form10-q.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 March
31, 2008
OR
¨
|
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
(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
Not
Applicable
|
|
(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 xNo ¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer.
Large accelerated filer ¨
|
Accelerated filer x
|
Non-accelerated filer ¨
|
Smaller reporting company ¨
|
Indicate by check
mark if the registrant is a shell company, in Rule 12b(2) of the Exchange
Act.
Yes ¨ No
x
As
of April 30, 2008 there were 5,144,584 shares of common stock
outstanding.
BANK
OF MARIN BANCORP
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.
PART I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1
|
|
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
8
|
|
|
|
Item
2
|
|
13
|
|
|
|
Item
3
|
|
25
|
|
|
|
Item
4
|
|
25
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1
|
|
26
|
|
|
|
Item
1A
|
|
26
|
|
|
|
Item
2
|
|
26
|
|
|
|
Item
3
|
|
26
|
|
|
|
Item
4
|
|
26
|
|
|
|
Item
5
|
|
26
|
|
|
|
Item
6
|
|
27
|
|
|
|
|
|
28
|
|
|
|
|
|
29
|
CONSOLIDATED STATEMENT OF
CONDITION
|
|
at
March 31, 2008 and December 31, 2007
|
|
|
|
|
|
|
|
|
(in
thousands, except share amounts - 2008 unaudited)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$ |
28,328 |
|
|
$ |
28,765 |
|
Fed funds
sold
|
|
|
--- |
|
|
|
47,500 |
|
Cash and cash
equivalents
|
|
|
28,328 |
|
|
|
76,265 |
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Held to
maturity, at amortized cost
|
|
|
20,297 |
|
|
|
13,182 |
|
Available for
sale (at fair market value, amortized cost$73,747 at 3/31/08 and $87,450
at 12/31/07)
|
|
|
74,118 |
|
|
|
86,989 |
|
Total
investment securities
|
|
|
94,415 |
|
|
|
100,171 |
|
|
|
|
|
|
|
|
|
|
Loans, net of
allowance for losses of $8,199 at 3/31/08 and$7,575 at
12/31/07
|
|
|
761,331 |
|
|
|
717,303 |
|
Bank premises
and equipment, net
|
|
|
7,887 |
|
|
|
7,821 |
|
Interest
receivable and other assets
|
|
|
27,878 |
|
|
|
32,341 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
919,839 |
|
|
$ |
933,901 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
204,875 |
|
|
$ |
220,272 |
|
Interest
bearing
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
|
76,461 |
|
|
|
110,174 |
|
Savings and
money market
|
|
|
396,463 |
|
|
|
421,255 |
|
Time
|
|
|
82,363 |
|
|
|
82,941 |
|
Total
deposits
|
|
|
760,162 |
|
|
|
834,642 |
|
|
|
|
|
|
|
|
|
|
Federal funds
purchased and Federal Home Loan Bank borrowings
|
|
|
55,300 |
|
|
|
--- |
|
Subordinated
debenture
|
|
|
5,000 |
|
|
|
5,000 |
|
Interest
payable and other liabilities
|
|
|
8,664 |
|
|
|
6,485 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
829,126 |
|
|
|
846,127 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common stock,
no par value
|
|
|
|
|
|
|
|
|
Authorized -
15,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and
outstanding - 5,131,546 shares at 3/31/08 and 5,122,971 at
12/31/07
|
|
|
50,959 |
|
|
|
51,059 |
|
Retained
earnings
|
|
|
39,539 |
|
|
|
36,983 |
|
Accumulated
other comprehensive gain (loss), net
|
|
|
215 |
|
|
|
(268 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
90,713 |
|
|
|
87,774 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
919,839 |
|
|
$ |
933,901 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
CONSOLIDATED STATEMENT OF
OPERATIONS
|
|
for
the three months ended March 31, 2008, December 31, 2007 and March 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except per share amounts - March 31, 2008 and March 31,
2007
|
|
|
|
|
|
|
|
|
|
unaudited)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans held in portfolio
|
|
$ |
13,312 |
|
|
$ |
13,662 |
|
|
$ |
12,696 |
|
Interest on
auto loans held for sale
|
|
|
--- |
|
|
|
--- |
|
|
|
1,108 |
|
Interest on
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
--- |
|
|
|
--- |
|
|
|
8 |
|
Securities of
U.S. Government agencies
|
|
|
867 |
|
|
|
1,045 |
|
|
|
842 |
|
Obligations
of state and political subdivisions (tax exempt)
|
|
|
161 |
|
|
|
121 |
|
|
|
118 |
|
Corporate
debt securities and other
|
|
|
89 |
|
|
|
320 |
|
|
|
98 |
|
Interest on
Federal funds sold
|
|
|
112 |
|
|
|
552 |
|
|
|
2 |
|
Total
interest income
|
|
|
14,541 |
|
|
|
15,700 |
|
|
|
14,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on
interest bearing transaction accounts
|
|
|
88 |
|
|
|
76 |
|
|
|
77 |
|
Interest on
savings and money market deposits
|
|
|
2,191 |
|
|
|
3,109 |
|
|
|
3,392 |
|
Interest on
time deposits
|
|
|
751 |
|
|
|
837 |
|
|
|
869 |
|
Interest on
borrowed funds
|
|
|
221 |
|
|
|
199 |
|
|
|
537 |
|
Total
interest expense
|
|
|
3,251 |
|
|
|
4,221 |
|
|
|
4,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
11,290 |
|
|
|
11,479 |
|
|
|
9,997 |
|
Provision for
loan losses
|
|
|
615 |
|
|
|
345 |
|
|
|
65 |
|
Net interest
income after provision for loan losses
|
|
|
10,675 |
|
|
|
11,134 |
|
|
|
9,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
406 |
|
|
|
357 |
|
|
|
248 |
|
Wealth
Management Services
|
|
|
336 |
|
|
|
325 |
|
|
|
275 |
|
Net gain on
indirect auto portfolio
|
|
|
--- |
|
|
|
--- |
|
|
|
520 |
|
Net gain on
redemption of shares in Visa, Inc.
|
|
|
457 |
|
|
|
--- |
|
|
|
--- |
|
Other
income
|
|
|
503 |
|
|
|
549 |
|
|
|
465 |
|
Total
non-interest income
|
|
|
1,702 |
|
|
|
1,231 |
|
|
|
1,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related benefits
|
|
|
4,158 |
|
|
|
3,836 |
|
|
|
3,963 |
|
Occupancy and
equipment
|
|
|
768 |
|
|
|
716 |
|
|
|
710 |
|
Depreciation
and amortization
|
|
|
318 |
|
|
|
317 |
|
|
|
301 |
|
Data
processing
|
|
|
445 |
|
|
|
403 |
|
|
|
418 |
|
Professional
services
|
|
|
406 |
|
|
|
442 |
|
|
|
318 |
|
Other
expense
|
|
|
906 |
|
|
|
1,314 |
|
|
|
979 |
|
Total
non-interest expense
|
|
|
7,001 |
|
|
|
7,028 |
|
|
|
6,689 |
|
Income before
provision for income taxes
|
|
|
5,376 |
|
|
|
5,337 |
|
|
|
4,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
2,100 |
|
|
|
2,079 |
|
|
|
1,777 |
|
Net
income
|
|
$ |
3,276 |
|
|
$ |
3,258 |
|
|
$ |
2,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.64 |
|
|
$ |
0.63 |
|
|
$ |
0.57 |
|
Diluted
|
|
$ |
0.63 |
|
|
$ |
0.62 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,136 |
|
|
|
5,158 |
|
|
|
5,231 |
|
Diluted
|
|
|
5,238 |
|
|
|
5,280 |
|
|
|
5,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY
|
|
for
the year ending December 31, 2007 and the three months ended March 31,
2008
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common
Stock
|
|
|
Retained
|
|
|
(Loss)/Gain,
|
|
|
|
|
(dollar
amounts in thousands - 2008 unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Net of
Taxes
|
|
|
Total
|
|
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
|
|
|
--- |
|
|
|
--- |
|
|
|
12,324 |
|
|
|
--- |
|
|
|
12,324 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
unrealized loss on available for sale securities (net of tax liability of
$234)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
322 |
|
|
|
322 |
|
Comprehensive
income
|
|
|
--- |
|
|
|
--- |
|
|
|
12,324 |
|
|
|
322 |
|
|
|
12,646 |
|
Stock options
exercised
|
|
|
112,496 |
|
|
|
1,620 |
|
|
|
--- |
|
|
|
--- |
|
|
|
1,620 |
|
Tax benefit
from exercised stock options
|
|
|
--- |
|
|
|
729 |
|
|
|
--- |
|
|
|
--- |
|
|
|
729 |
|
Stock
repurchased, including commission costs
|
|
|
(365,823 |
) |
|
|
(13,483 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
(13,483 |
) |
Stock issued
under employee stock purchase plan
|
|
|
292 |
|
|
|
8 |
|
|
|
--- |
|
|
|
--- |
|
|
|
8 |
|
Stock-based
compensation
|
|
|
--- |
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
502 |
|
Cash
dividends paid
|
|
|
--- |
|
|
|
--- |
|
|
|
(2,649 |
) |
|
|
--- |
|
|
|
(2,649 |
) |
Stock issued
in payment of director fees
|
|
|
9,590 |
|
|
|
328 |
|
|
|
--- |
|
|
|
--- |
|
|
|
328 |
|
Balance at
December 31, 2007
|
|
|
5,122,971 |
|
|
$ |
51,059 |
|
|
$ |
36,983 |
|
|
$ |
(268 |
) |
|
$ |
87,774 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--- |
|
|
|
--- |
|
|
|
3,276 |
|
|
|
--- |
|
|
|
3,276 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
unrealized loss on available for sale securities (net of tax liability of
$350)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
483 |
|
|
|
483 |
|
Comprehensive
income
|
|
|
--- |
|
|
|
--- |
|
|
|
3,276 |
|
|
|
483 |
|
|
|
3,759 |
|
Stock options
exercised
|
|
|
35,964 |
|
|
|
525 |
|
|
|
--- |
|
|
|
--- |
|
|
|
525 |
|
Tax benefit
from exercised stock options
|
|
|
--- |
|
|
|
81 |
|
|
|
--- |
|
|
|
--- |
|
|
|
81 |
|
Stock
repurchased, including commission costs
|
|
|
(31,602 |
) |
|
|
(950 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
(950 |
) |
Stock issued
under employee stock purchase plan
|
|
|
248 |
|
|
|
7 |
|
|
|
--- |
|
|
|
--- |
|
|
|
7 |
|
Stock-based
compensation
|
|
|
--- |
|
|
|
120 |
|
|
|
--- |
|
|
|
--- |
|
|
|
120 |
|
Cash
dividends paid
|
|
|
--- |
|
|
|
--- |
|
|
|
(720 |
) |
|
|
--- |
|
|
|
(720 |
) |
Stock issued
in payment of director fees
|
|
|
3,965 |
|
|
|
117 |
|
|
|
--- |
|
|
|
--- |
|
|
|
117 |
|
Balance at
March 31, 2008
|
|
|
5,131,546 |
|
|
$ |
50,959 |
|
|
$ |
39,539 |
|
|
$ |
215 |
|
|
$ |
90,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
CONSOLIDATED STATEMENT OF CASH
FLOWS
|
|
for
three months ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
(in
thousands, unaudited)
|
|
March 31,
2008
|
|
|
March 31,
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,276 |
|
|
$ |
2,974 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
|
615 |
|
|
|
65 |
|
Compensation
payable in common stock
|
|
|
70 |
|
|
|
104 |
|
Stock-based
compensation expense
|
|
|
120 |
|
|
|
122 |
|
Excess tax
benefits from exercised stock options
|
|
|
(78 |
) |
|
|
(497 |
) |
Amortization
and accretion of investment security premiums, net
|
|
|
80 |
|
|
|
42 |
|
Depreciation
and amortization
|
|
|
318 |
|
|
|
301 |
|
Net gain on
indirect auto portfolio
|
|
|
--- |
|
|
|
(520 |
) |
Net gain on
redemption of shares in Visa, Inc.
|
|
|
(457 |
) |
|
|
--- |
|
Net change in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
328 |
|
|
|
360 |
|
Interest
payable
|
|
|
(13 |
) |
|
|
24 |
|
Deferred rent
and other rent-related expenses
|
|
|
47 |
|
|
|
29 |
|
Other
assets
|
|
|
3,785 |
|
|
|
240 |
|
Other
liabilities
|
|
|
2,273 |
|
|
|
850 |
|
Total
adjustments
|
|
|
7,088 |
|
|
|
1,120 |
|
Net cash
provided by operating activities
|
|
|
10,364 |
|
|
|
4,094 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of
securities held-to-maturity
|
|
|
(7,137 |
) |
|
|
--- |
|
Purchase of
securities available-for-sale
|
|
|
(37,425 |
) |
|
|
--- |
|
Proceeds from
paydowns/maturity of:
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity
|
|
|
- |
|
|
|
1,000 |
|
Securities
available-for-sale
|
|
|
31,071 |
|
|
|
4,994 |
|
Proceeds from
sale of securities
|
|
|
20,457 |
|
|
|
--- |
|
Loans
originated and principal collected, net
|
|
|
(44,643 |
) |
|
|
(19,362 |
) |
Additions to
premises and equipment
|
|
|
(384 |
) |
|
|
(114 |
) |
Net cash used
in investing activities
|
|
|
(38,061 |
) |
|
|
(13,482 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in deposits
|
|
|
(74,480 |
) |
|
|
37,332 |
|
Proceeds from
stock options exercised
|
|
|
525 |
|
|
|
1,244 |
|
Net increase
(decrease) in Federal Funds purchased and Federal Home Loan Bank
borrowings
|
|
|
55,300 |
|
|
|
(24,800 |
) |
Common stock
repurchased
|
|
|
(950 |
) |
|
|
(11,055 |
) |
Dividends
paid in cash
|
|
|
(720 |
) |
|
|
(625 |
) |
Stock issued
under employee stock purchase plan
|
|
|
7 |
|
|
|
--- |
|
Excess tax
benefits from exercised stock options
|
|
|
78 |
|
|
|
497 |
|
Net cash
(used in) provided by financing activities
|
|
|
(20,240 |
) |
|
|
2,593 |
|
|
|
|
|
|
|
|
|
|
Net decrease
in cash and cash equivalents
|
|
|
(47,937 |
) |
|
|
(6,795 |
) |
Cash and cash
equivalents at beginning of period
|
|
|
76,265 |
|
|
|
38,783 |
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$ |
28,328 |
|
|
$ |
31,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Introductory
Explanation
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”), its sole and wholly- owned
subsidiary. On the Effective Date, in a tax-free exchange, each
outstanding share of the Bank was converted into one share of 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.
Note
1: Basis of Presentation
The 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.
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
consolidated financial statements should be read in conjunction with Bancorp’s
2007 Annual Report, which is incorporated by reference in Bancorp’s 2007 Annual
Report on Form 10-K. The results of operations for the three months
ended March 31, 2008 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
|
|
(in
thousands)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
Weighted
average basic shares outstanding
|
|
|
5,136 |
|
|
|
5,158 |
|
|
|
5,231 |
|
Add:
Potential common shares related to stock options
|
|
|
102 |
|
|
|
122 |
|
|
|
186 |
|
Weighted
average diluted shares outstanding
|
|
|
5,238 |
|
|
|
5,280 |
|
|
|
5,417 |
|
Anti-dilutive
shares not included in the calculation of diluted earnings per
share
|
|
|
211 |
|
|
|
206 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,276 |
|
|
$ |
3,258 |
|
|
$ |
2,974 |
|
Earnings per
share (basic)
|
|
$ |
0.64 |
|
|
$ |
0.63 |
|
|
$ |
0.57 |
|
Earnings per
share (diluted)
|
|
$ |
0.63 |
|
|
$ |
0.62 |
|
|
$ |
0.55 |
|
Note
2: Recently Issued Accounting Standards
On March 19, 2008,
the Financial Accounting Standards Board (FASB) issued SFAS. No. 161, “Disclosures
about Derivative Instruments and Hedging Activities-an Amendment of FASB
Statement 133.” SFAS No. 161 enhances required disclosures
regarding derivatives and hedging activities, including improved disclosures
regarding how: (a) an entity uses derivative instruments, (b) derivative
instruments and related hedged items are accounted for SFAS Statement No. 133,
Accounting
for Derivative Instruments and Hedging Activities, and (c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008, with early
application permitted. As SFAS No. 161 is disclosure-related only, it
is expected that SFAS No. 161 will have no impact on Bancorp’s financial
condition or results of operations.
In December 2007,
the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”. SFAS No. 141R establishes principles and requirements for
how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree. The statement also provides guidance
for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial
statement to evaluate the nature and financial effects of the business
combination. SFAS No. 141R is effective for financial statements issued for
fiscal years beginning after December 15, 2008. Accordingly, any business
combinations Bancorp engages in will be recorded and disclosed following
existing generally accepted accounting principles until January 1, 2009. Bancorp
expects SFAS No. 141R would have an impact on its consolidated financial
statements when effective if it acquires another company, but the nature and
magnitude of the specific effects will depend upon the nature, terms and size of
the acquisitions Bancorp consummates after the effective date.
In December 2007,
the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements,” which provides guidance
for accounting and reporting of noncontrolling (minority) interests in
consolidated financial statements. The statement is effective for fiscal years
and interim periods within fiscal years beginning on or after December 15,
2008. Bancorp does not hold minority interests in subsidiaries,
therefore it is expected that SFAS No. 160 will have no impact on its financial
condition or results of operations.
In September 2006,
the Emerging Issues Task Force (EITF) reached a final consensus on Issue No.
06-4 (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 EITF 06-4 had 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 Other Postretirement
Plans, an amendment of FASB Statements Nos. 87, 88, 106 and 132(R).” SFAS
No. 158 requires employers to recognize the under-funded or over-funded 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
postretirement 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
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,
“Fair
Value Measurements.” The
following table summarizes the Bank’s financial instruments that were measured
at fair value on a recurring basis at March 31, 2008.
BANK
OF MARIN BANCORP
(Dollars in
thousands)
Description
of Financial Instruments
|
|
March 31,
2008
|
|
|
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
|
|
$ |
74,118 |
|
|
$ |
74,118 |
|
|
$ |
--- |
|
|
$ |
--- |
|
Derivative
financial assets
|
|
|
57 |
|
|
|
|
|
|
|
57 |
|
|
|
--- |
|
Total
Assets
|
|
$ |
74,175 |
|
|
$ |
74,118 |
|
|
$ |
57 |
|
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial liabilities
|
|
$ |
1,336 |
|
|
$ |
--- |
|
|
$ |
1,336 |
|
|
$ |
--- |
|
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 income approach using
observable Level II market inputs, reflecting market expectations of future
interest rates as of the measurement date. Standard valuation
techniques are used to calculate the present value of the future expected cash
flows assuming an orderly transaction. Level II inputs for the
valuations are limited to observable market prices for LIBOR cash rates (for the
very short term), quoted prices for LIBOR futures contracts (two years and less)
and observable market prices for LIBOR swap rates (at commonly quoted intervals
from two years to beyond the derivative’s maturity). Mid-market
pricing of the inputs is used as a practical expedient in the fair value
measurements. Key inputs for interest rate valuations are used to
project spot rates at resets specified by each swap, as well as to discount
those future cash flows to present value at measurement date. The
interest rate derivative liability position was further discounted to reflect
the potential credit risk to counterparties. The Bank has used the
spread over LIBOR on the fifteen-year fixed-rate credit advance from the FHLB in
San Francisco to calculate this credit-risk related discount of future cash
flows. 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 interest rate
swaps are carried on the balance sheet at their fair value in other assets (when
the fair value is positive) or in other liabilities (when the fair value is
negative) and offset in other non-interest income.
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
|
|
(in thousands
- unaudited)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
Beginning
balance
|
|
$ |
7,575 |
|
|
$ |
7,227 |
|
|
$ |
8,023 |
|
Cumulative-effect
adjustment of adoption of SFAS No. 159
|
|
|
- |
|
|
|
- |
|
|
|
(1,048 |
) |
Provision for
loan loss charged to expense
|
|
|
615 |
|
|
|
345 |
|
|
|
65 |
|
Loans charged
off
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
Loan loss
recoveries
|
|
|
11 |
|
|
|
7 |
|
|
|
3 |
|
Ending
balance
|
|
$ |
8,199 |
|
|
$ |
7,575 |
|
|
$ |
7,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
held in portfolio at end of period, before deducting allowance for loan
losses
|
|
$ |
769,530 |
|
|
$ |
724,878 |
|
|
$ |
656,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
allowance for loan losses to loans held in portfolio
|
|
|
1.07 |
% |
|
|
1.05 |
% |
|
|
1.07 |
% |
Nonaccrual
loans at period end
|
|
$ |
244 |
|
|
$ |
144 |
|
|
$ |
117 |
|
BANK
OF MARIN BANCORP
At
March 31, 2008, the Bank had two non-accrual loans totaling $244
thousand. At December 31, 2007, the Bank had one non-accrual loan
totaling $144 thousand. At March 31, 2007, the Bank had two
non-accrual loans totaling $117 thousand.
The gross interest
income that would have been recorded had non-accrual loans been current totaled
$4 thousand in the quarter ended March 31, 2008, $3 thousand in the quarter
ended December 31, 2007, and $7 thousand in the quarter ended March 31,
2007.
Effective January
1, 2007, the Bank elected the early-adoption provisions of SFAS No. 159, which
permits entities to choose to measure eligible financial instruments at fair
value at specified election dates. Upon adoption, the Bank selected the fair
value option for the indirect auto loan portfolio, which was subsequently sold
on June 5, 2007. In conjunction with the adoption of SFAS No. 159, the allowance
for loan losses was reduced by $1.0 million in the first quarter of 2007, which
is reflected in the table above.
Note
5: Stockholders' Equity
On July 1, 2007,
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 stockholders who dissented to the exchange of these shares for
Bancorp common stock. Also, on the Effective Date, after the repurchase, each
remaining 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.
Effective January
1, 2007, the Bank elected early adoption of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities.” Upon adoption,
the Bank selected the fair value option for its indirect auto loan portfolio,
which was subsequently sold on June 5, 2007. 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.
Under a $15
million, twelve-month share repurchase program approved in October 2006 by the
California Department of Financial Institutions (DFI) and the Federal Deposit
Insurance Corporation (FDIC), the Bank repurchased 115,625 shares in the fourth
quarter of 2006 at an average price of $34.26 per share, plus commissions, for a
total cost of $4.0 million and 289,692 shares in the first quarter of 2007 at an
average price of $38.10 per share, plus commissions, for a total cost of $11.0
million, at which time the program was completed.
In November 2007,
Bancorp’s Board of Directors approved an additional plan to repurchase up to $5
million of common shares of Bancorp. No regulatory approval was
required for this repurchase plan as Bancorp was exempted under the provisions
of Regulation Y of the Federal Reserve Board. In the fourth quarter of 2007,
Bancorp repurchased a total of 51,732 shares at an average price of $29.96 per
share, plus commissions, for a total cost of $1.5 million. In the
first quarter of 2008, Bancorp repurchased 31,602 shares at an average price of
$30.01, plus commissions, for a total cost of $950 thousand.
The Bank executed
the repurchase transactions pursuant to the Securities and Exchange Commission’s
Rule 10b-18. All shares repurchased under both programs were made in
open market transactions and were part of publicly announced repurchase
programs.
A summary of cash
dividends paid to stockholders, which are recorded as a reduction of retained
earnings, is presented below.
|
|
Three months
ended
|
|
(in thousands
except per share data - unaudited)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
Cash
dividends
|
|
$ |
720 |
|
|
$ |
672 |
|
|
$ |
625 |
|
Cash
dividends per share
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.12 |
|
Under SFAS No. 123R
which was implemented in January 2006, the fair value of stock options on the
grant date is recorded as a compensation expense in 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.
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 compensation 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
|
|
(in thousands
- unaudited)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
Stock-based
compensation
|
|
$ |
120 |
|
|
$ |
123 |
|
|
$ |
122 |
|
Tax benefits
on exercised options
|
|
$ |
81 |
|
|
$ |
1 |
|
|
$ |
598 |
|
Note
6: 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
nonperformance 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 $238.0
million at March 31, 2008 at rates ranging from 4.25% to 10.00%. This
amount included $134.8 million under commercial lines of credit (these
commitments are contingent upon customers maintaining specific credit
standards), $60.5 million under revolving home equity lines and $35.4 million
under undisbursed construction loans. The Bank has set aside an allowance for
losses in the amount of $478 thousand for these commitments, which is recorded
in "interest payable and other liabilities."
Note
7: 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 the one-month LIBOR index. 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.
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 derivatives follows:
(in
thousands)
|
|
Fair
Value
Swap
(Shortcut
Accounting
Treatment)
|
|
|
Fair
Value
Swap
(Non-shortcut
Accounting
Treatment)
|
|
|
Yield
Maintenance
Agreement
|
|
At March 31,
2008:
|
|
|
|
|
|
|
|
|
|
Notional or
contractual amount
|
|
$ |
7,113 |
|
|
$ |
8,134 |
|
|
|
--- |
|
Credit risk
amount (1)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Estimated net
fair value
|
|
|
(370 |
) |
|
|
(966 |
) |
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional or
contractual amount
|
|
$ |
7,201 |
|
|
$ |
8,134 |
|
|
|
--- |
|
Credit risk
amount (1)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Estimated net
fair value
|
|
|
(44 |
) |
|
|
(603 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
Mar. 31,
2008
|
|
|
Dec. 31,
2007
|
|
|
Mar. 31,
2007
|
|
Fair Value
Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
Weighted
average receive rate
|
|
|
3.73 |
% |
|
|
5.05 |
% |
|
|
5.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Swap
|
|
|
|
|
|
|
|
|
|
|
|
|
(Non-Shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
5.54 |
% |
|
|
5.54 |
% |
|
|
5.54 |
% |
Weighted
average receive rate
|
|
|
3.68 |
% |
|
|
5.03 |
% |
|
|
5.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
maintenance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average receive rate (2)
|
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain
on designated and undesignated interest rate contracts
|
|
$ |
(689 |
) |
|
$ |
(556 |
) |
|
$ |
2 |
|
Increase
(decrease) in value of designated loans and yield maintenance agreement
qualifying as derivatives
|
|
|
689 |
|
|
|
545 |
|
|
|
(2 |
) |
Net (loss)
gain on derivatives used to hedge loans recorded in income
|
|
$ |
- |
|
|
$ |
(11 |
) |
|
$ |
--- |
|
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 8.45%.
|
|
ITEM 2.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTSOPERATIONS
|
In the following
pages, Management discusses its analysis of the financial condition and results
of operations for the first quarter of 2008 compared to the first quarter of
2007 and to the prior quarter (fourth quarter of 2007). 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 Bancorp’s 2007 Annual Report. 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 stockholders 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.
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
This 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.
Bancorp’s
forward-looking statements include descriptions of plans or objectives of
management for future operations, products or services, and forecasts of its
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 management’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 the
Risk Factors section of Bancorp’s 2007 Form 10-K as filed with the SEC, copies
of which are available from Bancorp at no charge. Forward-looking statements
speak only as of the date they are made. Bancorp does not undertake to update
forward-looking statements to reflect circumstances 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 four accounting policies to be critical: the Allowance for Loan
Losses, Share-Based Payment, Accounting for Income Taxes and Fair Value Option
for Financial Assets and Liabilities.
Allowance
for Loan Losses
Management has
considered the accounting principles upon which Bank of Marin Bancorp’s
financial reporting depends and has determined the allowance for loan losses to
be the most critical accounting policy. The Bank formally assesses the adequacy
of the allowance for loan losses on a quarterly basis. Determination of the
adequacy is based on ongoing assessments of the probable risk in the outstanding
loan portfolio. These assessments include the periodic re-grading of loans based
on changes in their individual credit characteristics including delinquency,
seasoning, recent financial performance of the borrower, economic factors,
changes in the interest rate environment, and other factors as warranted. Loans
are initially graded when originated. They are reviewed as they are renewed,
when there is a new loan to the same borrower and/or when identified facts
demonstrate heightened risk of default. Review of larger problem loans occurs at
least quarterly. Confirmation of the quality of the grading process is obtained
by independent credit reviews conducted by consultants specifically hired for
this purpose and by various bank regulatory agencies.
The Bank's method
for assessing the appropriateness of the allowance includes specific allowances
for identified problem loans, an allowance factor for pools of credits, and
allowances for changing environmental factors (e.g., portfolio trends,
concentration of credit, growth, economic factors). Allowances for identified
problem loans are based on specific analysis of individual credits. Loss
estimation factors for loan pools are based on analysis of local economic
factors applicable to each loan pool. Due to the Bank’s minimal historic losses,
loss estimation factors are based only in part on the previous historical loss
experience for each pool. Allowances for changing environmental factors are
management's best estimate of the probable impact these changes have had on the
loan portfolio as a whole.
Share-Based
Payment
On January 1, 2006,
the Bank adopted the provisions of Statement of Financial Accounting Standard
("SFAS") No.123R, “Share-Based Payment,” which requires that all share-based
payments, 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 to common stock.
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. For additional discussion of
SFAS No.123R, see Note 5 of the Notes to Financial
Statements.
Accounting
for Income Taxes
Effective January
1, 2007, the Bank adopted the provisions of FASB 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. There were no tax positions that did not
meet the more-likely-than-not recognition threshold; therefore, there were no
adjustments to retained earnings as a consequence of adopting FIN No. 48 and no
subsequent adjustments to the provision for income taxes related to FIN
48. To the extent tax authorities disagree with these tax positions,
the Bank’s and Bancorp’s effective tax rates could be materially affected in the
period of settlement with the taxing authorities.
Fair Value
Option for Financial Assets and Financial Liabilities and Fair Value
Measurements
Effective January
1, 2007, Bank of Marin elected early adoption of 159, “The Fair Value
Option for Financial Assets and Financial Liabilities” and SFAS No.
157, “Fair Value
Measurements” and
elected the fair value option for its indirect auto loan portfolio, which was
subsequently sold. The changes in fair value of the portfolio after the initial
adoption at each balance sheet date were recorded through earnings prior to the
sale 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. The assumptions represented
management’s best estimates, but these estimates involved 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.
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 2007 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
earnings.
2007 was a year of
rapid change. In the first half of the year, competition for deposits
in the Bank’s service area continued to put upward pressure on deposit rates
while economic factors resulted in relatively flat loan rates. As a result of a
management decision, the Bank sold its less profitable indirect auto loan
portfolio. The Bank also sold its Visa portfolio to a third party
vendor who can provide a more flexible product while retaining the Bank’s
branding on the Visa card. Proceeds from these sales markedly
improved the Bank’s liquidity, which lessened pressure to compete on deposit
pricing and provided funds for more profitable lending activity.
Beginning in August
through the end of 2007, in response to sudden turmoil in the housing market and
concerns over a possible recession, the Federal Reserve lowered its Federal
funds rate (the rate at which banks may borrow from each other) by 100 basis
points, resulting in lower offered deposit rates by the Bank, which positively
affected the interest margin, along with the reinvestment of sale proceeds into
higher-yielding relationship loans. Although variable rate loans adjusted
downward with the decline in the Prime rate, the yield on fixed rate loans,
which comprise about half of the loan portfolio, remained relatively unchanged.
These changes resulted in a significant improvement to the net
interest margin in the fourth quarter of 2007.
In the first
quarter of 2008, the Federal Reserve continued lowering target rates by another
200 basis points, resulting in lower offered rates on the Bank’s deposits,
further improving the Bank’s net interest margin. The largest factors
likely to affect the Bank’s net interest margin in 2008 will be the level to
which the Bank is responsive to competitive pricing in its market, which will,
in turn, be influenced by the Bank’s liquidity level, as well as the downward
repricing of variable rate loans.
Despite the turmoil
in the financial and housing markets beginning in 2007 and continuing in 2008,
the Bank’s servicing area has been somewhat insulated to date due to the upscale
nature of its market and relatively stable housing prices due to limited area
for housing expansion. The Bank experienced continued strong loan
growth from its market area with good credit quality in the first
quarter of 2008. The Bank holds no sub-prime loans nor does it hold
investment securities backed by sub prime loans.
Deposits declined
$21.5 million in the first quarter of 2008, after excluding a $53.0 million short-term
deposit placed with the bank in the last week of December 2007 which was
withdrawn in January 2008. Among the reasons for the decline in
deposits were general economic factors leading to less excess funds held by our
customers and normal seasonal decline, as well as a limited amount of deposits
leaving for other higher-yielding investment alternatives. Management
anticipates that cash and cash equivalents on hand, deposits and borrowing
capacity will provide adequate liquidity for its operating, investing and
financing needs and its regulatory liquidity requirements for the foreseeable
future.
Through its
Asset/Liability Management Committee (ALCO), Management continually monitors the
balance of loans, deposits and purchased or sold funds to ensure measured growth
under sound banking practices. The Bank’s compliance with regulatory
requirements including capital adequacy and liquidity are monitored on an
ongoing basis and loan or deposit rates may be adjusted to achieve management’s
objectives.
First-quarter 2008
net income includes a pre-tax non-recurring gain of $457 thousand related to the
mandatory redemption of 10,677 of the Bank’s 27,616 shares of class B common
stock of Visa Inc., which became a public company through an initial public
offering (IPO) on March 19, 2008. In addition, in the first quarter of 2008,
Bancorp reversed a pre-tax
charge of $242 thousand that was originally recorded in the fourth quarter of
2007, for the potential obligation to Visa Inc. in connection with certain
litigation indemnifications provided to Visa Inc. by Visa member banks.
Subsequent to its IPO, Visa Inc. established an escrow account from which it
plans to pay any potential settlements. The remaining shares of Visa
Inc. class B common stock held by the Bank are carried at a zero cost basis, as
they are restricted from sale for three years from the IPO
date. After three years these shares will be converted to class A
common stock of Visa Inc. at a conversion rate to be
determined.
Bancorp’s most
recent share repurchase program began in November 2007 under which repurchases
up to $5 million were approved by the Board of Directors. In the first quarter
of 2008, 31,602 shares were repurchased under the program for $950 thousand,
including commissions. Approximately $2.5 million is remaining under
this repurchase plan as of March 31, 2008. Management uses share
repurchase programs to utilize excess capital and to enhance earnings per
share.
RESULTS
OF OPERATIONS
Overview
Highlights of the
financial results are presented in the following table:
|
|
As of and for
the three months ended
|
|
(dollars in
thousands except per share data)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
For the
period:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
3,276 |
|
|
$ |
3,258 |
|
|
$ |
2,974 |
|
Net income
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.64 |
|
|
|
0.63 |
|
|
|
0.57 |
|
Diluted
|
|
|
0.63 |
|
|
|
0.62 |
|
|
|
0.55 |
|
Return on
average equity
|
|
|
14.63 |
% |
|
|
14.64 |
% |
|
|
14.36 |
% |
Return on
average assets
|
|
|
1.48 |
% |
|
|
1.41 |
% |
|
|
1.39 |
% |
Cash dividend
payout ratio
|
|
|
21.88 |
% |
|
|
20.63 |
% |
|
|
21.05 |
% |
Efficiency
ratio
|
|
|
53.89 |
% |
|
|
55.30 |
% |
|
|
58.14 |
% |
At period
end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
per share
|
|
$ |
17.68 |
|
|
$ |
17.13 |
|
|
$ |
15.81 |
|
Total
assets
|
|
$ |
919,839 |
|
|
$ |
933,901 |
|
|
$ |
881,550 |
|
Total
loans
|
|
$ |
769,530 |
|
|
$ |
724,878 |
|
|
$ |
736,115 |
|
Total
deposits
|
|
$ |
760,162 |
|
|
$ |
834,642 |
|
|
$ |
774,029 |
|
Loan-to-deposit
ratio
|
|
|
101.2 |
% |
|
|
86.8 |
% |
|
|
95.1 |
% |
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. Net interest income is impacted by changes in
general market interest rates and by changes in the amounts and composition of
interest-earning assets and 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 of 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.
The following
table, Distribution of Average Statements of Condition and Analysis of Net
Interest Income, compares interest income and interest-earning assets with
interest expense and interest-bearing liabilities for the quarters ended March
31, 2008, December 31, 2007 and March 31, 2007. The table also indicates net
interest income, net interest margin and net interest rate spread for each
quarter.
Distribution
of Average Statements of Condition and Analysis of Net Interest
Income
|
|
|
|
Three months
ended
|
|
|
Three months
ended
|
|
|
Three months
ended
|
|
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
|
March 31,
2007
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
(in
thousands)
|
|
Balance
|
|
|
Expense
(1)
|
|
|
Rate
(1)
|
|
|
Balance
|
|
|
Expense
(1)
|
|
|
Rate
(1)
|
|
|
Balance
|
|
|
Expense
(1)
|
|
|
Rate
(1)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
sold
|
|
$ |
11,156 |
|
|
$ |
112 |
|
|
|
4.02 |
% |
|
$ |
43,704 |
|
|
|
552 |
|
|
|
5.02 |
% |
|
|
121 |
|
|
|
2 |
|
|
|
5.21 |
% |
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
1,282 |
|
|
|
8 |
|
|
|
2.42 |
% |
U.S.
Government agencies
|
|
|
73,108 |
|
|
|
867 |
|
|
|
4.77 |
% |
|
|
79,531 |
|
|
|
1,045 |
|
|
|
5.21 |
% |
|
|
68,872 |
|
|
|
842 |
|
|
|
4.96 |
% |
Other
|
|
|
7,444 |
|
|
|
89 |
|
|
|
4.82 |
% |
|
|
21,119 |
|
|
|
320 |
|
|
|
6.02 |
% |
|
|
7,992 |
|
|
|
98 |
|
|
|
4.99 |
% |
Municipal
bonds
|
|
|
16,866 |
|
|
|
225 |
|
|
|
5.36 |
% |
|
|
13,291 |
|
|
|
164 |
|
|
|
4.93 |
% |
|
|
12,851 |
|
|
|
157 |
|
|
|
4.97 |
% |
Loans and
banker's acceptances (2)
|
|
|
735,888 |
|
|
|
13,312 |
|
|
|
7.28 |
% |
|
|
710,145 |
|
|
|
13,662 |
|
|
|
7.63 |
% |
|
|
722,629 |
|
|
|
13,804 |
|
|
|
7.75 |
% |
Total
interest-earning assets
|
|
|
844,462 |
|
|
|
14,605 |
|
|
|
6.96 |
% |
|
|
867,790 |
|
|
|
15,743 |
|
|
|
7.20 |
% |
|
|
813,747 |
|
|
|
14,911 |
|
|
|
7.43 |
% |
Cash and due
from banks
|
|
|
21,531 |
|
|
|
|
|
|
|
|
|
|
|
22,427 |
|
|
|
|
|
|
|
|
|
|
|
27,175 |
|
|
|
|
|
|
|
|
|
Bank premises
and equipment, net
|
|
|
7,866 |
|
|
|
|
|
|
|
|
|
|
|
7,931 |
|
|
|
|
|
|
|
|
|
|
|
8,378 |
|
|
|
|
|
|
|
|
|
Interest
receivable and other assets, net
|
|
|
16,332 |
|
|
|
|
|
|
|
|
|
|
|
16,549 |
|
|
|
|
|
|
|
|
|
|
|
16,702 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
890,191 |
|
|
|
|
|
|
|
|
|
|
$ |
914,697 |
|
|
|
|
|
|
|
|
|
|
$ |
866,002 |
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
|
78,527 |
|
|
|
88 |
|
|
|
0.45 |
% |
|
|
78,689 |
|
|
|
76 |
|
|
|
0.39 |
% |
|
|
74,810 |
|
|
|
77 |
|
|
|
0.41 |
% |
Savings and
money market accounts
|
|
|
407,890 |
|
|
|
2,191 |
|
|
|
2.16 |
% |
|
|
434,593 |
|
|
|
3,109 |
|
|
|
2.84 |
% |
|
|
376,976 |
|
|
|
3,392 |
|
|
|
3.65 |
% |
Time
accounts
|
|
|
81,948 |
|
|
|
751 |
|
|
|
3.69 |
% |
|
|
84,216 |
|
|
|
837 |
|
|
|
3.94 |
% |
|
|
88,010 |
|
|
|
869 |
|
|
|
4.01 |
% |
Purchased
funds
|
|
|
21,041 |
|
|
|
130 |
|
|
|
2.47 |
% |
|
|
7,837 |
|
|
|
95 |
|
|
|
4.79 |
% |
|
|
35,063 |
|
|
|
438 |
|
|
|
5.06 |
% |
Borrowed
funds
|
|
|
5,000 |
|
|
|
91 |
|
|
|
7.23 |
% |
|
|
5,000 |
|
|
|
104 |
|
|
|
8.36 |
% |
|
|
5,000 |
|
|
|
99 |
|
|
|
7.96 |
% |
Total
interest-bearing liabilities
|
|
|
594,406 |
|
|
|
3,251 |
|
|
|
2.20 |
% |
|
|
610,335 |
|
|
|
4,221 |
|
|
|
2.74 |
% |
|
|
579,859 |
|
|
|
4,875 |
|
|
|
3.41 |
% |
Demand
accounts
|
|
|
198,503 |
|
|
|
|
|
|
|
|
|
|
|
208,555 |
|
|
|
|
|
|
|
|
|
|
|
195,891 |
|
|
|
|
|
|
|
|
|
Interest
payable and other liabilities
|
|
|
7,210 |
|
|
|
|
|
|
|
|
|
|
|
7,512 |
|
|
|
|
|
|
|
|
|
|
|
6,234 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
90,072 |
|
|
|
|
|
|
|
|
|
|
|
88,295 |
|
|
|
|
|
|
|
|
|
|
|
84,018 |
|
|
|
|
|
|
|
|
|
Total
liabilities & stockholders' equity
|
|
$ |
890,191 |
|
|
|
|
|
|
|
|
|
|
$ |
914,697 |
|
|
|
|
|
|
|
|
|
|
$ |
866,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
|
|
|
$ |
11,354 |
|
|
|
|
|
|
|
|
|
|
$ |
11,522 |
|
|
|
|
|
|
|
|
|
|
$ |
10,036 |
|
|
|
|
|
Net interest
margin
|
|
|
|
|
|
|
|
|
|
|
5.41 |
% |
|
|
|
|
|
|
|
|
|
|
5.27 |
% |
|
|
|
|
|
|
|
|
|
|
5.00 |
% |
Net interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
4.76 |
% |
|
|
|
|
|
|
|
|
|
|
4.46 |
% |
|
|
|
|
|
|
|
|
|
|
4.02 |
% |
(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.
|
The tax-equivalent
net interest margin increased to 5.41% in the first quarter of 2008, up 41 basis
points from the first quarter of 2007 and up 14 basis points from the fourth
quarter of 2008. Lower rates on deposits and purchased funds were only partially
offset by lower loan and securities yields. The drop of 100 basis points in the
Federal funds target rate in the latter part of 2007 and 200 basis points in the
first quarter of 2008 resulted in lower offered rates on deposits, favorably
impacting the net interest margin. In the first quarter of 2008 the improvement
in the margin was partially offset by a shift in the mix of interest bearing
liabilities from non-maturity deposits to purchased funds.
Total average
interest-earning assets increased $30.7 million, or 3.8%, in the first quarter
of 2008 compared to the first quarter of 2007 and declined $23.3 million, or
2.7%, compared to the fourth quarter of 2008. The increase compared
to the first quarter of 2007 primarily relates to loan growth and increases in
Federal funds sold, while the decrease compared to the fourth quarter of 2007
primarily relates to lower levels of Federal funds sold and investments
resulting from a lower level of deposits, reflecting the anticipated withdrawal
of a $53 million deposit that was placed with the Bank in December 2007,
partially offset by loan growth.
Due to lower
average market interest rates on the largest components of earning assets, which
are loans and agency securities, the average yield on interest-earning assets
decreased 47 basis points in the first quarter of 2008 compared to the same
quarter in 2007 and 24 basis points less than the prior quarter.
The yield on the
loan portfolio, which comprised 87.1%, 88.8% and 81.8% of average earning assets
in the quarters ended March 31, 2008, March 31, 2007 and December 31, 2007,
respectively, decreased 47 basis points in the first quarter of 2008 over the
comparable period a year ago and 35 basis points from the prior quarter due to
generally declining market rates noted above.
In the quarter
ended March 31, 2008, the yield on the portfolio of agency securities decreased
19 basis points from the same quarter a year ago and 44 basis points from the
prior quarter. Agency securities comprised 8.7%, 8.5% and 9.2% of average
earning assets in those periods, respectively. These securities generally have
shorter lives than other securities in the portfolio and will mature or be
called more quickly. The decrease in yield on agency securities in the periods
primarily relates to maturities and paydowns of securities at higher yields and
purchases of securities at lower yields. The yield on municipal bond securities,
which comprised 2% or less of interest-earning assets in each of the three
quarters presented, increased 39 basis points from the same quarter a year ago
and 43 basis points from the prior quarter. The increases relate to the purchase
of municipal bonds at higher rates than those maturing. In the quarter ended
March 31, 2008, the higher rates on new municipal bonds resulted from reduced
market demand due to growing concern over the stability of certain companies
that insure municipal bonds. At the same time, investor demand moved toward
safer treasury securities in volatile market conditions. These market
conditions required some municipalities to offer higher rates to attract
investors.
The average balance
of interest-bearing liabilities increased $14.5 million, or 2.5% in the first
quarter of 2008 compared to the same period a year ago and decreased $15.9
million, or 2.6% from the prior period. An increase in savings and money market
accounts and interest-bearing transaction accounts was partially offset by the
decline in time accounts and purchased funds in the first quarter of 2008
compared to the first quarter of 2007. In the first quarter of 2008 compared to
the prior quarter, deposit accounts declined (primarily savings and money market
balances) and purchased funds increased, primarily due to economic factors
affecting customers and seasonal declines.
The rate on
interest-bearing liabilities decreased 121 basis points in the first quarter of
2008 over the same quarter a year ago and 54 basis points over the prior
quarter. The overall cost of liabilities is affected by offered rates and the
mix of deposits and liabilities. In the first quarter of 2008, the rate on
savings and money market accounts decreased 149 basis points compared to the
same quarter a year ago and the rate on time deposits decreased 32 basis points
in the same comparable period. Compared to the prior quarter, the
rate on savings and money market accounts decreased 68 basis points and the rate
on time deposits decreased 25 basis points. The decreases reflected
declining market rates.
In the first
quarter of 2008, demand deposits, on which no interest is paid, decreased to
25.9% of average deposits, down from 26.6% in the same quarter a year
ago. Savings and money market accounts increased to 53.2% of average
deposits in the first quarter of 2008, up from 51.2% in the first quarter of
2007, while time deposits decreased to 10.7%% of average deposits from 12.0% in
the same period. The increase in the cost of funds due to the lower proportion
of demand deposits from a year ago was more than offset by the rate reductions
discussed earlier. The mix of deposits in the first quarter of 2008 did not
change significantly from the prior quarter.
Average purchased
funds in the first quarter of 2008 decreased $14.0 million compared to the same
period a year ago and increased $13.2 million compared to the prior quarter. The
decrease compared to the first quarter of 2007 related
to average deposit growth in excess of loan growth. The increase in the first
quarter of 2008 compared to the prior quarter related to growth in loans
combined with a decline in deposits. The rate on purchased funds decreased 259
basis points in the first quarter of 2008 compared to the same quarter last year
and 232 basis points compared to the prior quarter, reflecting the changes in
the Federal funds target rate.
Interest rate
changes can create fluctuations in the net interest margin due to an imbalance
in the timing of repricing or maturity of assets or liabilities. Interest rate
risk exposure is managed with the goal of minimizing the impact of interest rate
volatility on the net interest margin. The largest factors likely to affect
the Bank’s net interest margin in the remainder of 2008 will be the level to
which the Bank is responsive to competitive deposit pricing in its market, which
will, in turn, be influenced by the Bank’s liquidity level, as well as
the downward repricing of variable rate loans.
Provision
for Loan Losses
The Bank formally
assesses the adequacy of the allowance on a quarterly basis. The Bank
provides as an expense an amount 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. For further discussion, see sections captioned “Critical
Accounting Policies”.
The Bank's
provision for loan losses was $615 thousand in the first quarter of 2008
compared to $65 thousand in the first quarter of 2007, and $345 thousand in the
fourth quarter of 2007. The increases
support the significant level of loan growth that the Bank experienced in 2007
and the first quarter of 2008. The allowance for loan losses as a percentage of
loans totaled 1.07% at March 31, 2008, unchanged from a year ago and up two
basis points from December 31, 2007. The provision for loan losses
reflects the amount deemed necessary to maintain the allowance at a level
considered adequate to provide for probable losses inherent in the
portfolio. Net recoveries for the first quarter of 2008 totaled $9
thousand compared with $2 thousand in the first quarter of 2007 and $3 thousand
in the fourth quarter of 2007.
Non-accrual loans totaled $244 thousand, $117
thousand, and $144 thousand at March 31, 2008, March 31, 2007, and December 31,
2007, respectively.
Non-interest
Income
The table below
details the components of non-interest income.
|
|
|
|
|
|
|
|
|
|
|
3/31/08
compared
|
|
|
3/31/08
compared
|
|
|
|
|
|
|
to
12/31/07
|
|
|
to
3/31/07
|
|
|
|
Three months
ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
March
31,
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
(dollars in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
406 |
|
|
$ |
357 |
|
|
$ |
248 |
|
|
$ |
49 |
|
|
|
13.7 |
% |
|
$ |
158 |
|
|
|
63.7 |
% |
Wealth
Management Services
|
|
|
336 |
|
|
|
325 |
|
|
|
275 |
|
|
|
11 |
|
|
|
3.4 |
% |
|
|
61 |
|
|
|
22.2 |
% |
Unrealized
gain on indirect auto portfolio
|
|
|
--- |
|
|
|
--- |
|
|
|
520 |
|
|
|
--- |
|
|
|
--- |
|
|
|
(520 |
) |
|
NM
|
|
Net gain on
redemption of shares in Visa, Inc
|
|
|
457 |
|
|
|
--- |
|
|
|
--- |
|
|
|
457 |
|
|
NM
|
|
|
|
457 |
|
|
NM
|
|
Other
non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings on
Bank-owned life insurance
|
|
|
147 |
|
|
|
147 |
|
|
|
139 |
|
|
|
--- |
|
|
|
--- |
|
|
|
8 |
|
|
|
5.8 |
% |
Customer
banking fees and other charges
|
|
|
94 |
|
|
|
127 |
|
|
|
120 |
|
|
|
(33 |
) |
|
|
(26.0 |
%) |
|
|
(26 |
) |
|
|
(21.7 |
%) |
Other
income
|
|
|
262 |
|
|
|
275 |
|
|
|
206 |
|
|
|
(13 |
) |
|
|
(4.7 |
%) |
|
|
56 |
|
|
|
27.2 |
% |
Total other
non-interest income
|
|
|
503 |
|
|
|
549 |
|
|
|
465 |
|
|
|
(46 |
) |
|
|
(8.4 |
%) |
|
|
38 |
|
|
|
8.2 |
% |
Total
non-interest income
|
|
$ |
1,702 |
|
|
$ |
1,231 |
|
|
$ |
1,508 |
|
|
$ |
471 |
|
|
|
38.3 |
% |
|
$ |
194 |
|
|
|
12.9 |
% |
NM-Not
Meaningful
Non-interest income
for the first quarter of 2008 increased $194 thousand, or 12.9%, as compared to
the first quarter of 2007 and increased $471 thousand, or 38.3%, compared to the
prior quarter. The first quarter of 2008 included a net gain of $457 thousand on
the mandatory redemption of a portion of the Bank’s shares of Visa, Inc, which
became a public company through its initial public offering on March 19,
2008. The first quarter of 2007 included a $520 thousand unrealized
gain on the indirect auto portfolio. Excluding these gains,
non-interest income in the first quarter of 2008 increased by 26.0% from the
same quarter a year ago and
remained relatively unchanged from the prior quarter. The
change from the same quarter a year ago is primarily due to an increase in the
fees the Bank charges for checks drawn against insufficient funds, an increase
in fees from the Bank’s business analysis accounts, and an increase in Wealth
Management Fees.
Service charges on
deposit accounts increased $158 thousand, or 63.7%, from the comparable quarter
a year ago and increased $49 thousand, or 13.7%, from the preceding quarter. The
increase from the first quarter of 2007 is primarily attributable to an increase
effective April 1, 2007, in the fees the Bank charges for checks drawn against
insufficient funds. The increase compared to the prior quarter relates to an
increase in business analysis fees reflecting a decrease in the earnings
allowance (the interest rate we give our business customers to help cover
analysis charges) and an increase in the fees the Bank charges for checks drawn
against insufficient funds, related to higher volume. Wealth
Management Services (WMS) income increased $61 thousand, or 22.2%, from the
first quarter of 2007, and increased $11 thousand, or 3.4%, from the prior
quarter,
reflecting an increase in assets under management and market
appreciation.
Other non-interest
income increased $38 thousand, or 8.2%, from the first quarter of 2007 and
decreased $46 thousand, or 8.4%, from the prior quarter. The increase from the
same quarter a year ago is primarily due to an increase of $31 thousand in
reverse mortgage fees and $14 thousand of indirect auto loan recoveries, which
were recorded in other non-interest income subsequent to recording these loans
at their fair value. The
decrease from the prior quarter primarily reflects lower reverse mortgage fees,
lower business Visa fees and lower net remote capture fees, which are generally
run through account analysis.
Non-interest
Expense
The table below
details the components of non-interest expense.
|
|
|
|
|
|
|
|
|
|
|
3/31/08
compared
|
|
|
3/31/08
compared
|
|
|
|
|
|
|
to
12/31/07
|
|
|
to
3/31/07
|
|
|
|
Three months
ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
March
31,
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
|
Increase
|
|
(dollars in
thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Salaries and
related benefits
|
|
$ |
4,158 |
|
|
$ |
3,836 |
|
|
$ |
3,963 |
|
|
$ |
322 |
|
|
|
8.4 |
% |
|
$ |
195 |
|
|
|
4.9 |
% |
Occupancy and
equipment
|
|
|
768 |
|
|
|
716 |
|
|
|
710 |
|
|
|
52 |
|
|
|
7.3 |
% |
|
|
58 |
|
|
|
8.2 |
% |
Depreciation
& amortization
|
|
|
318 |
|
|
|
317 |
|
|
|
301 |
|
|
|
1 |
|
|
|
0.3 |
% |
|
|
17 |
|
|
|
5.6 |
% |
Data
processing fees
|
|
|
445 |
|
|
|
403 |
|
|
|
418 |
|
|
|
42 |
|
|
|
10.4 |
% |
|
|
27 |
|
|
|
6.5 |
% |
Professional
services
|
|
|
406 |
|
|
|
442 |
|
|
|
318 |
|
|
|
(36 |
) |
|
|
(8.1 |
%) |
|
|
88 |
|
|
|
27.7 |
% |
Other
non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
102 |
|
|
|
47 |
|
|
|
63 |
|
|
|
55 |
|
|
|
117.0 |
% |
|
|
39 |
|
|
|
61.9 |
% |
Director
expense
|
|
|
113 |
|
|
|
104 |
|
|
|
112 |
|
|
|
9 |
|
|
|
8.7 |
% |
|
|
1 |
|
|
|
0.9 |
% |
Other
expense
|
|
|
691 |
|
|
|
1,163 |
|
|
|
804 |
|
|
|
(472 |
) |
|
|
(40.6 |
%) |
|
|
(113 |
) |
|
|
(14.1 |
%) |
Total other
non-interest expense
|
|
|
906 |
|
|
|
1,314 |
|
|
|
979 |
|
|
|
(408 |
) |
|
|
(31.1 |
%) |
|
|
(73 |
) |
|
|
(7.5 |
%) |
Total
non-interest expense
|
|
$ |
7,001 |
|
|
$ |
7,028 |
|
|
$ |
6,689 |
|
|
$ |
(27 |
) |
|
|
(0.4 |
%) |
|
$ |
312 |
|
|
|
4.7 |
% |
Non-interest
expense for the first quarter of 2008 increased $312 thousand, or 4.7%, as
compared to the first quarter of 2007 and decreased by $27 thousand, or 0.4%,
from the prior quarter. Excluding the $242 thousand Visa litigation
accrual and reversal discussed below, non interest expense for the first quarter
of 2008 increased by $554 thousand, or 8.3% from the same quarter a year ago and
increased by $457 thousand, or 6.7% from the prior quarter.
Salaries and
benefits for the first quarter of 2008 increased $195 thousand, or 4.9%, when
compared to the first quarter of 2007 and increased by $322 thousand, or 8.4%,
when compared to the fourth quarter of 2007. The increase from first quarter
2007 primarily represents higher bank wide incentive bonuses and normal salary
increases. The increase from the prior quarter reflects higher incentive bonuses
and higher 401K/ESOP contributions and payroll taxes in the first
quarter. These increases were partially offset by lower salaries, as
a result of lower FTE. The number of FTE totaled 184, 190 and 194 in March 2008,
December 2007 and March 2007, respectively.
Occupancy and
equipment expenses increased $58 thousand, or 8.2%, from the first quarter of
2007 and increased $52 thousand, or 7.3% from prior quarter. The
increase from first quarter 2007 is primarily due to annual rent increases in
the branch facilities. The increase from the prior quarter
reflects the addition of a new branch in Mill Valley and higher maintenance
and repair costs.
Depreciation and
amortization expenses for the first quarter of 2008 increased $17 thousand, or
5.6%, from the first quarter of 2007 and remained relatively unchanged from the
preceding quarter. The increase from the same quarter last year is
primarily due to the remodel of the Northgate branch, additions to data
processing equipment and a software upgrade.
Data processing
expense for the first quarter of 2008 increased $27 thousand, or 6.5%, compared
to the first quarter of 2007 and increased $42 thousand, or 10.4%, compared to
the fourth quarter of 2007. These increases primarily reflect a one time
de-conversion fee related to credit card customers.
Professional
services for the first quarter of 2008 increased $88 thousand, or 27.7%, from
the first quarter of 2007 and decreased $36 thousand, or 8.1% from the fourth
quarter of 2007. The increase compared to first quarter 2007 was mainly
attributable to higher consulting fees due to strategic initiatives and higher
investment advisory fees reflecting an increase in assets under management and
market appreciation. The decrease from the prior quarter is primarily
due to lower accounting fees.
Other non-interest
expense for the first quarter of 2008 decreased by $73 thousand, or 7.5%
compared to the first quarter of 2007 and decreased by $408 thousand, or 31.1%,
from the fourth quarter of 2008. The decreases reflect the reversal of a $242
thousand Visa litigation accrual that was originally recorded in the fourth
quarter of 2007 for the potential obligation to Visa Inc. in connection with
certain litigation indemnifications provided to Visa Inc. by Visa member
banks. Excluding this accrual and reversal, other non interest expense
increased $169 or 17.3% compared to the same quarter a year ago and increased
$76 thousand or 7.1% from the fourth quarter of 2007. The increase
from first quarter 2007 is primarily due to higher costs in FDIC insurance (for
industry-wide FDIC assessment), information technology (for storage area network
upgrade), and advertising (for additional print ads in new geographic locations
and a new transit campaign). The increase from the prior quarter
reflects higher advertising and information technology costs as
discussed.
Provision
for Income Taxes
Bancorp reported a
provision for income taxes of $2.1 million, $2.1 million, and $1.8 million for
the quarters ended March 31, 2008, December 31, 2007, and March 31, 2007,
respectively. The effective tax rates were 39.1%, 39.0% and 37.4% for
those same periods. 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. The Bank has not been subject to an alternative minimum tax
(AMT).
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
three months of 2008, total assets decreased $14.1 million to $919.8 million
from December 31, 2007. This reduction in assets primarily reflected
an increase in loans of $44.0 million, which was offset by a decline in Federal
funds sold of $47.5 million and maturities and paydowns of investment securities
in excess of purchases totaling $5.8 million. The decline in Federal funds sold
and investment securities resulted from a decline in deposits during the period,
which reflected the anticipated withdrawal of a $53.0 million short-term deposit
placed with the Bank in December of 2007, which left the Bank in January
2008. As reflected in the table below, the increase in loans
primarily reflected an increase in commercial real estate, residential and
construction loans.
(Dollars in
thousands)
|
|
March 31,
2008
|
|
|
December 31,
2007
|
|
Commercial
loans
|
|
$ |
126,677 |
|
|
$ |
124,336 |
|
Real
estate
|
|
|
|
|
|
|
|
|
Commercial
owner-occupied
|
|
|
144,709 |
|
|
|
132,614 |
|
Commercial
investor
|
|
|
277,183 |
|
|
|
257,127 |
|
Construction
|
|
|
101,865 |
|
|
|
97,153 |
|
Residential
(a)
|
|
|
84,013 |
|
|
|
78,860 |
|
Installment
|
|
|
35,083 |
|
|
|
34,788 |
|
Total
loans
|
|
|
769,530 |
|
|
|
724,878 |
|
Allowance for
loan losses
|
|
|
8,199 |
|
|
|
7,575 |
|
Total net
loans
|
|
$ |
761,331 |
|
|
$ |
717,303 |
|
(a) The residential
loan portfolio includes no sub-prime loans at March 31, 2008 and December 31,
2007.
Other assets
include net deferred tax assets of $5.2 million and $5.1 million at March 31,
2008 and December 31, 2007, 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. 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
three months of 2008, total liabilities decreased $17.0 million to $829.1
million. The decrease in total liabilities is primarily due to the
decrease in deposits of $74.5 million (including an anticipated withdrawal of
$53 million which was placed in December of 2007), offset by an increase in
overnight and FHLB borrowings of $55.3
million.
Stockholders’
equity increased $2.9 million to $90.7 million during the first three months of
2008. The increase in stockholders’ equity primarily reflects the
Bank’s earnings of $3.3 million and the exercise of stock options, (including
tax benefits) totaling $606 thousand, partially offset by the repurchase of the
Bank’s common stock totaling $950 thousand and the payment of cash dividends
totaling $720 thousand.
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 and Bancorp’s capital adequacy ratios as
of March 31, 2008 and December 31, 2007 are presented in the following
table. 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.
Capital
Ratios for Bancorp
|
|
|
|
|
|
|
Ratio for
Capital
|
(in
thousands)
|
|
Actual
Ratio
|
|
Adequacy
Purposes
|
As of March
31, 2008
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
Ratio
|
Total Capital
(to risk-weighted assets)
|
|
$ |
104,174 |
|
|
|
11.91 |
% |
≥
$70,002
|
≥
8.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
90,498 |
|
|
|
10.34 |
% |
≥
$35,001
|
≥
4.00%
|
Tier I
Capital (to average assets)
|
|
$ |
90,498 |
|
|
|
10.17 |
% |
≥
$35,608
|
≥
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to risk-weighted assets)
|
|
$ |
101,066 |
|
|
|
12.06 |
% |
≥
$67,015
|
≥
8.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
88,041 |
|
|
|
10.51 |
% |
≥
$33,508
|
≥
4.00%
|
Tier I
Capital (to average assets)
|
|
$ |
88,041 |
|
|
|
9.63 |
% |
≥
$36,588
|
≥
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio to be
Well
|
|
|
|
|
|
|
|
|
|
Capitalized
under
|
Capital
Ratios for the Bank
|
|
|
|
|
|
|
Ratio for
Capital
|
Prompt
Corrective
|
(in
thousands)
|
|
Actual
Ratio
|
|
Adequacy
Purposes
|
Action
Provisions
|
As of March
31, 2008
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Total Capital
(to risk-weighted assets)
|
|
$ |
100,046 |
|
|
|
11.44 |
% |
≥
$69,989
|
≥
8.00%
|
≥
$87,486
|
≥
10.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
86,369 |
|
|
|
9.87 |
% |
≥
$34,995
|
≥
4.00%
|
≥
$52,492
|
≥
6.00%
|
Tier I
Capital (to average assets)
|
|
$ |
86,369 |
|
|
|
9.70 |
% |
≥
$35,606
|
≥
4.00%
|
≥
$44,508
|
≥
5.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
(to risk-weighted assets)
|
|
$ |
97,179 |
|
|
|
11.61 |
% |
≥
$66,983
|
≥
8.00%
|
≥
$83,729
|
≥
10.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
84,155 |
|
|
|
10.05 |
% |
≥
$33,491
|
≥
4.00%
|
≥
$50,237
|
≥
6.00%
|
Tier I
Capital (to average assets)
|
|
$ |
84,155 |
|
|
|
9.20 |
% |
≥
$36,587
|
≥
4.00%
|
≥
$45,734
|
≥
5.00%
|
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 the Federal Home Loan Bank of San Francisco (FHLB) and 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.
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. The Bank’s primary uses of funds are the
origination of loans, the purchase of investment securities, maturing CDs,
deposit withdrawals, repayment of borrowings and dividends to common
stockholders.
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 long-term decline in retail deposit funding would
adversely impact the Bank’s liquidity. 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.
As presented in the
accompanying unaudited consolidated statements of cash flows, the sources of
liquidity vary between periods. Consolidated cash and cash equivalents at March
31, 2008 totaled $28.3 million. The primary sources of funds during the quarter
ended March 31, 2008 were $55.3 million in Federal funds purchased and Federal
Home Loan Bank borrowings, $31.0 million in the maturities and paydowns of
securities available for sale and $20.0 million in securities sales. The primary
uses of funds were a $74.5 million decline in deposits (including the
anticipated withdrawal of a $53 million short-term deposit placed with the Bank
in December 2007), $44.6 million in loan originations (net of principal
collections), and $44.6 million investment securities purchases.
The decline in
deposits in excess of the anticipated withdrawal of the $53.0 million short-term
deposit is primarily related to general economic factors affecting customers and
seasonal declines. The Bank anticipates that it will be in a borrowing position
in the short-term until the economy shows improvement. If short-term interest
rates continue to decline, the Bank’s net interest margin may be negatively
affected, as interest-earning assets reprice faster than interest-bearing
liabilities.
At March 31, 2008
the Bank’s cash and cash equivalents, Federal funds sold and unpledged assets
maturing within one year totaled $30.1 million. The remainder of the unpledged
securities portfolio of $70.0 million provides additional liquidity. Taken
together, these liquid assets equaled 10.9% of the Bank’s assets at March 31,
2008. The corresponding figure at December 31, 2007 was 16.6%. The
decreased liquidity at March 31, 2008 is primarily related to a lower Federal
funds sold level resulting from loan growth and a decline in
deposits.
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. Management
monitors the Bank's liquidity position daily, balancing loan fundings/payments
with changes in deposit activity and overnight investments. The Bank's emphasis
on local deposits combined with its 9.4% equity capital base, provides a very
stable funding base. 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 $3.5 million line of
credit with the Federal Reserve Bank to borrow overnight, which were not drawn
upon at March 31, 2008. The Bank is a member of the FHLB and has a line of
credit (secured under terms of a blanket collateral agreement by a pledge of
loans) for advances of $186.8 million, of which $131.4 million was available at
March 31, 2008, at an interest rate that is determined
daily. Borrowings under the line are limited to eligible
collateral.
Undisbursed loan
commitments, which are not reflected on the statement of condition, totaled
$238.0 million at March 31, 2008 at rates ranging from 4.25% to
10.00%. This amount included $134.8 million under commercial lines of
credit (these commitments are contingent upon customers maintaining specific
credit standards), $60.5 million under revolving home equity lines and $35.4
million under undisbursed construction loans. These commitments, to the extent
used, are expected to be funded through repayment of existing loans, deposit
growth and FHLB borrowings. Over the next twelve months $68.4 million of time
deposits will mature. The Bank expects these funds to be replaced with new time
or savings accounts.
The primary source
of funds for Bancorp is dividends from the Bank. The primary uses of
funds are stockholder dividends, stock repurchases 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.
Activities in asset
and liability management include, but are not limited to, lending, accepting
deposits and investing in securities. Interest rate risk is the primary market
risk associated with asset and liability management. Sensitivity of net interest
income (NII) and Capital to interest rate changes results from differences in
the maturity, or repricing, of asset and liability portfolios. To mitigate
interest rate risk, the structure of the Statement of Condition is managed with
the objective of correlating the movements of interest rates on loans and
investments with those of deposits and borrowings. The asset and liability
policy sets limits on the acceptable amount of change to NII and Capital in
changing interest rate environments. The Bank uses simulation models to forecast
NII and Capital.
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. A simplified statement of condition is prepared on a quarterly
basis as a starting point, using as inputs, actual loans, investments and
deposits. 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 during the first quarter of 2008. The decline in 2008 in
Federal funds sold and increase in loans has caused the Bank’s assets to be less
sensitive to interest rate changes. The decline
in deposits and increase in purchased funds in 2008 has caused the
Bank’s liabilities to become slightly more sensitive to interest rate movements.
Also refer to “Market Risk Management” in Bank of Marin Bancorp’s 2007 Annual
Report.
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.
PART
II OTHER INFORMATION
There are no
pending, or to management's knowledge any threatened, material legal proceedings
to which Bancorp is a party, or to which any of Bancorp’s properties are
subject. There are no material legal proceedings to which any
director, any nominee for election as a director, any executive officer of
Bancorp, or any associate of any such director, nominee or officer is a party
adverse to Bancorp.
Bancorp recorded a
liability of $242 thousand in the fourth quarter of 2007 to cover its potential
liability to Visa, Inc. in connection with its proportionate share of
certain litigation indemnifications provided to Visa U.S.A. by its member banks.
In the first quarter of 2008, Bancorp reversed this liability because,
subsequent to its initial public offering on March 19, 2008, Visa Inc.
established an escrow account from which it plans to pay any potential
settlements.
There have been no material changes from the risk
factors previously disclosed in Bank of Marin Bancorp’s 2007 Form 10-K. Refer to
“Risk Factors” in Bank of Marin’s 2007 Form 10-K, pages 9 through 13.
Item
2 Unregistered Sales of Equity Securities and Use of
Proceeds
In November 2007,
Bancorp’s Board of Directors approved a plan to repurchase common shares of
Bancorp up to $5 million. No regulatory approval was required for this
repurchase plan as Bancorp was exempted under the provisions of Regulation Y of
the Federal Reserve Board. In November and December of 2007, Bancorp repurchased
a total of 51,732 shares at an average price of $29.96 per share for a total
cost of $1.6 million.
A schedule of
purchases during the quarter ended March 31, 2008 follows.
(Dollars in
thousands, except per share data)
|
|
|
|
|
|
|
|
Total Number
of
|
|
|
Approximate
dollar
|
|
|
|
Total
Number
|
|
|
|
|
|
Shares
Purchases as
|
|
|
Value that
May Yet
|
|
|
|
of
Shares
|
|
|
Average
|
|
|
Part of
Publicly
|
|
|
be Purchased
Under
|
|
Period
|
|
Purchases
|
|
|
Price
|
|
|
Announced
Program
|
|
|
the
Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1-31,
2008
|
|
|
5,100 |
|
|
$ |
28.75 |
|
|
|
5,100 |
|
|
$ |
3,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
1-28, 2008
|
|
|
21,502 |
|
|
$ |
30.27 |
|
|
|
21,502 |
|
|
$ |
2,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1-31,
2008
|
|
|
5,000 |
|
|
$ |
30.20 |
|
|
|
5,000 |
|
|
$ |
2,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,602 |
|
|
$ |
30.01 |
|
|
|
31,602 |
|
|
$ |
2,501 |
|
Item
3 Defaults Upon Senior Securities
None.
Item
4 Submission of Matters to a Vote of Security
Holders
No
matters were submitted to a vote of security holders during the first quarter of
2008.
None.
The following
exhibits are filed as part of this report or hereby incorporated by reference to
filings previously made with the SEC.
|
3.01
|
Articles of
Incorporation, as amended, incorporated by reference to Exhibit 3.01 to
Bancorp’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2007.
|
|
3.02
|
Bylaws, as
amended, incorporated by reference to Exhibit 3.02 to Bancorp’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
2007.
|
|
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 10.01
to Current Report Form 8-K filed with the Securities and Exchange
Commission on October 30, 2007.
|
|
10.06
|
Form of
Indemnification Agreement for Directors and Executive Officers dated
August 9, 2007 is incorporated by reference to Exhibit 10.06 to Bancorp’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2007.
|
|
10.07
|
Retirement
Agreement and Release between the Bank and W. Robert Griswold, Jr. dated
March 11, 2006 is incorporated by reference to Exhibit 10.07 to Bancorp’s
Form 10-K for the year ended December 31,
2007.
|
|
10.08
|
Consulting
Agreement between the Bank and W. Robert Griswold, Jr. dated March 11,
2006 is incorporated by reference to Exhibit 10.08 to Bancorp’s Form 10-K
for the year ended December 31,
2007.
|
|
31.01
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.02
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.01
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 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)
|
|
|
|
|
|
|
|
|
|
May
5, 2008
|
|
/s/
Russell A. Colombo
|
|
Date
|
|
Russell A.
Colombo
|
|
|
|
President
& Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
5, 2008
|
|
/s/
Christina J. Cook
|
|
Date
|
|
Christina J.
Cook
|
|
|
|
Executive
Vice President & Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
5, 2008
|
|
/s/
Larry R. Olafson
|
|
Date
|
|
Larry R.
Olafson
|
|
|
|
Senior Vice
President & Controller
|
|
Exhibit
Number
|
|
Description
|
|
Location
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
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