|
|
September
30, 2007
|
|
|
|
|
|
Income
|
|
|
|
Dividends
from bank subsidiary
|
|
$ |
2,000
|
|
Total
income
|
|
|
2,000
|
|
|
|
|
|
|
Expense
|
|
|
|
|
Non-interest
expense
|
|
|
228
|
|
Total
expense
|
|
|
228
|
|
|
|
|
|
|
Income
before income taxes and equity in undistributed net income of
subsidiary
|
|
|
1,772
|
|
Income
tax benefit
|
|
|
95
|
|
Income
before equity in undistributed net income of subsidiary
|
|
|
1,867
|
|
Equity
in undistributed net income of subsidiary
|
|
|
1,322
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,189
|
|
Bank
of Marin Bancorp
CONDENSED
UNCONSOLIDATED STATEMENT OF CASH FLOWS
|
|
for
three months ended September 30, 2007
|
|
|
|
|
|
(in
thousands - unaudited)
|
|
September
30, 2007
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
Net
income
|
|
$ |
3,189
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
Equity
in undistrubuted net income of subsidiary
|
|
|
(1,322 |
) |
Net
change in operating assets and liabilities
|
|
|
|
|
Other
assets
|
|
|
(125 |
) |
Other
liabilities
|
|
|
20
|
|
Intercompany
payable
|
|
|
1
|
|
Net
cash provided by operating activities
|
|
|
1,763
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
Capital
contribution to subsidiary
|
|
|
(55 |
) |
Net
cash used in investing activities
|
|
|
(55 |
) |
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
Stock
options exercised
|
|
|
55
|
|
Dividends
paid in cash
|
|
|
(672 |
) |
Net
cash used by financing activities
|
|
|
(617 |
) |
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
1,091
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
---
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
1,091
|
|
Non-Cash
Transactions: Upon formation of the holding company on July 1, 2007, Bank of
Marin Bancorp exchanged one share of common stock for each share of common
stock
of the Bank of Marin. The investment in subsidiary account was created to
reflect the total capital of the Bank of $84.2 million at that date, comprised
of $53.0 million of common stock, $31.9 million of retained earnings, and $762
thousand of other comprehensive loss. During the quarter, the investment in
subsidiary was adjusted to reflect $3.3 million in earnings of the subsidiary
as
well as other non-cash changes in subsidiary capital. These other non-cash
adjustments consisted of $556 thousand to common stock, and a $464 thousand
increase to other comprehensive loss.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In
the
following pages, Management discusses its analysis of the financial
condition and results of operations for the third quarter of 2007 compared
to
the third quarter of 2006 and to the prior quarter (second quarter of 2007),
as
well as the first nine months of 2007 compared to the same period in 2006.
This
discussion should be read in conjunction with the related financial statements
and with the audited financial statements and accompanying notes included in
the
Bank of Marin’s 2006 Annual Report to Stockholders. Average balances,
including balances used in calculating certain financial ratios, are generally
comprised of average daily balances.
Holding
Company
On
May 8,
2007 Bank of Marin shareholders approved the formation of a bank holding
company. On July 1, 2007, the holding company, Bank of Marin Bancorp,
acquired Bank of Marin as its wholly owned subsidiary. The holding company
is
expected to provide flexibility in meeting the financing needs of the Bank
and
in responding to evolving changes in the banking and financial services
industries. See Note 1.
Bank
of Marin Bancorp
The
financial statements and discussion thereof contained in this report for periods
subsequent to the reorganization relate to consolidated Bank of Marin
Bancorp. Periods prior to the reorganization relate to Bank of Marin
only. The information is comparable as the sole subsidiary of Bank of
Marin Bancorp is the Bank of Marin.
Forward-looking
Statements
The
discussion of financial results includes forward-looking statements within
the
meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933
Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the
"1934 Act"). Those sections of the 1933 Act and 1934 Act provide a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their financial performance so long as they
provide meaningful, cautionary statements identifying important factors that
could cause actual results to differ significantly from projected
results.
Forward-looking
statements include descriptions of plans or objectives of management for future
operations, products or services, and forecasts of revenues, earnings or other
measures of economic performance. Forward-looking statements can be
identified by the fact that they do not relate strictly to historical or current
facts. They often include the words "believe," "expect," "intend,"
"estimate," or words of similar meaning, or future or conditional verbs such
as
"will," "would," "should," "could," or "may."
Forward-looking
statements are based on management's current expectations regarding economic,
legislative, and regulatory issues that may impact Bancorp’s earnings in future
periods. A number of factors - many of which are beyond Bancorp’s
control - could cause future results to vary materially from current management
expectations. Such factors include, but are not limited to, general
economic conditions, changes in interest rates, deposit flows, real estate
values and competition; changes in accounting principles, policies or
guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory and technological factors affecting
Bancorp’s operations, pricing, products and services. These and other
important factors are detailed in various securities law filings made
periodically by Bancorp or the Bank, copies of which are available
from:
Corporate
Secretary
Bank
of
Marin
504
Redwood Blvd., Suite 100
Novato,
CA 94947
415-763-4523
Copies
of
such filings are also available on Bancorp’s website at
www.bankofmarin.com. This website address is for information only and
is not intended to be an active link, or to incorporate any website information
into this document. Forward-looking statements speak only as of the date they
are made. Bancorp does not undertake to update forward-looking
statements to reflect circumstance or events that occur after the date the
forward-looking statements are made or to reflect the occurrence of
unanticipated events.
Critical
Accounting Policies
Management
considers three accounting policies to be critical: the Allowance for Loan
Losses, Share-Based Payment and Fair Value Option for Financial Assets and
Liabilities. Refer to the Bank’s 2006 Annual Report to Shareholders on Form 10-K
pages 8 and 9 for a discussion of Allowance for Loan Losses and Share-Based
Payment.
Effective
January 1, 2007, Bank of Marin elected early adoption of SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities and SFAS
No. 157, Fair Value Measurements. SFAS No. 159 generally permits
measurement of selected eligible financial instruments at fair value at
specified election dates. Upon adoption of SFAS No. 159, the Bank selected
the
fair value option for its indirect auto loan portfolio. The changes in fair
value of the selected financial instruments after the initial adoption at each
balance sheet date were recorded through earnings prior to the sale of the
portfolio on June 5, 2007. The Bank determined fair value at January 1, 2007
and
March 31, 2007 based on certain criteria including weighted average interest
rate, remaining term and FICO credit score. The expected cash flows were
discounted using Treasury rates and a spread above the Treasury rate was applied
based on recent sales of similar assets. (See Note3.) The assumptions represent
management’s best estimates, but these estimates involve inherent uncertainties
and the application of management’s judgment. As a result, if other assumptions
had been used, the Bank’s recorded unrealized gain in the first quarter of 2007
could have been materially different from that reflected in these financial
statements.
Bank
of Marin Bancorp
As
a
result of the Bank’s fair value measurement election for the auto loan
portfolio, the Bank recorded a cumulative-effect adjustment of $1.5 million,
net
of tax, as a reduction of retained earnings as of January 1, 2007. In addition,
$190 thousand and $520 thousand of pre-tax net gains were recorded in the Bank’s
second and first quarter earnings, respectively (2 cents and 6 cents per diluted
share, respectively, on an after-tax basis), representing the change
in fair value of such instruments during those periods after giving effect
to
the cumulative-effect adjustment.
Executive
Summary
The
majority of Bancorp’s and the Bank’s assets and liabilities are
monetary. As a result, movement of interest rates plays a large part
in the risk to its earnings.
In
2006,
the Bank’s earnings were impacted by interest rate compression in which its
deposit rates rose rapidly while loan rates remained flat. The rise
in deposit rates stemmed primarily from local market competition while loan
rates reflected general economic conditions in which the interest yield curve
was flat. A more normal yield curve slopes upward giving a premium to
longer term assets, such as term loans.
As
part
of the strategy for maintaining an adequate interest rate spread, the Bank
sold
its $76 million indirect auto loan portfolio in the second quarter of
2007. Management believes the sale of the indirect auto portfolio
will improve the Bank’s net interest margin and provide a source of funding for
higher-yielding relationship loans. In the third quarter of 2007, the
Bank sold its $1.5 million Visa Portfolio, which allows the Bank to offer a
third-party product that will better meet customers’ needs. Management
continually reviews the asset composition of the Bank in order to maximize
earnings within acceptable risk parameters.
In
2007,
reduced local market competition for deposits, due in part to softening loan
demand, eased pressure on the Bank’s deposit rates. Additionally, the sale of
the auto and Visa portfolios provided liquidity which further eased pressure
on
deposit rates, favorably affecting the net interest margin. The
flattening of loan rates is expected to offset some of the improvement in net
interest margin attributable to lower deposit rates.
Members
of the Bank’s Asset/Liability Management Committee monitor economic trends but
cannot predict with certainty the movement of interest rates. The Committee
is
charged with developing interest rate strategies for various scenarios and
works
with management to implement the appropriate selection for the current economic
environment.
Bank
of
Marin Bancorp has not been materially affected by the recent turmoil in the
residential housing market. A relatively small portion of the loan
portfolio (6.0%) is comprised of residential loans, which primarily relate
to
“tenancy in common” loans made to highly qualified applicants at a maximum loan
to value of 80%. This product has shown resiliency in the recently volatile
residential housing market. An additional 4.8% of the loan portfolio
is comprised of home equity loans and lines of credit, at a maximum loan to
value of 80%, in which historical delinquencies have been minimal. Bancorp
does
not make sub-prime mortgage loans nor does it invest in mortgage-backed
securities collateralized by sub-prime loans. Credit quality remains very strong
with only $150 thousand in non-accrual loans at September 30, 2007.
Management
is constantly alert for opportunities to offset the impact of interest rate
compression on earnings including offering new fee income services and expansion
of the franchise. The decision to create a bank holding company was made in
order to provide additional flexibility in meeting financing needs, to
facilitate acquisition of other banks and move into other financial services.
In
May of 2007, a loan production office was opened in San Francisco to help drive
commercial loan and core deposit growth. In August 2007, an application was
made
with the FDIC and California Department of Financial Institutions to open a
new
branch office in Mill Valley, which will complement the existing branches in
Marin County.
Banking
is a highly regulated industry. Bank management continually monitors
its compliance with regulatory requirements including capital adequacy and
liquidity. Upon formation of the bank holding company, Bank of Marin
Bancorp became subject to regulation under the Bank Holding Company Act of
1956,
as amended (BHCA) which subjects Bancorp and the Bank to Federal Reserve Board
Reporting and examination requirements although the Bank is not a member of
the
Federal Reserve System. As a California state-chartered insured bank, the Bank
remains subject to regulation and periodic examination by the California
Department of Financial Institutions and the Federal Deposit Insurance
Corporation.
Bank
of Marin Bancorp
RESULTS
OF OPERATIONS
Overview
Highlights
of the financial results are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands except
per share data) |
|
Sept. 30, 2007
|
|
|
June 30, 2007
|
|
|
Sept. 30, 2006
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2006
|
|
For
the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,189
|
|
|
$ |
2,903
|
|
|
$ |
3,105
|
|
|
$ |
9,066
|
|
|
$ |
8,656
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.62
|
|
|
$ |
0.56
|
|
|
$ |
0.57
|
|
|
$ |
1.74
|
|
|
$ |
1.62
|
|
Diluted
|
|
$ |
0.60
|
|
|
$ |
0.54
|
|
|
$ |
0.55
|
|
|
$ |
1.70
|
|
|
$ |
1.55
|
|
Return
on average equity
|
|
|
14.83 |
% |
|
|
13.90 |
% |
|
|
13.98 |
% |
|
|
14.37 |
% |
|
|
13.74 |
% |
Return
on average assets
|
|
|
1.38 |
% |
|
|
1.32 |
% |
|
|
1.41 |
% |
|
|
1.36 |
% |
|
|
1.35 |
% |
Cash
dividend payout ratio
|
|
|
20.97 |
% |
|
|
23.21 |
% |
|
|
21.05 |
% |
|
|
21.84 |
% |
|
|
20.99 |
% |
Efficiency
ratio
|
|
|
55.97 |
% |
|
|
59.22 |
% |
|
|
57.69 |
% |
|
|
57.75 |
% |
|
|
56.95 |
% |
At
period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per share
|
|
$ |
16.73
|
|
|
$ |
16.21
|
|
|
$ |
16.51
|
|
|
$ |
16.73
|
|
|
$ |
16.51
|
|
Total
assets
|
|
$ |
924,044
|
|
|
$ |
890,377
|
|
|
$ |
873,237
|
|
|
$ |
924,044
|
|
|
$ |
873,237
|
|
Total
loans
|
|
$ |
685,975
|
|
|
$ |
653,924
|
|
|
$ |
712,851
|
|
|
$ |
685,975
|
|
|
$ |
712,851
|
|
Total
deposits
|
|
$ |
809,414
|
|
|
$ |
776,477
|
|
|
$ |
742,218
|
|
|
$ |
809,414
|
|
|
$ |
742,218
|
|
Loan-to-deposit
ratio
|
|
|
84.7 |
% |
|
|
84.2 |
% |
|
|
96.0 |
% |
|
|
84.7 |
% |
|
|
96.0 |
% |
Net
Interest Income
Net
interest income is the difference between the interest earned on loans,
investments and other interest-earning assets and the interest expense on
deposits and other interest-bearing liabilities. The table below indicates
net
interest income, net interest margin, and net interest rate spread for each
period presented. Net interest margin is expressed as net interest income
divided by average earning assets. Net interest rate spread is the difference
between the average rate earned on total interest-earning assets and the average
rate incurred on total interest-bearing liabilities. Both these measures are
reported on a taxable-equivalent basis. Net interest margin is the
higher of the two because it reflects interest income earned on assets funded
with non-interest bearing sources of funds, which include demand deposits and
stockholders’ equity.
Bank
of Marin Bancorp
Distribution
of Average Statements of Condition and Analysis of Net Interest
Income
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
September 30, 2007
|
|
|
June 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(dollars
in thousands)
|
|
Balance
|
|
|
Expense (1)
|
|
|
Rate (1)
|
|
|
Balance
|
|
|
Expense (1)
|
|
|
Rate (1)
|
|
|
Balance
|
|
|
Expense (1)
|
|
|
Rate (1)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and other short-term investments
|
|
$ |
94,220
|
|
|
$ |
1,247
|
|
|
|
5.25 |
% |
|
$ |
31,739
|
|
|
$ |
415
|
|
|
|
5.24 |
% |
|
$ |
9,603
|
|
|
$ |
126
|
|
|
|
5.24 |
% |
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
2,646
|
|
|
|
17
|
|
|
|
2.47 |
% |
U.S.
Government agencies
|
|
|
85,557
|
|
|
|
1,063
|
|
|
|
4.93 |
% |
|
|
68,916
|
|
|
|
809
|
|
|
|
4.71 |
% |
|
|
84,437
|
|
|
|
921
|
|
|
|
4.33 |
% |
Other
|
|
|
7,164
|
|
|
|
108
|
|
|
|
5.91 |
% |
|
|
7,567
|
|
|
|
123
|
|
|
|
6.56 |
% |
|
|
6,113
|
|
|
|
75
|
|
|
|
4.87 |
% |
Municipal
bonds
|
|
|
13,909
|
|
|
|
172
|
|
|
|
4.90 |
% |
|
|
12,201
|
|
|
|
148
|
|
|
|
4.84 |
% |
|
|
13,049
|
|
|
|
158
|
|
|
|
4.82 |
% |
Loans
and banker's acceptances (2)
|
|
|
668,636
|
|
|
|
13,283
|
|
|
|
7.88 |
% |
|
|
711,502
|
|
|
|
13,981
|
|
|
|
7.88 |
% |
|
|
706,994
|
|
|
|
13,618
|
|
|
|
7.64 |
% |
Total
interest-earning assets
|
|
|
869,486
|
|
|
|
15,873
|
|
|
|
7.24 |
% |
|
|
831,925
|
|
|
|
15,476
|
|
|
|
7.46 |
% |
|
|
822,842
|
|
|
|
14,915
|
|
|
|
7.19 |
% |
Cash
and due from banks
|
|
|
22,847
|
|
|
|
|
|
|
|
|
|
|
|
25,078
|
|
|
|
|
|
|
|
|
|
|
|
29,741
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment, net
|
|
|
8,132
|
|
|
|
|
|
|
|
|
|
|
|
8,303
|
|
|
|
|
|
|
|
|
|
|
|
6,907
|
|
|
|
|
|
|
|
|
|
Interest
receivable and other assets, net
|
|
|
15,397
|
|
|
|
|
|
|
|
|
|
|
|
16,564
|
|
|
|
|
|
|
|
|
|
|
|
13,481
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
915,862
|
|
|
|
|
|
|
|
|
|
|
$ |
881,870
|
|
|
|
|
|
|
|
|
|
|
$ |
872,971
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
$ |
76,189
|
|
|
$ |
74
|
|
|
|
0.38 |
% |
|
$ |
76,969
|
|
|
$ |
74
|
|
|
|
0.39 |
% |
|
$ |
72,099
|
|
|
$ |
70
|
|
|
|
0.39 |
% |
Savings
and money market accounts
|
|
|
440,131
|
|
|
|
3,882
|
|
|
|
3.50 |
% |
|
|
405,754
|
|
|
|
3,778
|
|
|
|
3.73 |
% |
|
|
377,735
|
|
|
|
3,151
|
|
|
|
3.31 |
% |
Time
accounts
|
|
|
85,770
|
|
|
|
877
|
|
|
|
4.05 |
% |
|
|
87,123
|
|
|
|
882
|
|
|
|
4.06 |
% |
|
|
102,896
|
|
|
|
976
|
|
|
|
3.77 |
% |
Purchased
funds
|
|
|
10,246
|
|
|
|
107
|
|
|
|
4.15 |
% |
|
|
11,603
|
|
|
|
126
|
|
|
|
4.35 |
% |
|
|
13,786
|
|
|
|
158
|
|
|
|
4.55 |
% |
Borrowed
funds
|
|
|
5,000
|
|
|
|
102
|
|
|
|
8.19 |
% |
|
|
5,000
|
|
|
|
101
|
|
|
|
8.04 |
% |
|
|
5,000
|
|
|
|
102
|
|
|
|
8.17 |
% |
Total
interest-bearing liabilities
|
|
|
617,336
|
|
|
|
5,042
|
|
|
|
3.24 |
% |
|
|
586,449
|
|
|
|
4,961
|
|
|
|
3.39 |
% |
|
|
571,516
|
|
|
|
4,457
|
|
|
|
3.09 |
% |
Demand
accounts
|
|
|
206,579
|
|
|
|
|
|
|
|
|
|
|
|
205,394
|
|
|
|
|
|
|
|
|
|
|
|
207,983
|
|
|
|
|
|
|
|
|
|
Interest
payable and other liabilities
|
|
|
6,597
|
|
|
|
|
|
|
|
|
|
|
|
6,263
|
|
|
|
|
|
|
|
|
|
|
|
5,360
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
85,350
|
|
|
|
|
|
|
|
|
|
|
|
83,764
|
|
|
|
|
|
|
|
|
|
|
|
88,112
|
|
|
|
|
|
|
|
|
|
Total
liabilities & stockholders' equity
|
|
$ |
915,862
|
|
|
|
|
|
|
|
|
|
|
$ |
881,870
|
|
|
|
|
|
|
|
|
|
|
$ |
872,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
10,831
|
|
|
|
|
|
|
|
|
|
|
$ |
10,515
|
|
|
|
|
|
|
|
|
|
|
$ |
10,458
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.94 |
% |
|
|
|
|
|
|
|
|
|
|
5.07 |
% |
|
|
|
|
|
|
|
|
|
|
5.04 |
% |
Net
interest rate spread
|
|
|
|
|
|
|
|
|
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
4.10 |
% |
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(dollars
in thousands)
|
|
Balance
|
|
|
Expense (1)
|
|
|
Rate (1)
|
|
|
Balance
|
|
|
Expense (1)
|
|
|
Rate (1)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold and other short-term investments
|
|
$ |
42,372
|
|
|
$ |
1,664
|
|
|
|
5.25 |
% |
|
$ |
5,839
|
|
|
$ |
218
|
|
|
|
5.00 |
% |
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
|
423
|
|
|
|
8
|
|
|
|
2.42 |
% |
|
|
3,274
|
|
|
|
60
|
|
|
|
2.45 |
% |
U.S.
Government agencies
|
|
|
74,509
|
|
|
|
2,714
|
|
|
|
4.87 |
% |
|
|
85,094
|
|
|
|
2,741
|
|
|
|
4.31 |
% |
Other
|
|
|
7,571
|
|
|
|
329
|
|
|
|
5.80 |
% |
|
|
6,050
|
|
|
|
215
|
|
|
|
4.76 |
% |
Municipal
bonds
|
|
|
12,991
|
|
|
|
477
|
|
|
|
4.91 |
% |
|
|
15,534
|
|
|
|
594
|
|
|
|
5.11 |
% |
Loans
and banker's acceptances (2)
|
|
|
700,712
|
|
|
|
41,068
|
|
|
|
7.84 |
% |
|
|
694,732
|
|
|
|
39,352
|
|
|
|
7.57 |
% |
Total
interest-earning assets
|
|
|
838,578
|
|
|
|
46,260
|
|
|
|
7.38 |
% |
|
|
810,523
|
|
|
|
43,180
|
|
|
|
7.12 |
% |
Cash
and due from banks
|
|
|
25,017
|
|
|
|
|
|
|
|
|
|
|
|
27,874
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment, net
|
|
|
8,270
|
|
|
|
|
|
|
|
|
|
|
|
5,782
|
|
|
|
|
|
|
|
|
|
Interest
receivable and other assets, net
|
|
|
16,223
|
|
|
|
|
|
|
|
|
|
|
|
12,836
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
888,088
|
|
|
|
|
|
|
|
|
|
|
$ |
857,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
$ |
75,994
|
|
|
$ |
225
|
|
|
|
0.40 |
% |
|
$ |
76,098
|
|
|
$ |
222
|
|
|
|
0.39 |
% |
Savings
and money market accounts
|
|
|
407,852
|
|
|
|
11,052
|
|
|
|
3.62 |
% |
|
|
352,446
|
|
|
|
7,650
|
|
|
|
2.90 |
% |
Time
accounts
|
|
|
86,959
|
|
|
|
2,628
|
|
|
|
4.04 |
% |
|
|
108,305
|
|
|
|
2,921
|
|
|
|
3.61 |
% |
Purchased
funds
|
|
|
18,880
|
|
|
|
671
|
|
|
|
4.75 |
% |
|
|
22,424
|
|
|
|
771
|
|
|
|
4.60 |
% |
Borrowed
funds
|
|
|
5,000
|
|
|
|
302
|
|
|
|
8.06 |
% |
|
|
5,000
|
|
|
|
289
|
|
|
|
7.73 |
% |
Total
interest-bearing liabilities
|
|
|
594,685
|
|
|
|
14,878
|
|
|
|
3.34 |
% |
|
|
564,273
|
|
|
|
11,853
|
|
|
|
2.81 |
% |
Demand
accounts
|
|
|
202,660
|
|
|
|
|
|
|
|
|
|
|
|
203,540
|
|
|
|
|
|
|
|
|
|
Interest
payable and other liabilities
|
|
|
6,366
|
|
|
|
|
|
|
|
|
|
|
|
4,960
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
84,377
|
|
|
|
|
|
|
|
|
|
|
|
84,242
|
|
|
|
|
|
|
|
|
|
Total
liabilities & stockholders' equity
|
|
$ |
888,088
|
|
|
|
|
|
|
|
|
|
|
$ |
857,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
31,382
|
|
|
|
|
|
|
|
|
|
|
$ |
31,327
|
|
|
|
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
5.17 |
% |
Net
interest rate spread
|
|
|
|
|
|
|
|
|
|
|
4.04 |
% |
|
|
|
|
|
|
|
|
|
|
4.31 |
% |
(1)
|
Yields
and interest income are presented on a taxable-equivalent basis using
the
Federal statutory rate of 35
percent.
|
(2)
|
Average
balances on loans outstanding include non-performing loans, if any.
The
amortized portion of net loan origination fees (costs) is included
in interest income on loans, representing an adjustment to the
yield.
|
Bank
of Marin Bancorp
Third
Quarter 2007 Compared to Third Quarter 2006
In
the
third quarter of 2007, the tax-equivalent net interest margin was 4.94%, down
10
basis points from the third quarter of 2006. The decline in the third quarter
of
2007 compared to the same period a year ago reflects rate increases in interest
bearing deposits in response to competitive pressures, only partially offset
by
higher asset yields in most categories and a decline in purchased
funds. Since a large portion of the Bank’s interest-bearing deposits
are short-term, the impact of competitive market rates was significant. In
the
second quarter of 2007, the Bank sold its $76 million indirect auto portfolio
to
provide a source of funding for higher-yielding relationship loans in the
future. These funds were initially reinvested in assets approximating
the same overall return. Federal funds target rate reductions during
the third quarter of 2007 will negatively impact the yields on short-term
investments made with the proceeds from the sale, as well as the yields on
new
and repricing loans. The negative impact can be mitigated with
related rate reductions to interest-bearing deposits. In the third quarter
of
2007, the taxable-equivalent net interest income increased 3.6% compared to
the
third quarter of 2006.
Average
interest-earning assets for the third quarter of 2007 increased $46.6 million,
or 5.7%, from the same quarter a year ago. An increase of $84.6 million in
Federal funds sold and other short-term investments more than offset the decline
of $38.4 million in loans. The sale of the $76 million indirect auto portfolio
in mid-2007, the reinvestment of the proceeds from the sale, as well as softer
loan demand in 2007 caused this shift in the mix of assets. Investment
securities were essentially unchanged from the same quarter in
2006.
In
the
quarter ended September 30, 2007, the yield on interest-earning assets increased
by 5 basis points from the same quarter a year ago. Although the
yields on most interest-earning asset categories increased, the modest increase
to the overall yield on interest-earning assets reflects a shift in the mix
of
assets from loans to other similar yielding assets in connection with the sale
of the indirect auto portfolio. The yield on loans increased 24 basis points
from the same quarter a year ago. The yield on Federal funds sold was
essentially unchanged and the yield on agency securities increased 60 basis
points in the same period. These assets together account for 97.6% of
interest-earning assets. The increase in the loan yield from the third quarter
of 2006 is primarily attributable to the absence of indirect auto loans, which
were the lowest-yielding, loan originations at higher yields as long-term
average market interest rates increased, and maturities and paydowns of loans
at
lower yields. Approximately 4 basis points of the increase in the
third-quarter 2007 loan yield is attributable to the market value adjustment
of
the indirect auto loan portfolio on January 1, 2007. The increase in yields
on
agency securities primarily relates to purchases at higher yields combined
with
the maturity and paydown of securities at lower yields.
The
average balance of interest-bearing liabilities increased $45.8 million, or
8.0%, over the third quarter of 2006. A 16.5% increase in savings and
money market accounts, partially due to higher offered rates, and a 5.7%
increase in interest bearing transaction accounts, more than offset the decline
in time deposits and purchased funds compared to the same period a year
ago.
The
rate
on interest-bearing liabilities increased 15 basis points as compared to the
third quarter of 2006 mostly due to rate increases, primarily on money market
accounts and the repricing of time deposits at higher rates. The increase in
deposit rates was partially offset by the decline in the overall rate paid
on
purchased funds reflecting a more favorable mix of purchased funds. (Purchased
funds include a term FHLB advance and overnight borrowings). The rate on the
Bank’s long-term borrowed funds, which is tied to LIBOR, was essentially
unchanged from the third quarter of 2006.
Third
Quarter 2007 Compared to Second Quarter 2007
In
the
third quarter of 2007, the tax-equivalent net interest margin of 4.94% was
down
13 basis points from the second quarter of 2007. The yield on interest earning
assets decreased 22 basis points in the quarter ended September 30, 2007 from
the prior quarter reflecting a shift in the mix from higher-yielding loans
to
Federal funds and other short-term investments, partially offset by increases
in
yields on U.S. government agency securities and municipal bonds. The rate on
interest-bearing liabilities decreased 15 basis points, primarily reflecting
rate reductions to money market accounts made throughout the third quarter
of
2007. Softening of loan demand together with increased liquidity generated
from
the sale of the auto portfolio eased pressure on deposit rates in the third
quarter of 2007 compared to the prior quarter.
Total
average interest-earning assets increased $37.6 million, or 4.5%, in the quarter
ending September 30, 2007 compared to the prior quarter. An increase of $62.5
million in Federal funds sold more than offset the decline of $42.9 million
in
average loan balances. The composition of interest-earning assets changed in
the
third quarter of 2007 compared to the prior quarter, primarily reflecting the
sale of the indirect auto loan portfolio of approximately $76 million, and
the
subsequent investment of the proceeds in Federal funds sold and other short-term
investments as well as investment securities.
Bank
of Marin Bancorp
Average
interest-bearing liabilities increased $30.9 million in the third quarter over
the second quarter, primarily due to an increase of $34.4 million in savings
and
money market accounts, partially offset by smaller declines in other categories
of interest-bearing liabilities.
Nine
Months 2007 Compared to Nine Months 2006
In
the
first nine months of 2007, the tax-equivalent net interest margin totaled 5.00%,
down 17 basis points from the same period a year ago, reflecting the same
interest rate compression discussed in the comparison of the third quarter
of
2007 to the third quarter of 2006. The increase in the cost of
interest-bearing liabilities by 53 basis points, primarily due to the increased
cost of deposits, was partially offset by an increase of 26 basis points in
interest earning assets, primarily due to increased yields on loans, U.S.
Government agency securities and other investment securities. The
nine-month 2007 taxable-equivalent net interest income was essentially unchanged
compared to the first nine months of 2006.
Average
interest-earning assets for the nine months of 2007 increased $28.1 million,
or
3.5%, from the same period a year ago. An increase of $36.5 million in Federal
funds sold and an increase of $6.0 million in loans more than offset the decline
in investments. Average loans include the average balance of the indirect auto
loan portfolio prior to its sale in the second quarter of 2007 and are not
representative of the period end results. The sale of the indirect auto
portfolio caused a shift in the mix of assets from loans to Federal funds sold
and other short-term investments as well as investment securities late in the
second quarter of 2007. The decline in average investment securities relates
to
maturities and paydowns of these instruments, partially offset by
purchases.
The
yield
on interest-earning assets increased by 26 basis points in the first nine months
of 2007 compared to the same period a year ago. This increase reflects a 27
basis point increase in loan yield from the same period a year ago, primarily
attributable to loan originations at higher yields and maturities and paydowns
of loans at lower yields. This increase also reflects the write-down to fair
value and subsequent sale of the lower-yielding indirect auto portfolio. The
yield on agency securities increased 56 basis points in the same comparative
period, primarily related to maturities and paydowns of securities at lower
yields as well as purchases of securities at higher yields. The yields on other
investment securities increased 104 basis points in the nine months ended
September 30, 2007 compared to the same period a year ago, primarily related
to
purchase of higher yielding instruments in the third quarter of
2007. The increase in yield on Federal funds sold in the nine months
ended September 30, 2007 compared to the same period a year ago primarily
relates to Federal fund target rate increases during the third quarter of 2006,
which were still in effect through most of the third quarter of
2007.
The
average balance of interest-bearing liabilities in the first nine months of
2007
increased $30.4 million, or 5.4%, over the first nine months of
2006. An increase in savings and money market accounts, partially due
to higher offered rates, was partially offset by the decline in time accounts
and purchased funds. The decline in time deposits reflected a move to money
market accounts, as offered rates on money market accounts rose.
In
the
first nine months of 2007, the rate on interest-bearing liabilities increased
53
basis points as compared to the same period in 2006, primarily due to higher
offered rates as a result of increased competition for deposits. The
rate on savings and money market accounts increased 72 basis points, and the
rate on time deposits increased 43 basis points. The increase in the rate of
borrowed funds by 33 basis points during the same comparative periods reflects
an increase in the LIBOR rate to which this borrowing is tied.
Bank
of Marin Bancorp
Provision
for Loan Losses
The
adequacy of the allowance for loan losses is formally assessed on a quarterly
basis. An expense is provided to bring the allowance for loan losses
to a level to provide adequate coverage for probable loan losses. The adequacy
of the allowance for loan losses is evaluated based on several factors,
including growth of the loan portfolio, analysis of probable losses in the
portfolio and recent loss experience. Actual losses on loans are charged against
the allowance, and the allowance is increased through the provision charged
to
expense.
The
provision for loan losses was $200 thousand during the third quarter of 2007
compared with $287 thousand during the third quarter of 2006 and $75 thousand
in
the second quarter of 2007. Net (charge-offs) recoveries totaled
$(26) thousand in the third quarter of 2007, $(76) thousand in the third quarter
of 2006 and $(64) thousand in the second quarter of 2007. Charge-offs in the
second quarter of 2007 primarily related to one mobile home loan, and in the
third quarter of 2006 related primarily to one commercial loan as well as auto
loan charge-offs. During the first nine months of 2007,
the provision for loan losses totaled $340 thousand compared to $789 thousand
in
the first nine months of 2006. Net (charge-offs) recoveries totaled $(88)
thousand in the first nine months of 2007 compared to $(174) thousand in the
same period a year ago. The first nine months of 2007 reflect the absence of
charge-offs and recoveries on the auto portfolio, which was accounted for at
fair value in accordance with SFAS No. 159 beginning January 1, 2007 and was
sold during the quarter ended June 30, 2007. The cumulative effect adjustment
to
retained earnings upon initial adoption of SFAS No. 159 includes $1.0 million
that was removed from the allowance for loan losses. See Note 3 to the financial
statements.
The
provision for loan losses declined in the third quarter of 2007 compared to
the
third quarter of 2006, as well as in the first nine months of 2007 compared
to
the first nine months of 2006, reflecting the amount deemed by management
necessary to maintain the allowance at a level considered adequate to provide
for probable losses inherent in the portfolio.
Non-accrual
loans totaled $150 thousand, $5 thousand and $4.4 million at September 30,
2007,
June 30, 2007 and September 30 2006, respectively. At September 30, 2006,
non-accrual loans included one commercial loan for $2.3 million, which was
sold
in the fourth quarter of 2006 and one commercial real estate loan for $2.0
million, for which the principal and related interest was fully paid in the
fourth quarter of 2006.
Bank
of Marin Bancorp
Non-Interest
Income
The
table
below details the components of non-interest income.
|
|
|
|
|
9/30/07 compared
|
|
|
9/30/07 compared
|
|
|
|
|
|
|
to 6/30/07
|
|
|
to 9/30/06
|
|
|
|
Three months ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
(dollars
in thousands)
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Service
charges on deposit accounts
|
|
$ |
325
|
|
|
$ |
321
|
|
|
$ |
259
|
|
|
$ |
4
|
|
|
|
1.2 |
% |
|
$ |
66
|
|
|
|
25.5 |
% |
Wealth
Management Services
|
|
|
331
|
|
|
|
298
|
|
|
|
271
|
|
|
|
33
|
|
|
|
11.1 |
% |
|
|
60
|
|
|
|
22.1 |
% |
Net
gain on indirect auto and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Visa
portfolios
|
|
|
387
|
|
|
|
190
|
|
|
|
---
|
|
|
|
197
|
|
|
|
103.7 |
% |
|
|
387
|
|
|
NM
|
|
Other
non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on Bank owned life insurance
|
|
|
146
|
|
|
|
144
|
|
|
|
123
|
|
|
|
2
|
|
|
|
1.4 |
% |
|
|
23
|
|
|
|
18.7 |
% |
Customer
banking fees and other charges
|
|
|
133
|
|
|
|
155
|
|
|
|
126
|
|
|
|
(22 |
) |
|
|
(14.2 |
%) |
|
|
7
|
|
|
|
5.6 |
% |
Other
income
|
|
|
264
|
|
|
|
285
|
|
|
|
217
|
|
|
|
(21 |
) |
|
|
(7.4 |
%) |
|
|
47
|
|
|
|
21.7 |
% |
Total
other non-interest income
|
|
|
543
|
|
|
|
584
|
|
|
|
466
|
|
|
|
(41 |
) |
|
|
(7.0 |
%) |
|
|
77
|
|
|
|
16.5 |
% |
Total
non-interest income
|
|
$ |
1,586
|
|
|
$ |
1,393
|
|
|
$ |
996
|
|
|
$ |
193
|
|
|
|
13.9 |
% |
|
$ |
590
|
|
|
|
59.2 |
% |
|
|
Nine months ended
|
|
|
Amount
|
|
|
Percent
|
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Increase
|
|
|
Increase
|
|
(dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Service
charges on deposit accounts
|
|
$ |
894
|
|
|
$ |
757
|
|
|
$ |
137
|
|
|
|
18.1% |
|
Wealth
Management Services
|
|
|
904
|
|
|
|
794
|
|
|
|
110
|
|
|
|
13.9% |
|
Net
gain on indirect auto and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Visa
portfolios
|
|
|
1,097
|
|
|
|
---
|
|
|
|
1,097
|
|
|
NM
|
|
Other
non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
on Bank owned life insurance
|
|
|
429
|
|
|
|
362
|
|
|
|
67
|
|
|
|
18.5% |
|
Customer
banking fees and other charges
|
|
|
408
|
|
|
|
368
|
|
|
|
40
|
|
|
|
10.9% |
|
Other
income
|
|
|
755
|
|
|
|
654
|
|
|
|
101
|
|
|
|
15.4% |
|
Total
other non-interest income
|
|
|
1,592
|
|
|
|
1,384
|
|
|
|
208
|
|
|
|
15.0% |
|
Total
non-interest income
|
|
$ |
4,487
|
|
|
$ |
2,935
|
|
|
$ |
1,552
|
|
|
|
52.9% |
|
NM
- Not
Meaningful
Non-interest
income for the third quarter of 2007 increased $590 thousand, or 59.2%, as
compared to the third quarter of 2006 and increased $193 thousand, or 13.9%,
compared to the prior quarter. The third quarter of 2007 included a net gain
of
$387 thousand on the sale of the Visa portfolio and the second quarter of 2007
included a net gain of $190 thousand on the sale of the indirect auto
portfolio. Excluding these gains, non-interest income in
the third quarter of 2007 increased 20.4% from the same quarter a year
ago and remained relatively unchanged from the prior
quarter.
Bank
of Marin Bancorp
Service
charges on deposit accounts increased $66 thousand, or 25.5%, from the
comparable quarter a year ago and increased $4 thousand, or 1.2%, from the
preceding quarter. The increase from the third quarter of 2006 is primarily
attributable to an increase effective April 1, 2007, in the fees the Bank
charges for checks drawn against insufficient funds, as well as reduced earnings
credits provided to certain customer accounts. Wealth Management Services
(WMS)
income increased $60 thousand, or 22.1%, from the second quarter of 2006,
and
increased $33 thousand, or 11.1%, from the prior quarter,
reflecting an increase in assets under management and market
appreciation. Other non-interest income increased $77 thousand, or 16.5%,
from
the second quarter of 2006 and decreased $41 thousand, or 7.0%, from the
prior
quarter. The increase from the same quarter a year ago is primarily due to
an
increase in Bank owned life insurance income (due to additional investment
of
$1.2 million in September 2006 and a gradually increasing
yield), an increase in reverse mortgage fees,
and miscellaneous income (the third quarter
of 2007 included $23
thousand of indirect auto loan recoveries subsequent to recording these loans
at
their fair value). The decrease from the prior quarter
primarily reflects lower remote deposit fees and lower miscellaneous income.
(The third quarter of 2007 reflected $29 thousand fewer indirect auto loan
recoveries than the second quarter of 2007.)
Non-interest
income totaled $4.5 million for the first nine months of 2007, an increase
of
$1.6 million, or 52.9%, from the first nine months of 2006. The adoption of
SFAS
No. 159 and the subsequent sale of the indirect auto loan portfolio generated
a
net gain in the first nine months of 2007 of $710 thousand and the sale of
the
Visa portfolio generated a net gain of $387 thousand,
resulting in total net gains of $1.1 million. Excluding these gains,
non-interest income in the first nine months of 2007 increased 15.5% from the
comparable period a year ago. The net gain on sale of the
auto portfolio is comprised of $520 thousand recorded in the first quarter
of
2007 representing the change in the fair value of the portfolio during the
quarter, plus a net gain recorded in the second quarter representing the pre-tax
gain on sale totaling $489 thousand based on actual proceeds, net of selling
expenses of $299 thousand, including commissions, legal fees and conversion
costs. The $387 thousand gain recorded in the third quarter of 2007 represents
the premium received on the sale of the Visa portfolio.
Service
charges on deposit accounts in the first nine months of 2007 increased $137
thousand, or 18.1%, compared to the first nine months of 2006 and is primarily
attributable to an increase effective April 1, 2007, in the fees the Bank
charges for checks drawn against insufficient funds as well as reduced earnings
credits provided to certain customer accounts. WMS income was $904 thousand
during the first nine months of 2007, an increase of $110 thousand, or 13.9%,
compared to the same period in 2006, primarily reflecting new assets under
management as well as market appreciation. Other income increased by $208
thousand, or 15.0%, in the nine months ended September 30, 2007, compared to
the
same period a year ago. The increase is primarily due to an increase in Bank
owned life insurance (as previously discussed), customer banking fee income
related to Visa debit fees and business Visa interchange fees, and higher
miscellaneous income (which included $75 thousand of indirect auto loan
recoveries subsequent to recording these loans at their fair
value).
Bank
of Marin Bancorp
Non-Interest
Expense
The
table
below details the components of non-interest expense.
|
|
|
|
|
|
|
|
|
|
|
9/30/07 compared
|
|
|
9/30/07 compared
|
|
|
|
|
|
to 6/30/07
|
|
|
to 9/30/06
|
|
|
Three months ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
(dollars
in thousands)
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
Salaries
and related benefits
|
|
$ |
3,938
|
|
|
$ |
4,163
|
|
|
$ |
3,732
|
|
|
$ |
(225 |
) |
|
|
(5.4 |
%) |
|
$ |
206
|
|
|
|
5.5% |
Occupancy
and equipment
|
|
|
716
|
|
|
|
729
|
|
|
|
741
|
|
|
|
(13 |
) |
|
|
(1.8 |
%) |
|
|
(25 |
) |
|
|
(3.4%) |
Depreciation
& amortization
|
|
|
318
|
|
|
|
310
|
|
|
|
261
|
|
|
|
8
|
|
|
|
2.6 |
% |
|
|
57
|
|
|
|
21.8% |
Data
processing fees
|
|
|
411
|
|
|
|
425
|
|
|
|
422
|
|
|
|
(14 |
) |
|
|
(3.3 |
%) |
|
|
(11 |
) |
|
|
(2.6%) |
Professional
services
|
|
|
536
|
|
|
|
384
|
|
|
|
343
|
|
|
|
152
|
|
|
|
39.6 |
% |
|
|
193
|
|
|
|
56.3% |
Other
non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
79
|
|
|
|
108
|
|
|
|
86
|
|
|
|
(29 |
) |
|
|
(26.9 |
%) |
|
|
(7 |
) |
|
|
(8.1%) |
Director
expense
|
|
|
65
|
|
|
|
114
|
|
|
|
120
|
|
|
|
(49 |
) |
|
|
(43.0 |
%) |
|
|
(55 |
) |
|
|
(45.8%) |
Other
expense
|
|
|
863
|
|
|
|
797
|
|
|
|
880
|
|
|
|
66
|
|
|
|
8.3 |
% |
|
|
(17 |
) |
|
|
(1.9%) |
Total
other non-interest expense
|
|
|
1,007
|
|
|
|
1,019
|
|
|
|
1,086
|
|
|
|
(12 |
) |
|
|
(1.2 |
%) |
|
|
(79 |
) |
|
|
(7.3%) |
Total
non-interest expense
|
|
$ |
6,926
|
|
|
$ |
7,030
|
|
|
$ |
6,585
|
|
|
$ |
(104 |
) |
|
|
(1.5 |
%) |
|
$ |
341
|
|
|
|
5.2% |
|
|
Nine months ended
|
|
|
Amount
|
|
|
Percent
|
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Increase
|
|
|
Increase
|
|
(dollars
in thousands)
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Salaries
and related benefits
|
|
$ |
12,064
|
|
|
$ |
11,756
|
|
|
$ |
308
|
|
|
|
2.6% |
|
Occupancy
and equipment
|
|
|
2,155
|
|
|
|
1,912
|
|
|
|
243
|
|
|
|
12.7% |
|
Depreciation
& amortization
|
|
|
929
|
|
|
|
704
|
|
|
|
225
|
|
|
|
32.0% |
|
Data
processing fees
|
|
|
1,254
|
|
|
|
1,139
|
|
|
|
115
|
|
|
|
10.1% |
|
Professional
services
|
|
|
1,239
|
|
|
|
873
|
|
|
|
366
|
|
|
|
41.9% |
|
Other
non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
250
|
|
|
|
308
|
|
|
|
(58 |
) |
|
|
(18.8%) |
|
Director
expense
|
|
|
291
|
|
|
|
373
|
|
|
|
(82 |
) |
|
|
(22.0%) |
|
Other
expense
|
|
|
2,463
|
|
|
|
2,355
|
|
|
|
108
|
|
|
|
4.6% |
|
Total
other non-interest expense
|
|
|
3,004
|
|
|
|
3,036
|
|
|
|
(32 |
) |
|
|
(1.1%) |
|
Total
non-interest expense
|
|
$ |
20,645
|
|
|
$ |
19,420
|
|
|
$ |
1,225
|
|
|
|
6.3% |
|
Non-interest
expense for the third quarter of 2007 increased $341 thousand, or 5.2%, as
compared to the third quarter of 2006 and decreased by $104 thousand, or 1.5%,
from the prior quarter.
Salaries
and benefits for the third quarter of 2007 increased $206 thousand, or 5.5%,
when compared to the third quarter of 2006 and decreased by $225 thousand,
or
5.4%, when compared to the second quarter of 2007. The increase from 2006
primarily represents a higher bank wide incentive bonus accrual and normal
annual salary increases, partially offset by fewer FTE. The decrease from the
prior quarter primarily reflects lower expenses associated with lower FTE.
The
number of FTE totaled 188, 194 and 192 in September 2007, June 2007 and
September 2006, respectively.
Occupancy
and equipment expenses decreased $25 thousand, or 3.4%, from the third quarter
of 2006 and decreased $13 thousand, or 1.8% from the second quarter of
2007. The decreases are primarily due to the implementation of
negotiated contracts with equipment maintenance providers, partially offset
by
annual rent adjustments on branch operating leases.
Depreciation
and amortization expenses for the third quarter of 2007 increased $57 thousand,
or 21.8%, from the third quarter of 2006 and increased $8 thousand, or 2.6%
from
the preceding quarter. The increase reflects expenses associated with
the amortization of leasehold improvements, furniture and equipment associated
with the move to a newly-leased administrative, operations and loan production
facility late in the third quarter of 2006.
Bank
of Marin Bancorp
Data
processing expense for the third quarter of 2007 decreased $11 thousand, or
2.6%, over the third quarter of 2006 and decreased $14 thousand, or 3.3%, over
the second quarter of 2007. These decreases primarily reflect one-time expenses
in the third quarter of 2006 relating to the move to the Bank’s new facility,
and in the second quarter of 2007 primarily relating to consumer internet
banking security upgrades.
Professional
services for the third quarter of 2007 increased $193 thousand, or 56.3%, from
the third quarter of 2006 and increased $152 thousand, or 39.6% from the second
quarter of 2007. The increases are mainly attributable to higher legal and
accounting expenses, primarily associated with the implementation of the holding
company in the third quarter of 2007.
Other
non-interest expense for the third quarter of 2007 decreased by $79 thousand,
or
7.3% compared to the third quarter of 2006 and decreased by $12 thousand, or
1.2%, from the second quarter of 2007. The decrease from the same quarter a
year
ago includes a decrease in director expenses. Other expense in the third quarter
of 2006 includes approximately $105 thousand related to the loss on a leased
facility that was vacated eight months prior to the end of the lease term,
as
well as moving expenses associated with the relocation of administrative,
operational and loan production personnel, which did not recur in the third
quarter of 2007. These decreases were partially offset by higher FDIC
insurance. The change from the second quarter of 2007 is
primarily due to decreases in director expenses and shareholder expenses,
partially offset by an increase in FDIC insurance.
Non-interest
expense totaled $20.6 million for the first nine months of 2007, an increase
of
$1.2 million, or 6.3%, from the corresponding period of 2006. Salaries and
benefits increased by $308 thousand, or 2.6%, primarily reflecting normal annual
salary increases. Occupancy and equipment expense increased by $243 thousand,
or
12.7%, in the first nine months of 2007 compared to the same period in 2006,
mainly due to expenses associated with the relocation of the Bank’s
administrative, operations and loan production facility. Depreciation and
amortization increased by $225 thousand, or 32.0%, for primarily the same
reason. Data processing increased by $115 thousand, or 10.1%, due to
contractually stipulated price increases that are part of the Bank’s long-term
agreement with its data processing provider. Professional services increased
in
the first nine months of 2007 compared to the same period in the prior year
by
$366 thousand, or 41.9%, largely attributable to higher legal and accounting
expenses associated with the implementation of the holding company in the third
quarter of 2007. Other non-interest expense decreased by $32 thousand, or 1.1%.
The change reflects decreases in moving expenses, loss on leased facility as
previously discussed, director expenses, and telephone expenses. These increases
were partially offset by increases in FDIC insurance, shareholder expenses
and
information technology costs.
Provision
for Income Taxes
The
provision for income taxes totaled $2.1 million, $1.9 million, and $1.4 million
during the quarters ended September 30, 2007, June 30, 2007, and September
30,
2006, respectively. The effective tax rates for those same periods
were 39.2%, 39.1%, and 31.6%, respectively. The provisions for the
nine-month periods ending September 30, 2007 and 2006 were $5.7 million and
$5.2
million, respectively, reflecting effective tax rates of 38.6% and 37.7%,
respectively. These provisions reflect accruals for taxes at the
applicable rates for Federal income and California franchise taxes based upon
reported pre-tax income and adjusted for the effects of all permanent
differences between income for tax and financial reporting purposes (such as
earnings on qualified municipal securities and certain life insurance
products). Therefore, there are normal fluctuations in the effective
rate from period to period based on the relationship of net permanent
differences to income before tax. However, the primary reason for the
lower effective rate in the third quarter of 2006 was the recognition of tax
benefits related to enterprise zone loans for the tax years 2002 through
2005. The Bank has not been subject to alternative minimum tax
(AMT).
Short-period
Federal and California tax returns will be filed for the Bank for the period
ending July 1, 2007. Thereafter, consolidated returns will be filed
for Bancorp and the Bank. Bancorp and the Bank have entered into a
tax allocation agreement which provides that income taxes shall be allocated
between the parties on a separate entity basis. The intent of this
agreement is that each member of the consolidated group will incur no greater
tax liability than it would have incurred on a stand-alone basis.
FINANCIAL
CONDITION
Summary
During
the first nine months of 2007, total assets increased $47.5 million to $924.0
million from December 31, 2006. Although loans other than indirect
auto loans increased $50.3 million, loans overall decreased $33.8 million to
$686.0 million. This was a result of the sale of the indirect auto portfolio,
which totaled $84.1 million at December 31, 2006.
Bank
of Marin Bancorp
In
the
first quarter, the Bank elected to adopt SFAS No. 159 and record its indirect
auto portfolio at fair value. In connection with this event, an unrealized
loss
of $3.5 million was recorded as a reduction of loans, and the allowance for
loan
losses was reduced by $1.0 million. These changes were recorded, net of tax,
as
a reduction to retained earnings. See Note 3.
The
table
below details the components of loans.
(Dollars
in thousands)
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
Commercial
loans
|
|
$ |
123,164
|
|
|
$ |
117,391
|
|
Real
estate
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
354,731
|
|
|
|
311,692
|
|
Construction
|
|
|
98,915
|
|
|
|
116,790
|
|
Residential
(a)
|
|
|
73,952
|
|
|
|
58,912
|
|
Installment
|
|
|
|
|
|
|
|
|
Indirect
auto loans
|
|
|
---
|
|
|
|
84,141
|
|
Other
installment
|
|
|
35,213
|
|
|
|
30,852
|
|
Total
loans held in portfolio (at amortized cost)
|
|
|
685,975
|
|
|
|
719,778
|
|
Allowance
for loan losses
|
|
|
7,227
|
|
|
|
8,023
|
|
Total
net loans
|
|
$ |
678,748
|
|
|
$ |
711,755
|
|
(a)
|
The
residential loan portfolio includes no sub-prime loans at September
30,
2007 and December 31, 2006.
|
The
change in assets also reflected increases in cash and cash equivalents of $71.7
million and investment securities of $9.2 million, reflecting the application
of
the proceeds from the sale of the indirect auto loan portfolio.
Other
assets include deferred tax assets of $5.1 million and $5.6 million at September
30, 2007 and December 31, 2006, respectively. These assets consist primarily
of
tax benefits expected to be realized in future periods related to deductions
for
loan losses, depreciation and deferred compensation, as well as for currently
unrealized losses on securities. Management believes these assets to be
realizable due to the Bank’s consistent record of earnings and the expectation
that earnings will continue at a level adequate to realize such
benefits.
During
the first nine months of 2007, total liabilities increased $50.4 million to
$837.5 million. The increase in total liabilities is primarily due to
the increase in deposits of $72.7 million, partially offset by a decrease in
overnight borrowings of $24.1 million.
During
the first nine months of 2007, stockholders’ equity decreased $3.0 million to
$86.6 million. The decline in stockholders’ equity reflects the
repurchase of the Bank’s common stock totaling $11.9 million, the payment of
cash dividends totaling $2.0 million, and a charge to retained earnings of
$1.5
million related to the cumulative-effect of the adoption of SFAS No. 159,
partially offset by earnings of $9.1 million and the exercise of stock options
(including tax benefits), totaling $2.3 million.
Capital
Adequacy
Bancorp
and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a material
effect on Bancorp’s consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Bancorp and the Bank must meet specific capital guidelines that involve
quantitative measures of Bancorp’s and the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and the Bank’s prompt corrective
action classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other
factors. Prompt corrective action provisions are not applicable to
bank holding companies such as Bancorp.
Quantitative
measures established by regulation to ensure capital adequacy require Bancorp
and the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk weighted assets and of Tier 1 capital
to quarterly average assets.
The
Bank’s capital adequacy ratios as of September 30, 2007 and December 31, 2006
are presented in the following table. Bancorp’s capital adequacy
ratios are presented as of September 30 2007, subsequent to the creation of
the
holding company in the third quarter of 2007. Capital ratios are
reviewed by Management on a regular basis to ensure that capital exceeds the
prescribed regulatory minimums and is adequate to meet the Bank’s anticipated
future needs. For all periods presented, the Bank’s ratios exceed the
regulatory definition of “well capitalized” under the regulatory framework for
prompt corrective action and Bancorp’s ratios exceed the required minimum ratios
for capital adequacy purposes.
Bank
of Marin Bancorp
|
|
Actual Ratio
|
|
Ratio
for Capital
Adequacy Purposes
|
Capital
Ratios for Bancorp:
|
|
|
|
|
As
of September 30, 2007
|
|
|
|
|
Total
Capital (to risk-weighted assets)
|
|
|
12.37 |
% |
=>8.0%
|
Tier
I Capital (to risk-weighted assets)
|
|
|
10.80 |
% |
=>4.0%
|
Tier
I Capital (to average assets)
|
|
|
9.49 |
% |
=>4.0%
|
|
|
Actual Ratio
|
|
Ratio
for Capital
Adequacy Purposes
|
Ratio
to be Well
Capitalized
under
Prompt
Corrective
Action Provisions
|
Capital
Ratios for the Bank:
|
|
|
|
|
|
As
of September 30, 2007
|
|
|
|
|
|
Total
Capital (to risk-weighted assets)
|
|
|
12.23 |
% |
=>8.0%
|
=>10.0%
|
Tier
I Capital (to risk-weighted assets)
|
|
|
10.65 |
% |
=>4.0%
|
=>6.0%
|
Tier
I Capital (to average assets)
|
|
|
9.35 |
% |
=>4.0%
|
=>5.0%
|
|
|
|
|
|
|
|
As
of December 31, 2006
|
|
|
|
|
|
|
Total
Capital (to risk-weighted assets)
|
|
|
12.56 |
% |
=>8.0%
|
=>10.0%
|
Tier
I Capital (to risk-weighted assets)
|
|
|
10.93 |
% |
=>4.0%
|
=>6.0%
|
Tier
I Capital (to average assets)
|
|
|
10.27 |
% |
=>4.0%
|
=>5.0%
|
Liquidity
The
goal
of liquidity management is to provide adequate funds to meet both loan demands
and unexpected deposit withdrawals. This goal is accomplished by
maintaining an appropriate level of liquid assets, and formal lines of credit
with correspondent banks that enable the Bank to borrow funds as needed. The
Bank’s Asset/Liability Management Committee is responsible for establishing and
monitoring the Bank’s liquidity targets and strategies.
Bank
management regularly adjusts its investments in liquid assets based upon its
assessment of expected loan demand, expected deposit flows, yields available
on
interest-earning securities and the objectives of the Bank’s asset/liability
management program.
A
major
source of funding during the nine months ended September 30, 2007 was proceeds
from the sale of the Bank’s indirect auto portfolio for $77 million. These
proceeds are available for investment in higher-yielding relationship loans.
The
Bank’s funding needs will be met, in part, by these proceeds as well as its
retail deposit branch network.
The
Bank
must retain and attract new deposits, which depends upon the variety and
effectiveness of its customer account products, service and convenience, and
rates paid to customers. Any decline in retail deposit funding would adversely
impact the Bank’s liquidity. The Bank obtains funds from the repayment and
maturity of loans as well as deposit inflows, investment security maturities
and
paydowns, Federal funds purchased, FHLB advances, and other borrowings. Bank
management anticipates that Federal funds purchased and FHLB advances will
continue to be important sources of funding in the future, and management
expects there to be adequate collateral for such funding requirements. A decline
in Bancorp’s or the Bank’s credit rating would adversely affect the Bank’s
ability to borrow and/or the related borrowing costs, thus impacting the Bank’s
liquidity. The Bank’s primary uses of funds are the origination of loans, the
purchase of investment securities, maturing CDs, demand deposit withdrawals,
repayment of borrowings and dividends to common shareholders.
At
September 30, 2007, the Bank’s cash, Federal funds sold and other short-term
investments, and unpledged securities maturing within one year totaled $121.2
million. The remainder of the unpledged securities portfolio of $69.0 million
provides additional liquidity. Taken together, these liquid assets equaled
20.6%
of the Bank’s assets at September 30, 2007. The corresponding percentage at
December 31, 2006 was 12.4%. The increased liquidity at September 30, 2007
is
primarily related to the sale of the auto portfolio discussed
above.
Bank
of Marin Bancorp
The
Bank
anticipates that cash and cash equivalents on hand and its sources of funds
will
provide adequate liquidity for its operating, investing and financing needs
and
its regulatory liquidity requirements for the foreseeable future. In addition
to
cash and cash equivalents, the Bank has substantial additional borrowing
capacity including unsecured lines of credit totaling $65.0 million with
correspondent banks and a $3.9 million line of credit with the Federal Reserve
Bank to borrow overnight, which were not drawn upon at September 30, 2007.
The
Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB) and
has a
line of credit (secured under terms of a blanket collateral agreement by a
pledge of loans) for advances of $178.1 million ($162.8 million of which was
available at September, 2007) at an interest rate that is determined
daily. Borrowings under the line are limited to eligible
collateral.
As
of
September 30, 2007, the Bank had undisbursed loan commitments of $225.8 million,
including $129.2 million under commercial lines of credit (these commitments
are
contingent upon customers maintaining specific credit standards), $59.4 million
under revolving home equity lines, and $29.8 million under undisbursed
construction loans. These commitments, to the extent used, are expected to
be
funded through current liquidity, repayment of existing loans and normal deposit
growth. Over the next twelve months $69.0 million of time deposits will mature.
The Bank expects these funds to be replaced with new time or savings
accounts.
As
presented in the accompanying unaudited consolidated statements of cash flows,
the sources of liquidity vary between periods. Consolidated cash and cash
equivalents at September 30, 2007 and December 31, 2006 totaled $110.4 million
and $38.8 million, respectively. The primary sources of funds during the nine
months ending September 30, 2007 were $79.0 million from the sale of the
indirect auto and Visa portfolios, a $72.7 million increase in deposits and
$17.6 million in maturities and paydowns of investment securities. The primary
uses of funds were $47.3 million in loan originations (net of principal
collections), $26.5 million in investment security purchases, $24.1 million
in
reduced Federal funds purchased and FHLB advances and $11.9 million in
repurchases of common stock.
The
primary source of funds for Bancorp is dividends from the Bank. The
primary uses of funds are shareholder dividends and ordinary operating
expenses. Management anticipates that there will be sufficient
earnings at the Bank level to provide dividends to Bancorp to meet its funding
requirements for the foreseeable future.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Bancorp’s
most significant form of market risk is interest rate risk. The risk is inherent
in its deposit and lending activities. Bancorp’s management together
with the Asset Liability Management Committee (ALCO), which is comprised of
certain directors of the Bank, has sought to manage rate sensitivity and
maturities of assets and liabilities to minimize the exposure of its earnings
and capital to changes in interest rates. Additionally, interest rate risk
exposure is managed with the goal of minimizing the impact of interest rate
volatility on its net interest margin.
Exposure
to interest rate risk is reviewed at least quarterly by the ALCO and the Board
of Directors. They utilize
interest rate sensitivity simulation models as a tool for achieving these
objectives and for developing ways in which to improve profitability. If
potential changes to net equity value and net interest income resulting from
hypothetical interest changes are not within the limits established by the
Board
of Directors, management may adjust the asset and liability mix to bring
interest rate risk within approved limits.
Bancorp’s
interest rate risk has changed slightly during the first nine-months of 2007.
The proceeds from the sale of the $76 million indirect auto loan portfolio
late
in the second quarter of 2007 have created increased liquidity. As these funds
are primarily invested in Fed Funds sold and other short-term investments it
has
caused Bancorp’s assets to become slightly more sensitive to interest rate
movements. Also refer to “Market Risk Management” in Bank of Marin’s 2006 Annual
Report to Stockholders, pages 21 through 22.
ITEM
4. CONTROLS AND
PROCEDURES
Bancorp
maintains a system of disclosure controls and procedures that is designed to
provide reasonable assurance that information required to be disclosed is
accumulated and communicated to management in a timely
manner. Management has reviewed this system of disclosure controls
and procedures as of the end of the period covered by this report and believes
that the system is operating effectively to ensure appropriate
disclosure. No significant changes were made in Bancorp’s internal
controls over financial reporting during the quarter that have materially
affected, or are reasonably likely to materially affect, Bancorp’s internal
control over financial reporting.
Bank
of Marin Bancorp
PART
II OTHER
INFORMATION
There
are
no pending, or to management’s knowledge, any threatened material legal
proceedings to which Bancorp or Bank of Marin is a party or to which any of
Bancorp’s or the Bank’s properties are subject.
There
have been no material changes from the risk factors previously disclosed in
Bank
of Marin’s 2006 Form 10-K. Refer to “Risk Factors” in Bank of Marin’s 2006 Form
10-K, pages 6 through 8.
Item
2 Unregistered Sales of Equity
Securities and Use of Proceeds
In
October 2006, Bank of Marin received approval from the California Department
of
Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC) to buy back up to 10%, or up to 545,884 of the Bank’s 5,458,838
then-outstanding shares, not to exceed $15 million. The repurchase program
allowed the Bank to purchase common shares for a period of twelve months from
the approval date in the open market or in privately negotiated
transactions.
From
October 1, 2006 to December 31, 2006, the Bank purchased 115,625 shares at
an
average price of $34.26 per share for a total cost of $4.0
million. The schedule below reflects purchases under the regulatory
approved repurchase plan from January 1, 2007 through February 28,
2007. This repurchase program was concluded in the first quarter of 2007.
The Bank executed these transactions pursuant to the Securities and Exchange
Commission’s Rule 10b-18. Repurchase transactions are subject to market
conditions as well as applicable legal and other considerations.
The
schedule below also reflects the repurchase, upon formation of the bank holding
company on July 1, 2007, of 24,399 common shares of the Bank for $876 thousand
from six shareholders who dissented to the exchange of those shares for Bancorp
common shares.
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Approximate
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price
|
|
|
Part of
Publicly
Announced
Plans or
Programs
|
|
|
Dollar Value
that May Yet be
Purchased
Under the
Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1-31, 2007
|
|
|
74,980
|
|
|
$ |
37.10
|
|
|
|
74,980
|
|
|
$ |
8,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1-28, 2007
|
|
|
214,712
|
|
|
$ |
38.45
|
|
|
|
214,712
|
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Purchases Under Regulatory-Approved Plan
|
|
|
289,692
|
|
|
$ |
38.10
|
|
|
|
289,692
|
|
|
$ |
---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1-31
|
|
|
24,399
|
|
|
$ |
35.92
|
|
|
|
24,399
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Repurchased from Dissenting Shareholders
|
|
|
24,399
|
|
|
$ |
35.92
|
|
|
|
24,399
|
|
|
N/A
|
|
Bank
of Marin Bancorp
Effective
June 14, 2007, in anticipation of the formation of a bank holding company,
the
Bank redeemed all the preferred share purchase rights issued pursuant to
the
Bank’s Rights Agreement of August 11, 2003, at a redemption price of $0.001 per
right. The total cost of redemption was $5 thousand. On that same day, Bank
of
Marin Bancorp’s Board of Directors executed a Rights Agreement substantially
similar to the Bank’s agreement and has issued replacement rights under the new
Rights Agreement to shareholders of record as of July 23, 2007. The Rights
plan
is designed to discourage takeovers that involve abusive tactics or do not
provide fair value to shareholders.
Item
3
|
Defaults
Upon Senior Securities
|
None.
Item
4
|
Submission
of Matters to a Vote of Security
Holders
|
None.
None.
The
following exhibits are filed as part of this report or hereby incorporated
by
reference to filings previously made with the SEC.
|
2.01
|
Plan
of Reorganization and Agreement of Merger dated March 8, 2007 is
incorporated by reference to Exhibit 2.1 to Current Report Form 8-K12G3
filed with the Securities and Exchange Commission on June 29,
2007.
|
|
|
Articles
of Incorporation for Bank of Marin
Bancorp.
|
|
|
Bylaws
of Bank of Marin Bancorp.
|
|
4.01
|
Rights
Agreement dated as of July 2, 2007 is incorporated by reference to
Exhibit
4.1 to Registration Statement on Form 8-A12B filed with the Securities
and
Exchange Commission on July 2,
2007.
|
|
10.01
|
2007
Employee Stock Purchase Plan is incorporated by reference to Exhibit
4.1
to Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on July 24,
2007.
|
|
10.02
|
1989
Stock Option Plan is incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8 filed with the Securities and
Exchange
Commission on July 24, 2007.
|
|
10.03
|
1999
Stock Option Plan is incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8 filed with the Securities and
Exchange
Commission on July 24, 2007.
|
|
10.04
|
2007
Equity Plan is incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange Commission
on
July 24, 2007.
|
|
10.05
|
Form
of Change in Control Agreement is incorporated by reference to Exhibit
10.1 to Current Report Form 8-K filed with the Securities and Exchange
Commission on October 30, 2007.
|
|
|
Form
of Indemnification Agreement for Directors and Executive Officers
dated
August 9, 2007.
|
|
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
as
adopted pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
Bank
of Marin Bancorp
|
|
|
|
|
(registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
November
6, 2007
|
|
/s/
Russell A. Colombo
|
|
|
Date
|
|
Russell
A. Colombo
|
|
|
|
|
President
&
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
6, 2007
|
|
/s/
Christina J. Cook
|
|
|
Date
|
|
Christina
J. Cook
|
|
|
|
|
Executive
Vice President &
|
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
6, 2007
|
|
/s/
Larry R. Olafson
|
|
|
Date
|
|
Larry
R. Olafson
|
|
|
|
|
Controller
|
|
Exhibit
Number
|
|
Description
|
|
Location
|
|
|
|
|
|
|
|
Articles
of Incorporation for Bank of Marin Bancorp.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
Bylaws
of Bank of Marin Bancorp.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
Form
of Indemnification Agreement for Directors and Executive Officers
dated
August 9, 2007.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
Certification
of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act
of 2002.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
as
adopted pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
|
Filed
herewith.
|
|
|
|
|
|
|
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
|
|
Furnished
herewith.
|
page
36