form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the quarterly period ended September
30,
2008
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the transition
period from __________________ to __________________
Commission File Number 001-33572
Bank
of Marin Bancorp
(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 x No o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
Large accelerated filer o
|
Accelerated filer x
|
Non-accelerated filer o
|
Smaller reporting company
o
|
Indicate by check
mark if the registrant is a shell company, in Rule 12b(2) of the Exchange
Act.
Yes o No
x
As
of October 31, 2008 there were 5,144,822 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 filings 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.
TABLE OF
CONTENTS
PART I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
|
|
4
|
|
|
5
|
|
|
7
|
|
|
8
|
|
|
9
|
|
|
|
Item
2
|
|
17
|
|
|
|
Item
3
|
|
32
|
|
|
|
Item
4
|
|
33
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1
|
|
33
|
|
|
|
Item
1A
|
|
33
|
|
|
|
Item
2
|
|
34
|
|
|
|
Item
3
|
|
34
|
|
|
|
Item
4
|
|
34
|
|
|
|
Item
5
|
|
34
|
|
|
|
Item
6
|
|
34
|
|
|
|
|
36
|
|
|
|
|
37
|
CONSOLIDATED
STATEMENTS OF CONDITION
at September
30, 2008 and December 31,
2007
|
(in
thousands, except share amounts - 2008
unaudited)
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$ |
20,464 |
|
|
$ |
28,765 |
|
Federal funds
sold
|
|
|
--- |
|
|
|
47,500 |
|
Cash and cash
equivalents
|
|
|
20,464 |
|
|
|
76,265 |
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
Held to
maturity, at amortized cost
|
|
|
20,542 |
|
|
|
13,182 |
|
Available for sale (at fair
market value, amortized cost $73,405at September
30, 2008 and $87,450 at December 31,
2007)
|
|
|
73,348 |
|
|
|
86,989 |
|
Total
investment securities
|
|
|
93,890 |
|
|
|
100,171 |
|
|
|
|
|
|
|
|
|
|
Loans, net of
allowance for losses of $9,271 at September 30, 2008 and $7,575 at
December 31, 2007
|
|
|
829,736 |
|
|
|
717,303 |
|
Bank premises
and equipment, net
|
|
|
8,558 |
|
|
|
7,821 |
|
Interest
receivable and other assets
|
|
|
32,091 |
|
|
|
32,341 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
984,739 |
|
|
$ |
933,901 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
215,307 |
|
|
$ |
220,272 |
|
Interest
bearing
|
|
|
|
|
|
|
|
|
Transaction
accounts
|
|
|
80,723 |
|
|
|
110,174 |
|
Savings and
money market
|
|
|
449,303 |
|
|
|
421,255 |
|
CDARS®
reciprocal time
|
|
|
16,776 |
|
|
|
--- |
|
Other
time
|
|
|
87,119 |
|
|
|
82,941 |
|
Total
deposits
|
|
|
849,228 |
|
|
|
834,642 |
|
|
|
|
|
|
|
|
|
|
Federal funds
purchased and Federal Home Loan Bank borrowings
|
|
|
28,600 |
|
|
|
--- |
|
Subordinated
debenture
|
|
|
5,000 |
|
|
|
5,000 |
|
Interest
payable and other liabilities
|
|
|
7,238 |
|
|
|
6,485 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
890,066 |
|
|
|
846,127 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value
|
|
|
|
|
|
|
|
|
Authorized -
5,000,000 shares; none issued
|
|
|
--- |
|
|
|
--- |
|
Common stock,
no par value
|
|
|
|
|
|
|
|
|
Authorized -
15,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and
outstanding - 5,136,267 shares at September 30, 2008 and 5,122,971 at
December 31, 2007
|
|
|
50,527 |
|
|
|
51,059 |
|
Retained
earnings
|
|
|
44,179 |
|
|
|
36,983 |
|
Accumulated
other comprehensive loss, net
|
|
|
(33 |
) |
|
|
(268 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
94,673 |
|
|
|
87,774 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders'
equity
|
|
$ |
984,739 |
|
|
$ |
933,901 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the nine
months ended September 30, 2008 and September 30,
2007
|
(in
thousands, except per share amounts -
unaudited)
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
Interest and
fees on loans held in portfolio
|
|
$ |
40,545 |
|
|
$ |
39,006 |
|
Interest on
auto loans held for sale
|
|
|
--- |
|
|
|
2,062 |
|
Interest on
investment securities
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
--- |
|
|
|
8 |
|
Securities of
U.S. Government agencies
|
|
|
2,641 |
|
|
|
2,714 |
|
Obligations
of state and political subdivisions (tax exempt)
|
|
|
531 |
|
|
|
358 |
|
Corporate
debt securities and other
|
|
|
258 |
|
|
|
336 |
|
Interest on
Federal funds sold
|
|
|
138 |
|
|
|
1,657 |
|
Total
interest income
|
|
|
44,113 |
|
|
|
46,141 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Interest on
interest bearing transaction accounts
|
|
|
277 |
|
|
|
225 |
|
Interest on
savings and money market deposits
|
|
|
5,607 |
|
|
|
11,052 |
|
Interest on
CDARS® reciprocal time deposits
|
|
|
55 |
|
|
|
--- |
|
Interest on
other time deposits
|
|
|
1,962 |
|
|
|
2,628 |
|
Interest on
borrowed funds
|
|
|
702 |
|
|
|
973 |
|
Total
interest expense
|
|
|
8,603 |
|
|
|
14,878 |
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
35,510 |
|
|
|
31,263 |
|
Provision for
loan losses
|
|
|
2,810 |
|
|
|
340 |
|
Net interest
income after provision for loan
losses
|
|
|
32,700 |
|
|
|
30,923 |
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,253 |
|
|
|
894 |
|
Wealth
Management Services
|
|
|
976 |
|
|
|
904 |
|
Net gain on
indirect auto and Visa portfolios
|
|
|
--- |
|
|
|
1,097 |
|
Net gain on
redemption of shares in Visa, Inc.
|
|
|
457 |
|
|
|
--- |
|
Other
income
|
|
|
1,489 |
|
|
|
1,592 |
|
Total
non-interest income
|
|
|
4,175 |
|
|
|
4,487 |
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
Salaries and
related benefits
|
|
|
12,372 |
|
|
|
12,064 |
|
Occupancy and
equipment
|
|
|
2,363 |
|
|
|
2,155 |
|
Depreciation
and amortization
|
|
|
996 |
|
|
|
929 |
|
Data
processing
|
|
|
1,355 |
|
|
|
1,254 |
|
Professional
services
|
|
|
1,161 |
|
|
|
1,239 |
|
Other
expense
|
|
|
3,336 |
|
|
|
3,004 |
|
Total
non-interest expense
|
|
|
21,583 |
|
|
|
20,645 |
|
|
|
|
|
|
|
|
|
|
Income before
provision for income taxes
|
|
|
15,292 |
|
|
|
14,765 |
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
5,935 |
|
|
|
5,699 |
|
Net
income
|
|
$ |
9,357 |
|
|
$ |
9,066 |
|
|
|
|
|
|
|
|
|
|
Net income
per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.82 |
|
|
$ |
1.74 |
|
Diluted
|
|
$ |
1.79 |
|
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income per common
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,135 |
|
|
|
5,197 |
|
Diluted
|
|
|
5,224 |
|
|
|
5,347 |
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.42 |
|
|
$ |
0.38 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
BANK
OF MARIN BANCORP
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the three
months ended September 30, 2008, June 30, 2008 and September 30,
2007
|
(in
thousands, except per share amounts -
unaudited
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans held in portfolio
|
|
$ |
13,833 |
|
|
$ |
13,400 |
|
|
$ |
13,283 |
|
Interest on
investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of
U.S. Government agencies
|
|
|
892 |
|
|
|
882 |
|
|
|
1,063 |
|
Obligations
of state and political subdivisions (tax exempt)
|
|
|
187 |
|
|
|
183 |
|
|
|
129 |
|
Corporate
debt securities and other
|
|
|
91 |
|
|
|
78 |
|
|
|
115 |
|
Interest on
Federal funds sold
|
|
|
25 |
|
|
|
1 |
|
|
|
1,240 |
|
Total
interest income
|
|
|
15,028 |
|
|
|
14,544 |
|
|
|
15,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on
interest bearing transaction accounts
|
|
|
93 |
|
|
|
96 |
|
|
|
74 |
|
Interest on
savings and money market deposits
|
|
|
1,833 |
|
|
|
1,583 |
|
|
|
3,882 |
|
Interest on
CDARS® reciprocal time deposits
|
|
|
50 |
|
|
|
4 |
|
|
|
--- |
|
Interest on
other time deposits
|
|
|
562 |
|
|
|
650 |
|
|
|
877 |
|
Interest on
borrowed funds
|
|
|
179 |
|
|
|
302 |
|
|
|
209 |
|
Total
interest expense
|
|
|
2,717 |
|
|
|
2,635 |
|
|
|
5,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
|
12,311 |
|
|
|
11,909 |
|
|
|
10,788 |
|
Provision for
loan losses
|
|
|
1,685 |
|
|
|
510 |
|
|
|
200 |
|
Net interest
income after provision for loan
losses
|
|
|
10,626 |
|
|
|
11,399 |
|
|
|
10,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
417 |
|
|
|
430 |
|
|
|
325 |
|
Wealth
Management Services
|
|
|
330 |
|
|
|
310 |
|
|
|
331 |
|
Net gain on
Visa portfolio
|
|
|
--- |
|
|
|
--- |
|
|
|
387 |
|
Other
income
|
|
|
447 |
|
|
|
539 |
|
|
|
543 |
|
Total
non-interest income
|
|
|
1,194 |
|
|
|
1,279 |
|
|
|
1,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related benefits
|
|
|
4,179 |
|
|
|
4,035 |
|
|
|
3,938 |
|
Occupancy and
equipment
|
|
|
802 |
|
|
|
793 |
|
|
|
716 |
|
Depreciation
and amortization
|
|
|
351 |
|
|
|
327 |
|
|
|
318 |
|
Data
processing
|
|
|
480 |
|
|
|
430 |
|
|
|
411 |
|
Professional
services
|
|
|
336 |
|
|
|
419 |
|
|
|
536 |
|
Other
expense
|
|
|
1,294 |
|
|
|
1,136 |
|
|
|
1,007 |
|
Total
non-interest expense
|
|
|
7,442 |
|
|
|
7,140 |
|
|
|
6,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
provision for income taxes
|
|
|
4,378 |
|
|
|
5,538 |
|
|
|
5,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
1,683 |
|
|
|
2,152 |
|
|
|
2,059 |
|
Net
income
|
|
$ |
2,695 |
|
|
$ |
3,386 |
|
|
$ |
3,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.53 |
|
|
$ |
0.66 |
|
|
$ |
0.62 |
|
Diluted
|
|
$ |
0.52 |
|
|
$ |
0.65 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used to compute net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,130 |
|
|
|
5,139 |
|
|
|
5,172 |
|
Diluted
|
|
|
5,209 |
|
|
|
5,226 |
|
|
|
5,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
for the year
ended December 31, 2007 and the nine months ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive
|
|
|
|
|
|
|
Common
Stock
|
|
|
Retained
|
|
|
Loss,
|
|
|
|
|
(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 |
|
Excess tax
benefit - stock-based compensation
|
|
|
--- |
|
|
|
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 - stock options
|
|
|
--- |
|
|
|
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
|
|
|
--- |
|
|
|
--- |
|
|
|
9,357 |
|
|
|
--- |
|
|
|
9,357 |
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized loss
on available for sale securities
(net of tax liability of
$170)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
235 |
|
|
|
235 |
|
Comprehensive
income
|
|
|
--- |
|
|
|
--- |
|
|
|
9,357 |
|
|
|
235 |
|
|
|
9,592 |
|
Stock options
exercised
|
|
|
85,066 |
|
|
|
1,262 |
|
|
|
--- |
|
|
|
--- |
|
|
|
1,262 |
|
Excess tax
benefit - stock-based compensation
|
|
|
--- |
|
|
|
128 |
|
|
|
--- |
|
|
|
--- |
|
|
|
128 |
|
Stock
repurchased, including commission costs
|
|
|
(88,316 |
) |
|
|
(2,526 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
(2,526 |
) |
Stock issued
under employee stock purchase plan
|
|
|
954 |
|
|
|
26 |
|
|
|
--- |
|
|
|
--- |
|
|
|
26 |
|
Stock-based
compensation - stock options
|
|
|
--- |
|
|
|
316 |
|
|
|
--- |
|
|
|
--- |
|
|
|
316 |
|
Restricted
stock granted
|
|
|
6,700 |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Stock-based
compensation - restricted stock
|
|
|
--- |
|
|
|
15 |
|
|
|
--- |
|
|
|
--- |
|
|
|
15 |
|
Cash
dividends paid
|
|
|
--- |
|
|
|
--- |
|
|
|
(2,161 |
) |
|
|
--- |
|
|
|
(2,161 |
) |
Stock issued
in payment of director fees
|
|
|
8,892 |
|
|
|
247 |
|
|
|
--- |
|
|
|
--- |
|
|
|
247 |
|
Balance at
September 30, 2008
|
|
|
5,136,267 |
|
|
$ |
50,527 |
|
|
$ |
44,179 |
|
|
$ |
(33 |
) |
|
$ |
94,673 |
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for nine
months ended September 30, 2008 and
2007
|
(in
thousands, unaudited)
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
9,357 |
|
|
$ |
9,066 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
|
2,810 |
|
|
|
340 |
|
Compensation
paid and payable in common stock
|
|
|
195 |
|
|
|
193 |
|
Stock-based
compensation expense
|
|
|
331 |
|
|
|
379 |
|
Excess tax
benefits from exercised stock options
|
|
|
(128 |
) |
|
|
(534 |
) |
Amortization
and accretion of investment security premiums, net
|
|
|
186 |
|
|
|
142 |
|
Loss on sale
of investment securities
|
|
|
2 |
|
|
|
--- |
|
Depreciation
and amortization
|
|
|
996 |
|
|
|
929 |
|
Net gain on
indirect auto and Visa portfolios
|
|
|
--- |
|
|
|
(1,097 |
) |
Net gain on
redemption of shares in Visa, Inc.
|
|
|
(457 |
) |
|
|
--- |
|
Loss on
disposal of premises and equipment
|
|
|
14 |
|
|
|
--- |
|
Net change in
operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
106 |
|
|
|
139 |
|
Interest
payable
|
|
|
57 |
|
|
|
125 |
|
Deferred rent
and other rent-related expenses
|
|
|
105 |
|
|
|
83 |
|
Other
assets
|
|
|
2,194 |
|
|
|
707 |
|
Other
liabilities
|
|
|
988 |
|
|
|
2,454 |
|
Total
adjustments
|
|
|
7,399 |
|
|
|
3,860 |
|
Net cash
provided by operating
activities
|
|
|
16,756 |
|
|
|
12,926 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of
securities held-to-maturity
|
|
|
(9,584 |
) |
|
|
(2,056 |
) |
Purchase of
securities available-for-sale
|
|
|
(42,607 |
) |
|
|
(24,445 |
) |
Proceeds from
sale of securities
|
|
|
21,489 |
|
|
|
--- |
|
Proceeds from
paydowns/maturity of:
|
|
|
|
|
|
|
|
|
Securities
held-to-maturity
|
|
|
1,125 |
|
|
|
2,590 |
|
Securities
available-for-sale
|
|
|
36,531 |
|
|
|
15,024 |
|
Proceeds from
sale of indirect auto and Visa portfolios
|
|
|
--- |
|
|
|
78,599 |
|
Loans
originated and principal collected, net
|
|
|
(115,460 |
) |
|
|
(47,334 |
) |
Purchase of
bank owned life insurance policies
|
|
|
(2,219 |
) |
|
|
--- |
|
Additions to
premises and equipment
|
|
|
(1,747 |
) |
|
|
(502 |
) |
Net cash
(used in) provided by investing
activities
|
|
|
(112,472 |
) |
|
|
21,876 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Net increase
in deposits
|
|
|
14,586 |
|
|
|
72,717 |
|
Proceeds from
stock options exercised
|
|
|
1,262 |
|
|
|
1,614 |
|
Net increase
(decrease) in Federal funds purchased and Federal Home Loan Bank
borrowings
|
|
|
28,600 |
|
|
|
(24,100 |
) |
Common stock
repurchased
|
|
|
(2,526 |
) |
|
|
(11,931 |
) |
Dividends
paid in cash
|
|
|
(2,161 |
) |
|
|
(1,977 |
) |
Stock issued
under employee stock purchase plan
|
|
|
26 |
|
|
|
3 |
|
Excess tax
benefits from exercised stock
options
|
|
|
128 |
|
|
|
534 |
|
Net cash
provided by financing
activities
|
|
|
39,915 |
|
|
|
36,860 |
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(55,801 |
) |
|
|
71,662 |
|
Cash and cash
equivalents at beginning of
period
|
|
|
76,265 |
|
|
|
38,783 |
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$ |
20,464 |
|
|
$ |
110,445 |
|
Non-Cash
Transactions: The nine months ended September 30, 2007 reflected a
cumulative-effect adjustment of the adoption of SFAS No. 159, which included
non-cash decreases to net loans of $2.5 million and retained earnings of $1.5
million, and a non-cash increase to other assets of $1.0 million.
The 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 nine months
ended September 30, 2008 are not necessarily indicative of the operating results
for the full year.
The following table
shows weighted average basic shares, common stock equivalents related to stock
options and nonvested restricted stock, 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 (including vested
restricted stock) during each period. Diluted earnings per share
incorporates the dilutive effect of common stock equivalents outstanding,
including stock options and nonvested restricted stock, on an average basis
during each period.
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
(in
thousands)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
Weighted
average basic shares outstanding
|
|
|
5,130 |
|
|
|
5,139 |
|
|
|
5,172 |
|
|
|
5,135 |
|
|
|
5,197 |
|
Add: Common stock equivalents
related to stock
options and nonvested restricted
stock
|
|
|
79 |
|
|
|
87 |
|
|
|
129 |
|
|
|
89 |
|
|
|
150 |
|
Weighted
average diluted shares
outstanding
|
|
|
5,209 |
|
|
|
5,226 |
|
|
|
5,301 |
|
|
|
5,224 |
|
|
|
5,347 |
|
Anti-dilutive
shares not included in the calculation of diluted earnings per
share
|
|
|
201 |
|
|
|
236 |
|
|
|
187 |
|
|
|
201 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,695 |
|
|
$ |
3,386 |
|
|
$ |
3,189 |
|
|
$ |
9,357 |
|
|
$ |
9,066 |
|
Earnings per
share (basic)
|
|
$ |
0.53 |
|
|
$ |
0.66 |
|
|
$ |
0.62 |
|
|
$ |
1.82 |
|
|
$ |
1.74 |
|
Earnings per
share (diluted)
|
|
$ |
0.52 |
|
|
$ |
0.65 |
|
|
$ |
0.60 |
|
|
$ |
1.79 |
|
|
$ |
1.70 |
|
Note
2: Recently Issued Accounting Standards
On October 10,
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) FAS 157-3,
“Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active.” The FSP clarifies the application of Statement of Financial
Accounting Standards (SFAS) No. 157, “Fair
Value Measurements”, in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. The FSP
is effective upon issuance, including prior periods for which financial
statements have not been issued. Revisions resulting from a change in the
valuation technique or its application should be accounted for as a change in
accounting estimate following the guidance in SFAS No. 154, “Accounting
Changes and Error Corrections.” However, the disclosure provisions in
SFAS No. 154 for a change in accounting estimate are not required for revisions
resulting from a change in valuation technique or its application. Adoption of
FSP FAS 157-3 did not have a significant impact on Bancorp’s financial condition
or results of operations.
BANK
OF MARIN BANCORP
On June 16, 2008,
the FASB issued FSP on Emerging Issues Task Force (EITF) 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities” which states that when calculating basic
earnings per share pursuant to the two-class method, all awards that contain
rights to nonforfeitable dividends should be considered participating
securities. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating
security according to dividends declared (or accumulated) and participation
rights in undistributed earnings. Dividends or dividend equivalents actually
paid on share-based payment awards not expected to vest should be excluded from
the earnings allocation to avoid counting the dividends as both compensation
cost and distributed earnings. Undistributed earnings should be allocated to all
outstanding share-based payment awards, including those that are not expected to
vest. FSP EITF 03-6-1 will be effective for Bancorp beginning January 1,
2009. All prior-period earnings per share data presented will be
adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1. Early
adoption is not permitted. Bancorp’s presentation, but not the amount, of
earnings per share will be affected upon adoption of FSP EITF 03-6-1 due to
Bancorp’s issuance of nonvested restricted common shares on May 1,
2008. See Note 8 below for further discussion.
In May 2008, the
FASB issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles.” SFAS
No. 162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements that
are presented in conformity with generally accepted accounting principles in the
United States. SFAS No. 162 is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section
411, The
Meaning of “Present Fairly in Conformity With Generally Accepted Accounting
Principles.” Bancorp expects that SFAS No. 162 will have no impact on its
financial condition or results of operations.
On March 19, 2008,
the 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 under SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (SFAS No.133),
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 June 2007, the
FASB EITF reached a consensus on EITF Issue No. 06-11, "Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards."
The EITF requires that the tax benefit related to dividends paid on restricted
stock, which are expected to vest, be recorded as an increase to additional
paid-in-capital. The EITF was effective for all tax benefits on dividends
declared by Bancorp after January 1, 2008. At adoption, there was no impact on
Bancorp's financial position or results of operations.
BANK
OF MARIN BANCORP
Note
3: Fair Value Measurement
The Bank performs
fair market valuations on certain assets and liabilities 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 September 30, 2008.
(Dollars in
thousands)
Description
of Financial Instruments
|
|
September 30, 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
|
|
$ |
73,348 |
|
|
$ |
--- |
|
|
$ |
73,348 |
|
|
$ |
--- |
|
Derivative
financial assets
|
|
|
48 |
|
|
|
|
|
|
|
48 |
|
|
|
--- |
|
Total
Assets
|
|
$ |
73,396 |
|
|
$ |
--- |
|
|
$ |
73,396 |
|
|
$ |
--- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial liabilities
|
|
$ |
902 |
|
|
$ |
--- |
|
|
$ |
902 |
|
|
$ |
--- |
|
When available,
quoted market prices (Level 1) are used to determine the fair value of
securities available for sale. If quoted market prices are not available,
management obtains pricing information from a reputable third-party service
provider, who may utilize valuation techniques that use current market-based or
independently sourced parameters, such as bid prices, dealer-quoted prices,
interest rates, benchmark yield curves, prepayment speeds, and credit spreads
(Level 2). Level 1 securities include those traded on active markets,
including U.S. Treasury securities. Level 2 securities include U.S.
agencies’ securities, mortgage-backed securities and corporate collateralized
mortgage obligations. 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 2 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. Valuation adjustments
may be made to reflect both the Bank’s own credit risk and the
counterparties’ credit quality in determining the fair value of the derivatives.
Level 2 inputs for the valuations are limited to observable market prices for
London Interbank Offered Rate (LIBOR) cash rates (for the very short term),
quoted prices for LIBOR futures contracts (two years and less), observable
market prices for LIBOR swap rates (at commonly quoted intervals from two years
to beyond the derivative’s maturity), and 1-month and 3-month LIBOR basis
spreads at commonly quoted intervals. 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. When
the value of any collateral placed with counterparties is less than the interest
rate derivative liability, the interest rate liability position is further
discounted to reflect the potential credit risk to
counterparties. The Bank has used the spread over LIBOR on the
Federal Home Loan Bank San Francisco (FHLB) fixed-rate credit advance with the
duration corresponding to the swaps' to calculate this credit-risk related
discount of future cash flows.
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.
Certain financial
assets may be measured at fair value on a nonrecurring basis. For example, when
a loan is identified as impaired, it is reported at the lower of cost or fair
value, measured based on the loan's observable market price (Level 1), the
present value of expected future cash flows discounted at the loan’s original
effective interest rate (Level 2), or the fair value of the underlying
collateral securing the loan if the loan is collateral dependent (Level 3). The
value of impaired loans, which totaled $823 thousand at September 30, 2008, were
primarily based on the appraised value of the collateral (Level 3).
BANK
OF MARIN BANCORP
Note
4: Investment Securities
The Bank's
investment securities portfolio at September 30, 2008 consists primarily of U.S.
government agency securities, including mortgage-backed securities (MBS) and
collateralized mortgage obligations (CMOs) issued or guaranteed by Federal
National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC), or Government National Mortgage Association (GNMA). The Bank’s
portfolio also includes obligations of state and political subdivisions,
debentures issued by government-sponsored agencies including FHLB, Federal Farm
Credit Bank and FNMA, as well as corporate CMOs, as reflected in the table
below.
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
(Dollars in
thousands)
|
|
Amortized Cost
|
|
|
Market Value
|
|
|
Amortized Cost
|
|
|
Market Value
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of state and political
subdivisions
|
|
$ |
20,542 |
|
|
$ |
19,627 |
|
|
$ |
13,182 |
|
|
$ |
13,238 |
|
Total held to
maturity
|
|
|
20,542 |
|
|
|
19,627 |
|
|
|
13,182 |
|
|
|
13,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of
U. S. government agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBS
pass-through securities issued by FNMA and FHLMC
|
|
|
8,206 |
|
|
|
8,123 |
|
|
|
8,715 |
|
|
|
8,475 |
|
CMOs issued
by FNMA and FHLMC
|
|
|
41,224 |
|
|
|
41,442 |
|
|
|
39,122 |
|
|
|
38,870 |
|
CMOs issued
by GNMA
|
|
|
5,257 |
|
|
|
5,356 |
|
|
|
4,575 |
|
|
|
4,619 |
|
Debentures of
government sponsored agencies
|
|
|
17,000 |
|
|
|
16,723 |
|
|
|
22,551 |
|
|
|
22,551 |
|
Corporate
CMOs
|
|
|
1,718 |
|
|
|
1,704 |
|
|
|
2,487 |
|
|
|
2,474 |
|
Corporate
debt securities and other
|
|
|
--- |
|
|
|
--- |
|
|
|
10,000 |
|
|
|
10,000 |
|
Total
available for sale
|
|
|
73,405 |
|
|
|
73,348 |
|
|
|
87,450 |
|
|
|
86,989 |
|
The Bank generally
invests in mortgage-backed securities with borrowers having strong credit scores
and/or collateral compositions reflecting low loan-to-value ratios. Investment
securities carried at $25.8 million and $20.7 million were pledged at September
30, 2008 and December 31, 2007, respectively.
Note
5: Allowance for Loan Losses and Non-accrual Loans
The allowance for
loan losses is maintained at levels considered adequate by management to provide
for probable loan losses inherent in the portfolio. The allowance is based on
management's assessment of various factors affecting the loan portfolio,
including problem loans, economic conditions and loan loss experience, and an
overall evaluation of the quality of the underlying collateral.
Activity in the
allowance for loan losses follows:
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
(in thousands
- unaudited)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
Beginning
balance
|
|
$ |
8,555 |
|
|
$ |
8,199 |
|
|
$ |
7,053 |
|
|
$ |
7,575 |
|
|
$ |
8,023 |
|
Cumulative-effect
adjustment of adoption of SFAS No. 159
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
(1,048 |
) |
Provision for
loan loss charged to expense
|
|
|
1,685 |
|
|
|
510 |
|
|
|
200 |
|
|
|
2,810 |
|
|
|
340 |
|
Loans charged
off
|
|
|
(970 |
) |
|
|
(156 |
) |
|
|
(33 |
) |
|
|
(1,128 |
) |
|
|
(111 |
) |
Loan loss
recoveries
|
|
|
1 |
|
|
|
2 |
|
|
|
7 |
|
|
|
14 |
|
|
|
23 |
|
Ending
balance
|
|
$ |
9,271 |
|
|
$ |
8,555 |
|
|
$ |
7,227 |
|
|
$ |
9,271 |
|
|
$ |
7,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
held in portfolio at end of period, before deducting allowance for loan
losses
|
|
$ |
839,007 |
|
|
$ |
799,510 |
|
|
$ |
685,975 |
|
|
$ |
839,007 |
|
|
$ |
685,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
allowance for loan losses to loans held in portfolio
|
|
|
1.11 |
% |
|
|
1.07 |
% |
|
|
1.05 |
% |
|
|
1.11 |
% |
|
|
1.05 |
% |
Non-accrual
loans at period end
|
|
$ |
823 |
|
|
$ |
236 |
|
|
$ |
150 |
|
|
$ |
823 |
|
|
$ |
150 |
|
At September 30,
2008, the Bank had six non-accrual loans totaling $823 thousand. At
December 31, 2007 the Bank had one non-accrual loan totaling $144
thousand. At September 30, 2007, the Bank had two non-accrual loans
amounting to $150 thousand. Impaired loan balances at each period-end
approximated the balance of nonaccrual loans, with an allocated allowance of $47
thousand, $49 thousand, and zero at September 30, 2008, June 30, 2008, and
September 30, 2007, respectively. At September 30, 2008, there were
no commitments to extend credit on impaired loans.
BANK
OF MARIN BANCORP
The gross interest
income that would have been recorded had non-accrual loans been current
totaled $37 thousand, $6 thousand, and $3 thousand in the quarters ended
September 30, 2008, June 30, 2008 and September 30, 2007,
respectively. The amount of foregone interest income on nonaccrual
loans was $49 thousand and $8 thousand for the nine-month periods ended
September 30, 2008 and 2007, respectively. The Bank recognized
interest income of $12 thousand and $5 thousand for cash payments received
during the nine-month periods ended September 30, 2008 and 2007,
respectively.
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
6: CDARS® Reciprocal Deposits
Late in the first
quarter of 2008, the Bank began to offer the CDARS® deposit product, short for
Certificate of Deposit Account Registry Service. Through CDARS®, the Bank may
accept deposits in excess of the FDIC insured maximum from a depositor and place
the deposits through a network to other member banks in increments of less than
the FDIC insured maximum to provide the depositor full FDIC insurance
coverage. Where the Bank receives an equal dollar amount of deposits
from other member banks in exchange for the deposits the Bank places into the
network, the Bank records these as CDARS® reciprocal deposits. At
September 30, 2008, CDARS® reciprocal deposits totaled $16.8
million.
Note
7: Borrowings
As of September 30,
2008 and December 31, 2007, the Bank had lines of credit with the FHLB totaling
$170.7 million and $184.8 million, respectively. At September 30, 2008 overnight
borrowings totaled $13.6 million with the FHLB under the line of
credit. At December 31, 2007, the Bank had no outstanding borrowings
with FHLB, correspondent banks, or the Federal Reserve. The interest rate for
overnight borrowings is determined daily.
On February 5,
2008, the Bank entered into a ten-year borrowing agreement under the same FHLB
line of credit for $15.0 million at a fixed rate of 2.07%. Interest-only
payments are required every three months until maturity. Although the entire
principal is due on February 5, 2018, the FHLB has the unconditional right to
accelerate the due date on February 5, 2009 and every three months thereafter
(the “put” dates). If the FHLB exercises its right to accelerate the due date,
the FHLB will offer replacement funding at the current market rate, subject to
certain conditions. The Bank must comply with the put date, but is not required
to accept replacement funding.
At September 30,
2008, $142.1 million was remaining as available for borrowing from the FHLB
under a formula based on eligible collateral. The FHLB overnight borrowing and
the FHLB line of credit are secured by certain assets, including a portfolio of
loans, investment securities, cash and cash equivalents under a blanket lien. On
September 30, 2008, the pledged loans totaled $341.4 million.
Additional
borrowing capacity includes lines of credit with correspondent banks totaling
$65.0 million and a line of credit with the Federal Reserve Bank totaling $3.0
million to borrow overnight. There were no borrowings under these credit
facilities on September 30, 2008.
Note
8: Stockholders' Equity
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.
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.
BANK
OF MARIN BANCORP
The California
Department of Financial Institutions (DFI) and the FDIC approved a
$15 million, twelve-month share repurchase program in October 2006.Under this
program, 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. During the
first nine months of 2008, Bancorp repurchased 88,316 shares at an average price
of $28.55, plus commissions, for a total cost of $2.5 million. In September
2008, the repurchases under the plan were discontinued to preserve capital
during a time of extreme economic turbulence.
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
|
|
|
Nine months
ended
|
|
(in thousands
except per share data -
unaudited)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
Cash
dividends
|
|
$ |
719 |
|
|
$ |
722 |
|
|
$ |
672 |
|
|
$ |
2,161 |
|
|
$ |
1,977 |
|
Cash
dividends per share
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.13 |
|
|
$ |
0.42 |
|
|
$ |
0.38 |
|
Under SFAS No.
123R, “Share-Based
Payment,”
which was implemented in January 2006, the fair value of stock options on the
grant date is recorded as a stock-based compensation expense in the income
statement over the requisite service period with a corresponding increase in
common stock. In addition, the Bank records excess tax benefits on
the exercise of non-qualified stock options, disqualifying disposition of
incentive stock options or vesting of restricted stock as an addition to common
stock with a corresponding decrease in current taxes payable.
Stock-based
compensation also includes compensation expense related to the issuance of
nonvested restricted common shares pursuant to the 2007 Equity
Plan. On May 1, 2008 employees were granted 6,700 restricted common
shares of Bancorp, which vest twenty percent on each anniversary of the grant
for five years. The grant-date fair value of the restricted common
shares, which is equal to its intrinsic value, is recorded as compensation
expense over the requisite service period with a corresponding increase in
common stock. Any excess tax benefit on the vesting of these shares will be also
recorded as increase in common stock and a corresponding decrease in current
taxes payable. The holders of the nonvested restricted common shares are
entitled to dividends on the same per-share ratio as the holders of common
stock. Dividends paid on the portion of share-based awards not expected to vest
are also included in stock-based compensation expense. Tax benefits on dividends
paid on the portion of share-based awards expected to vest are recorded as
increase to common stock with a corresponding decrease in current taxes
payable.
Stock-based
compensation and excess tax benefits on exercised options are shown
below.
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
(in thousands
- unaudited)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
Stock-based
compensation
|
|
$ |
103 |
|
|
$ |
108 |
|
|
$ |
124 |
|
|
$ |
331 |
|
|
$ |
379 |
|
Excess(Deficient)
tax benefits on exercised options
|
|
$ |
69 |
|
|
$ |
(22 |
) |
|
$ |
4 |
|
|
$ |
128 |
|
|
$ |
728 |
|
BANK
OF MARIN BANCORP
Note
9: 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. Standby letters of credit issued by the Bank guarantee the
performance of a customer to a third party. 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
estate property.
The contract amount
of loan commitments and standby letters of credit not reflected on the statement
of condition was $251.2 million at September 30, 2008 at rates ranging from
3.73% to 10.25%. This amount included $128.7 million under commercial
lines of credit (these commitments are contingent upon customers maintaining
specific credit standards), $74.0 million under revolving home equity
lines, $37.4 million under undisbursed construction loans, $4.0 million under
standby letters of credit, and the remaining $7.1 million under personal and
other lines of credit. The Bank has set aside an allowance for losses in the
amount of $502 thousand for these commitments, which is recorded in "interest
payable and other liabilities."
Note
10: Derivative Financial Instruments and Hedging
Activities
The Bank has
entered into interest-rate swap agreements, primarily as an asset/liability
management strategy, in order to mitigate the changes in the fair value of the
hedged long-term fixed-rate loans or firm commitments to enter into long-term
fixed-rate loans caused by 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, generally benchmarked to
the one-month U.S. dollar LIBOR index, thus protecting the Bank against an
adverse effect on the net interest margin due to fluctuating interest
rates.
The interest rate
swap agreements are generally structured at inception to mirror all of the
provisions of the hedged loan agreements. These interest rate swaps, designated
and qualified as fair value hedges, 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). One of the Bank’s interest rate
swap agreements qualifies for short-cut hedge accounting treatment in accordance
with SFAS 133. The change in fair value of the swap using the short-cut
accounting treatment is recorded in other non-interest income, while the change
in fair value of swaps using non-short cut accounting is recorded in interest
income. The unrealized gain or loss in market value of the hedged
fixed-rate loan is recorded as an adjustment to the hedged loan and offset in
other non-interest income (for short-cut accounting treatment) or interest
income (for non-short cut accounting treatment).
During the third
quarter of 2007, a 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,
recorded in other assets, is being amortized to interest income using the
effective yield method over the life of the loan.
The Bank’s credit
exposure, if any, on interest rate swaps is limited to the net favorable value
(net of any collateral pledged) and interest payments of all swaps by each
counterparty. Conversely, when the interest rate swaps are in liability position
exceeding certain threshold, the Bank may be required to post collateral to the
counterparties. Collateral levels are monitored and adjusted on a
regular basis for changes in interest rate swap values. The Bank’s securities
totaling $3.0 million were held as collateral by one of the counterparties for
derivative liabilities at September 30, 2008.
BANK
OF MARIN BANCORP
As of September 30,
2008, the Bank had three interest rate swap agreements, which are scheduled to
mature in September 2018, June 2020 and June 2022. Information on the
Bank’s derivatives follows:
|
|
Derivatives
designated as fair value hedge under SFAS
133
|
|
|
|
Interest rate
swaps
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Shortcut
Accounting Treatment
|
|
|
Non-shortcut
Accounting Treatment
|
|
|
Yield
Maintenance Agreement
|
|
|
Total
|
|
At September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional or
contractual amount
|
|
$ |
6,933 |
|
|
$ |
11,168 |
|
|
$ |
--- |
|
|
$ |
18,101 |
|
Credit risk
amount (1)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Estimated
fair value
|
|
|
(160 |
) |
|
|
(742 |
) |
|
|
48 |
|
|
|
(854 |
) |
Blance sheet
location
|
|
Other
liabilites
|
|
|
Other
liabilites
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional or
contractual amount
|
|
$ |
7,201 |
|
|
$ |
8,134 |
|
|
$ |
--- |
|
|
$ |
15,335 |
|
Credit risk
amount (1)
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Estimated
fair value
|
|
|
(44 |
) |
|
|
(603 |
) |
|
|
62 |
|
|
|
(585 |
) |
Blance sheet
location
|
|
Other
liabilites
|
|
|
Other
liabilites
|
|
|
Other
assets
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
Nine months
ended
|
|
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
Interest rate
swap designated as fair value hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
|
|
4.59 |
% |
Weighted
average receive rate
|
|
|
2.47 |
% |
|
|
2.68 |
% |
|
|
5.47 |
% |
|
|
2.96 |
% |
|
|
5.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
swaps designated as fair value hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Non-shortcut
Accounting Treatment):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average pay rate
|
|
|
5.44 |
% |
|
|
5.54 |
% |
|
|
5.54 |
% |
|
|
5.51 |
% |
|
|
5.54 |
% |
Weighted
average receive rate
|
|
|
2.47 |
% |
|
|
2.67 |
% |
|
|
5.44 |
% |
|
|
2.94 |
% |
|
|
5.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield
maintenance agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average receive rate (2)
|
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
5.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
on designated interest rate swaps recognized in income
|
|
$ |
(231 |
) |
|
$ |
665 |
|
|
$ |
(500 |
) |
|
$ |
(255 |
) |
|
$ |
(16 |
) |
Increase (decrease) in value
of hedged loans and yield maintenance agreement
qualifying as derivatives recognized in
income
|
|
|
181 |
|
|
|
(667 |
) |
|
|
491 |
|
|
|
203 |
|
|
|
6 |
|
Net loss on
derivatives used to hedge loans recorded in
income
|
|
$ |
(50 |
) |
|
$ |
(2 |
) |
|
$ |
(9 |
) |
|
$ |
(52 |
) |
|
$ |
(10 |
) |
1 Credit
risk represents the amount of unrealized gain included in derivative assets
which is subject to counterparty credit risk. It reflects the effect of master
netting agreements and includes credit risk on virtual
derivatives.
2 Tax
equivalent yield equals 8.43%, 8.44%, and 8.26% for three months ended Spetember
30, 2008, June 30, 2008, and September 30, 2007, respectively; 8.43% and 8.26%
for the nine months ended
September 30, 2008 and 2007,
respectively.
Note
11: Transactions with Visa Inc.
As a member bank of
Visa Inc., the Bank holds 16,939 shares of Visa Inc. Class B common stock at a
zero cost basis. In connection with Visa Inc.’s initial public
offering (IPO) on March 19, 2008, the Bank recognized a $457 thousand gain on
the mandatory redemption of 10,677 shares of Class B common stock representing
the difference between the cash proceeds received and the zero carrying basis of
the stock redeemed. The remaining shares owned by the Bank cannot be converted
into Class A (voting) shares until the later of March 25, 2011 or the final
resolution of the covered litigation described below.
The Bank recorded a
liability of $242 thousand in the fourth quarter of 2007 to cover its potential
indemnification obligations to Visa, Inc. The obligations arose in connection
with the Bank’s proportionate share of certain litigation indemnifications
provided to Visa U.S.A. by its member banks prior to Visa U.S.A.’s merger into
Visa Inc. In March of 2008, the Bank reversed this liability because, subsequent
to Visa Inc.’s IPO, Visa, Inc. established an escrow account from which it
planned to pay any potential settlements.
On October 27, 2008
Visa Inc. announced a settlement with one of the litigants, Discover Card, for
$1.9 billion, of which $1.7 billion is the responsibility of member
banks. As of the settlement date, the escrow account was underfunded
by $1.1 billion. The Bank’s proportionate share of the shortfall is $75
thousand. Visa Inc. expects to further fund the escrow account in the fourth
quarter of 2008 to cover the settlement through a reduction in the conversion
factor of Class B shares held by member banks that are available for conversion
to Class A as allowed by the “Retrospective Responsibility Plan” outlined in the
Form S-1 filed by Visa Inc. on November 9, 2007. The Bank expects
that its liability
will be fully covered by the additional escrow funding, with no cash payment
required by the Bank.
BANK
OF MARIN BANCORP
Item
2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
In the following
pages, Management discusses its analysis of the financial condition and results
of operations for the third quarter of 2008 compared to the third quarter of
2007 and to the prior quarter (second quarter of 2008). 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.
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, the current financial turmoil in the United States and abroad,
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, and in the Risk Factors noted in Part II,
Item 1A of this report . 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.
Executive
Summary
In 2007 and 2008,
financial markets experienced significant disruptions beginning with dramatic
declines in the housing market leading to increased foreclosures, declines in
home values and increased unemployment which culminated in significantly reduced
liquidity in financial markets. Banks and other financial institutions became
reluctant to lend to clients and to other banks. The liquidity crisis has spread
worldwide.
Recently, the
federal government has announced various programs under the Emergency Economic
Stabilization Act of 2008 (the Act) intended to inject liquidity and stabilize
the financial industry. The Act includes the Treasury Capital Purchase
Program (TCPP), Troubled Assets Relief Program (TARP), FDIC Temporary
Liquidity Guarantee Program
(TLGP) and the Money Market Investor Funding Facility. Bancorp is assessing the
potential impact of its participation in the TCPP and TLGP but has not yet made
a definitive decision as to whether it will participate.
It
cannot be determined whether these recent steps taken by the federal government
will result in significant improvement in financial and economic conditions
affecting the banking industry. Despite the federal government's recent fiscal
and monetary measures, if the U.S. economy were to remain in a recessionary
condition for an extended period, this would present additional significant
challenges for the U.S. banking and financial services industry, and inevitably,
businesses of Bancorp.
BANK
OF MARIN BANCORP
While the banking
industry continued to be impacted by the slowing U.S. economy and volatility in
the financial markets, due to the strength of
the market in which it operates, Bancorp continued to generate healthy loan
growth, maintain stable deposits and increase efficiency. It maintains a strong
capital base. It’s sources of funding, including lines of credit with
the FHLB and correspondent banks remain available.
Bancorp experienced
loan growth of $114 million, an increase of 15.7%, in the first nine months of
2008, and experienced loan growth of $38.8 million, or 4.9% in the third quarter
of 2008, with no significant changes to the mix of loans. During the
same period, deposits, exclusive of a $53 million short-term deposit placed with
Bancorp over the 2007 year-end, increased $67 million, or 8.6%.
Bancorp recorded an
increase in net income of $291 thousand, or 3.2% in the nine-month period ended
September 30, 2008 compared to the same period in 2007 and a decrease of $494
thousand, or 15.5%, in the quarter ended September 30, 2008 compared to the same
period last year. The results reflect increases in the provision for loan losses
from $340 thousand in the nine months ended September 30, 2007 to $2.8 million
in the nine months ended September 30, 2008 and from $200 thousand in the third
quarter of 2007 to $1.7 million in the third quarter of 2008. The increases in
the loan loss reserve reflect strong loan growth, an increased allocation for
economic uncertainty, and increases to the specific reserve where
needed.
Charge-offs in the
first nine months of 2008 totaling $1.1 million and in the third quarter of 2008
totaling $969 thousand primarily relate to the charge-off of one unsecured
commercial line of credit and one commercial term loan collateralized by a
residence where the Bank holds the second deed of trust. The allowance for loan
losses as a percentage of loans totaled 1.11% at September 30, 2008 compared to
1.05% a year ago. In addition, our allowance for loan losses is 11.3 times our
non-performing loans at September 30, 2008.
Bancorp has not
participated in subprime lending nor does it hold investment securities backed
by subprime loans. Bancorp does not hold common or preferred stock of
either the Federal National Mortgage Association (Fannie Mae) or the Federal
Home Loan Mortgage Corporation (Freddie Mac).
A combination of
lower deposit and borrowing rates and a shift in interest-earning assets from
Federal funds sold to higher-yielding loans contributed to expansion of the
tax-equivalent net interest margin to 5.43% percent in the nine months ended
September 30, 2008 compared to 5.00% in the nine months ended September 30,
2007. Beginning in August 2007 and continuing through April 2008, the
Federal Reserve lowered its target interest rate by 325 basis points, resulting
in lower deposit rates offered by Bancorp. Loan yields did not fall
as dramatically since the yield on fixed-rate loans, which comprise over half of
the loan portfolio, remained relatively unchanged. During June 2007,
Bancorp received proceeds of $76.7 million from sale of its indirect auto loan
portfolio. Such proceeds were mainly invested in Federal funds sold during the
second and third quarters of 2007, and were gradually reinvested in
higher-yielding relationship loans.
In the third
quarter of 2008, Bancorp experienced a decline in the tax-equivalent net
interest margin to 5.35% from 5.52% in the second quarter, reflecting downward
repricing on variable rate loans and new loans originated at lower market rates,
partially offset by lower deposit rates in a declining rate environment. During
the quarter, there were no changes in the Federal funds target rate. The
repricing relates to rate re-sets at specified intervals and loans tied to
indexes that may not move in tandem with the Federal funds rate. The effect of
lower loan yields was partially offset by a decline in the cost of purchased
funds during the period due to an injection of liquidity into the market by the
Federal Reserve in later part of the third quarter.
The largest factors
likely to affect Bancorp’s net interest margin in the remainder of 2008 will be
the volume of loan demand and deposits, which will in turn influence Bancorp’s
liquidity level, the Federal funds target rate, which is expected to decline
during the remainder of 2008, as well as Bancorp’s responsiveness to competitive
pricing on loans and deposits in its market.
Higher net interest
income combined with modest growth in non-interest expenses have resulted in a
marked improvement in efficiency. The efficiency ratio improved 336
basis points in the nine-month period ended September 30, 2008 compared to the
same period in 2007 and 86 basis points in the quarter ended September 30, 2008
compared to the same period last year.
In the first nine
months of 2008, Bancorp recorded a non-recurring pre-tax gain of $457 thousand
related to the mandatory redemption of shares in Visa, Inc. and the reversal of
a $242 thousand pre-tax charge for the potential obligation to Visa Inc. in
connection with certain indemnifications provided to Visa Inc. by Visa member
banks. In the first nine months of 2007, Bancorp recorded a non-recurring
pre-tax gain of $710 thousand on the sale of the indirect auto portfolio and a
$387 pre-tax gain on the sale of the Visa card portfolio.
BANK
OF MARIN BANCORP
Bancorp has
continued to expand its franchise with the opening of a new branch in downtown
Mill Valley in June of 2008 and has secured a site for an additional branch
in Greenbrae.
In November 2007,
Bancorp initiated a stock repurchase plan to buy back up to $5 million of its
common stock. Bancorp purchased 88,316 shares during the first nine
months of 2008 for $2.5 million, bringing the total amount purchased under this
program to $4.1 million. In September 2008, Bancorp discontinued purchases under
the program to preserve capital during a time of extreme economic turbulence.
Bancorp has maintained a strong capital position, with total risk-based capital
at September 30, 2008 of 11.6%, well over the ten percent regulatory minimum to
be considered well-capitalized.
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.
Critical
Accounting Policies
Critical accounting
policies are those that are both most important to the portrayal of Bancorp’s
financial condition and results of operations and require management’s most
difficult, subjective, or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management has
determined the following four accounting policies to be critical: Allowance for
Loan Losses, Share-Based Payment, Accounting for Income Taxes and Fair Value
Option for Financial Assets and Liabilities.
Allowance
for Loan Losses
Allowance for loan
losses is based upon estimates of loan losses and is maintained at a level
considered adequate to provide for probable losses inherent in the outstanding
loan portfolio. The allowance is increased by provisions charged to expense and
reduced by net charge-offs. In periodic evaluations of the adequacy
of the allowance balance, management considers the Bank's past loan loss
experience by type of credit, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, current economic conditions and other factors. The
Bank formally assesses the adequacy of the allowance for loan losses on a
quarterly basis. 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. Larger problem loans
are monitored continuously and formal impairment analysis for the purpose of
SFAS No. 114 occurs at least quarterly.
The Bank's method
for assessing the appropriateness of the allowance includes specific allowances
for identified problem loans, an allowance factor for categories 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 categories are based on analysis of local economic
factors applicable to each loan categories. 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.
BANK
OF MARIN BANCORP
Share-Based
Payment
On January 1, 2006,
the Bank adopted the provisions of SFAS No.123R, “Share-Based
Payment,” which requires that all share-based payments, including stock
options and nonvested restricted common shares, 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
the fair value of stock options 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, stock price volatility 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. The fair value of
nonvested restricted common shares generally equals the stock price at grant
date. In addition, the Bank is required to estimate the expected
forfeiture rate and only recognize expense for those share-based awards 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 6 of
the Notes to Consolidated Financial Statements in this Form 10-Q.
Accounting
for Income Taxes
Income taxes
reported in the financial statements are computed based on an asset and
liability approach in accordance with FASB Statement No. 109, “Accounting
for Income Taxes.”(FASB No. 109). Bancorp recognizes the amount of taxes
payable or refundable for the current year, and deferred tax assets and
liabilities for the expected future tax consequences that have been recognized
in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Bancorp
records net deferred tax assets to the extent it is more likely than not that
they will be realized. In evaluating Bancorp’s ability to recover the
deferred tax assets, management considers all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent financial
operations. In projecting future taxable income, management develops
assumptions including the amount of future state and federal pretax operating
income, the reversal of temporary differences, and the implementation of
feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are
consistent with the plans and estimates being used to manage the underlying
business. Bancorp files consolidated federal and combined state income tax
returns.
Effective January
1, 2007, Bancorp 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 No.
109. 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. Management believed that 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, the Bank elected early adoption of FASB Statement No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities” and
FASB Statement 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.
BANK
OF MARIN BANCORP
As a result of the
Bank’s fair value measurement election for the auto loan portfolio, the Bank
recorded a cumulative-effect adjustment of $1.5 million, net of tax, as a
reduction of retained earnings as of January 1, 2007. In addition, $190 thousand
and $520 thousand of pre-tax net gains were recorded in the Bank’s second and
first quarter 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.
The Bank has
established and documented a process for determining fair value. For detailed
information on the Bank’s use of fair valuation of financial instruments and our
related valuation methodologies, see Note 3 of the Consolidated Financial
Statements in this Form 10-Q.
RESULTS
OF OPERATIONS
Overview
Highlights of the
financial results are presented in the following table:
|
|
As of and for
the three months ended
|
|
|
As of and for
the nine months ended
|
|
(dollars in
thousands except per share
data)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
For the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,695 |
|
|
$ |
3,386 |
|
|
$ |
3,189 |
|
|
$ |
9,357 |
|
|
$ |
9,066 |
|
Net income
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.53 |
|
|
|
0.66 |
|
|
|
0.62 |
|
|
|
1.82 |
|
|
|
1.74 |
|
Diluted
|
|
|
0.52 |
|
|
|
0.65 |
|
|
|
0.60 |
|
|
|
1.79 |
|
|
|
1.70 |
|
Return on
average equity
|
|
|
11.37 |
% |
|
|
14.73 |
% |
|
|
14.83 |
% |
|
|
13.55 |
% |
|
|
14.37 |
% |
Return on
average assets
|
|
|
1.10 |
% |
|
|
1.48 |
% |
|
|
1.38 |
% |
|
|
1.35 |
% |
|
|
1.36 |
% |
Cash dividend
payout ratio
|
|
|
26.42 |
% |
|
|
21.21 |
% |
|
|
20.97 |
% |
|
|
23.08 |
% |
|
|
21.84 |
% |
Efficiency
ratio
|
|
|
55.11 |
% |
|
|
54.14 |
% |
|
|
55.97 |
% |
|
|
54.39 |
% |
|
|
57.75 |
% |
At period
end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value
per share
|
|
|
18.43 |
|
|
|
18.00 |
|
|
|
16.73 |
|
|
|
18.43 |
|
|
|
16.73 |
|
Total
assets
|
|
|
984,739 |
|
|
|
952,539 |
|
|
|
924,044 |
|
|
|
984,739 |
|
|
|
924,044 |
|
Total loans,
gross
|
|
|
839,007 |
|
|
|
799,510 |
|
|
|
685,975 |
|
|
|
839,007 |
|
|
|
685,975 |
|
Total
deposits
|
|
$ |
849,228 |
|
|
$ |
801,220 |
|
|
$ |
809,414 |
|
|
$ |
849,228 |
|
|
$ |
809,414 |
|
Loan-to-deposit
ratio
|
|
|
98.80 |
% |
|
|
99.79 |
% |
|
|
84.75 |
% |
|
|
98.80 |
% |
|
|
84.75 |
% |
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 interest-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 higher than net interest rate spread because net interest
margin reflects interest income earned on assets funded with
non-interest-bearing sources of funds, which include demand deposits and
stockholders’ equity.
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 following
table, Distribution
of Average Statements of Condition and Analysis of Net Interest Income,
compares interest income and average interest-earning assets with interest
expense and average interest-bearing liabilities for the periods presented. The
tables also indicate net interest income, net interest margin and net interest
rate spread for each period presented.
Distribution
of Average Statements of Condition and Analysis of Net Interest
Income
|
|
Three months
ended
|
|
|
Three months
ended
|
|
|
Three months
ended
|
|
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
(in
thousands)
|
|
Average Balance
|
|
|
Interest Income/ Expense
(1)
|
|
|
Yield/ Rate
(1)
|
|
|
Average Balance
|
|
|
Interest Income/ Expense
(1)
|
|
|
Yield/ Rate
(1)
|
|
|
Average Balance
|
|
|
Interest Income/ Expense
(1)
|
|
|
Yield/ Rate
(1)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
sold
|
|
$ |
5,065 |
|
|
$ |
25 |
|
|
|
1.93 |
% |
|
$ |
208 |
|
|
$ |
1 |
|
|
|
2.23 |
% |
|
$ |
93,732 |
|
|
$ |
1,240 |
|
|
|
5.18 |
% |
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
|
71,726 |
|
|
|
892 |
|
|
|
4.95 |
% |
|
|
71,206 |
|
|
|
882 |
|
|
|
4.98 |
% |
|
|
85,557 |
|
|
|
1,063 |
|
|
|
4.93 |
% |
Other
|
|
|
5,697 |
|
|
|
91 |
|
|
|
6.35 |
% |
|
|
5,906 |
|
|
|
78 |
|
|
|
5.39 |
% |
|
|
7,652 |
|
|
|
115 |
|
|
|
5.96 |
% |
Obligations of
state and political subdivisions
|
|
|
20,184 |
|
|
|
282 |
|
|
|
5.56 |
% |
|
|
19,607 |
|
|
|
261 |
|
|
|
5.34 |
% |
|
|
13,909 |
|
|
|
172 |
|
|
|
4.90 |
% |
Loans
(2)
|
|
|
819,886 |
|
|
|
13,833 |
|
|
|
6.71 |
% |
|
|
776,821 |
|
|
|
13,400 |
|
|
|
6.94 |
% |
|
|
668,636 |
|
|
|
13,283 |
|
|
|
7.88 |
% |
Total
interest-earning assets
|
|
|
922,558 |
|
|
|
15,123 |
|
|
|
6.52 |
% |
|
|
873,748 |
|
|
|
14,622 |
|
|
|
6.73 |
% |
|
|
869,486 |
|
|
|
15,873 |
|
|
|
7.24 |
% |
Cash and due
from banks
|
|
|
23,248 |
|
|
|
|
|
|
|
|
|
|
|
22,048 |
|
|
|
|
|
|
|
|
|
|
|
22,847 |
|
|
|
|
|
|
|
|
|
Bank premises
and equipment, net
|
|
|
8,699 |
|
|
|
|
|
|
|
|
|
|
|
8,377 |
|
|
|
|
|
|
|
|
|
|
|
8,132 |
|
|
|
|
|
|
|
|
|
Interest
receivable and other
assets
|
|
|
17,530 |
|
|
|
|
|
|
|
|
|
|
|
17,016 |
|
|
|
|
|
|
|
|
|
|
|
15,397 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
972,035 |
|
|
|
|
|
|
|
|
|
|
$ |
921,189 |
|
|
|
|
|
|
|
|
|
|
$ |
915,862 |
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
$ |
78,650 |
|
|
$ |
93 |
|
|
|
0.47 |
% |
|
$ |
77,812 |
|
|
$ |
96 |
|
|
|
0.50 |
% |
|
$ |
76,189 |
|
|
$ |
74 |
|
|
|
0.38 |
% |
Savings and
money market accounts
|
|
|
459,633 |
|
|
|
1,833 |
|
|
|
1.59 |
% |
|
|
400,627 |
|
|
|
1,583 |
|
|
|
1.59 |
% |
|
|
440,131 |
|
|
|
3,882 |
|
|
|
3.50 |
% |
Time
accounts
|
|
|
82,992 |
|
|
|
562 |
|
|
|
2.69 |
% |
|
|
82,071 |
|
|
|
650 |
|
|
|
3.18 |
% |
|
|
85,770 |
|
|
|
877 |
|
|
|
4.05 |
% |
CDARS®
reciprocal deposits
|
|
|
7,640 |
|
|
|
50 |
|
|
|
2.60 |
% |
|
|
823 |
|
|
|
4 |
|
|
|
1.95 |
% |
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Purchased
funds
|
|
|
22,484 |
|
|
|
110 |
|
|
|
1.95 |
% |
|
|
43,371 |
|
|
|
234 |
|
|
|
2.17 |
% |
|
|
10,246 |
|
|
|
107 |
|
|
|
4.15 |
% |
Subordinated
debenture
|
|
|
5,000 |
|
|
|
69 |
|
|
|
5.40 |
% |
|
|
5,000 |
|
|
|
68 |
|
|
|
5.40 |
% |
|
|
5,000 |
|
|
|
102 |
|
|
|
8.19 |
% |
Total
interest-bearing liabilities
|
|
|
656,399 |
|
|
|
2,717 |
|
|
|
1.65 |
% |
|
|
609,704 |
|
|
|
2,635 |
|
|
|
1.74 |
% |
|
|
617,336 |
|
|
|
5,042 |
|
|
|
3.24 |
% |
Demand
accounts
|
|
|
213,618 |
|
|
|
|
|
|
|
|
|
|
|
211,193 |
|
|
|
|
|
|
|
|
|
|
|
206,579 |
|
|
|
|
|
|
|
|
|
Interest
payable and other liabilities
|
|
|
7,730 |
|
|
|
|
|
|
|
|
|
|
|
7,857 |
|
|
|
|
|
|
|
|
|
|
|
6,597 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
94,288 |
|
|
|
|
|
|
|
|
|
|
|
92,435 |
|
|
|
|
|
|
|
|
|
|
|
85,350 |
|
|
|
|
|
|
|
|
|
Total
liabilities & stockholders' equity
|
|
$ |
972,035 |
|
|
|
|
|
|
|
|
|
|
$ |
921,189 |
|
|
|
|
|
|
|
|
|
|
$ |
915,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
(1)
|
|
|
|
|
|
$ |
12,406 |
|
|
|
|
|
|
|
|
|
|
$ |
11,987 |
|
|
|
|
|
|
|
|
|
|
$ |
10,831 |
|
|
|
|
|
Net interest
margin
|
|
|
|
|
|
|
|
|
|
|
5.35 |
% |
|
|
|
|
|
|
|
|
|
|
5.52 |
% |
|
|
|
|
|
|
|
|
|
|
4.94 |
% |
Net interest
rate
spread
|
|
|
|
|
|
|
|
|
|
|
4.87 |
% |
|
|
|
|
|
|
|
|
|
|
4.99 |
% |
|
|
|
|
|
|
|
|
|
|
4.00 |
% |
|
|
Nine months
ended
|
|
|
Nine months
ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
(in
thousands)
|
|
Average Balance
|
|
|
Interest Income/ Expense
(1)
|
|
|
Yield/ Rate
(1)
|
|
|
Average Balance
|
|
|
Interest Income/ Expense
(1)
|
|
|
Yield/ Rate
(1)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds
sold
|
|
$ |
5,475 |
|
|
$ |
138 |
|
|
|
3.31 |
% |
|
$ |
42,207 |
|
|
$ |
1,657 |
|
|
|
5.18 |
% |
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
securities
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
423 |
|
|
|
8 |
|
|
|
2.42 |
% |
U.S.
Government agencies
|
|
|
72,012 |
|
|
|
2,641 |
|
|
|
4.90 |
% |
|
|
74,509 |
|
|
|
2,714 |
|
|
|
4.87 |
% |
Other
|
|
|
6,347 |
|
|
|
258 |
|
|
|
5.43 |
% |
|
|
7,736 |
|
|
|
336 |
|
|
|
5.81 |
% |
Obligations of
state and political subdivisions
|
|
|
18,890 |
|
|
|
798 |
|
|
|
5.64 |
% |
|
|
12,991 |
|
|
|
477 |
|
|
|
4.91 |
% |
Loans
(2)
|
|
|
777,686 |
|
|
|
40,545 |
|
|
|
6.96 |
% |
|
|
700,712 |
|
|
|
41,068 |
|
|
|
7.84 |
% |
Total
interest-earning assets
|
|
|
880,410 |
|
|
|
44,380 |
|
|
|
6.73 |
% |
|
|
838,578 |
|
|
|
46,260 |
|
|
|
7.38 |
% |
Cash and due
from banks
|
|
|
22,279 |
|
|
|
|
|
|
|
|
|
|
|
25,017 |
|
|
|
|
|
|
|
|
|
Bank premises
and equipment, net
|
|
|
8,316 |
|
|
|
|
|
|
|
|
|
|
|
8,270 |
|
|
|
|
|
|
|
|
|
Interest
receivable and other
assets
|
|
|
16,961 |
|
|
|
|
|
|
|
|
|
|
|
16,223 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
927,966 |
|
|
|
|
|
|
|
|
|
|
$ |
888,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
transaction accounts
|
|
$ |
78,331 |
|
|
$ |
277 |
|
|
|
0.47 |
% |
|
$ |
75,994 |
|
|
$ |
225 |
|
|
|
0.40 |
% |
Savings and
money market accounts
|
|
|
422,852 |
|
|
|
5,607 |
|
|
|
1.77 |
% |
|
|
407,852 |
|
|
|
11,052 |
|
|
|
3.62 |
% |
Time
accounts
|
|
|
82,323 |
|
|
|
1,962 |
|
|
|
3.18 |
% |
|
|
86,959 |
|
|
|
2,628 |
|
|
|
4.04 |
% |
CDARS®
reciprocal deposits
|
|
|
2,854 |
|
|
|
55 |
|
|
|
2.57 |
% |
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
Purchased
funds
|
|
|
28,942 |
|
|
|
473 |
|
|
|
2.18 |
% |
|
|
18,880 |
|
|
|
671 |
|
|
|
4.75 |
% |
Subordinated
debenture
|
|
|
5,000 |
|
|
|
229 |
|
|
|
6.02 |
% |
|
|
5,000 |
|
|
|
302 |
|
|
|
8.06 |
% |
Total
interest-bearing liabilities
|
|
|
620,302 |
|
|
|
8,603 |
|
|
|
1.85 |
% |
|
|
594,685 |
|
|
|
14,878 |
|
|
|
3.34 |
% |
Demand
accounts
|
|
|
207,792 |
|
|
|
|
|
|
|
|
|
|
|
202,660 |
|
|
|
|
|
|
|
|
|
Interest
payable and other liabilities
|
|
|
7,600 |
|
|
|
|
|
|
|
|
|
|
|
6,366 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
92,272 |
|
|
|
|
|
|
|
|
|
|
|
84,377 |
|
|
|
|
|
|
|
|
|
Total
liabilities & stockholders' equity
|
|
$ |
927,966 |
|
|
|
|
|
|
|
|
|
|
$ |
888,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
(1)
|
|
|
|
|
|
$ |
35,777 |
|
|
|
|
|
|
|
|
|
|
$ |
31,382 |
|
|
|
|
|
Net interest
margin
|
|
|
|
|
|
|
|
|
|
|
5.43 |
% |
|
|
|
|
|
|
|
|
|
|
5.00 |
% |
Net interest
rate
spread
|
|
|
|
|
|
|
|
|
|
|
4.88 |
% |
|
|
|
|
|
|
|
|
|
|
4.04 |
% |
(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 is included in interest income on
loans, representing an adjustment to the yield.
BANK
OF MARIN BANCORP
Third Quarter 2008
Compared to Third Quarter 2007
The tax-equivalent
net interest margin increased to 5.35% in the third quarter of 2008, up 41 basis
points from the third quarter of 2007. Sharply lower rates on deposits,
purchased funds and borrowed funds were only partially offset by lower loan
yields. The drop of 100 basis points in the Federal funds target rate in the
latter part of 2007 and 225 basis points in the first four months of 2008
resulted in lower offered rates on deposits and lower borrowing rates only
partially offset by lower loan yields, favorably impacting the net interest
margin. The net interest margin was also enhanced by a shift in the mix of
interest-earning assets from Federal funds sold to higher-yielding loans,
partially offset by an increase in purchased funds whose cost is higher than the
average cost of the Bank’s interest-bearing deposits. The impact to the net
interest margin of the $823 thousand non-accrual loan balances as of September
30, 2008 was not significant.
Total average
interest-earning assets increased $53.1 million, or 6.1%, in the third quarter
of 2008 compared to the third quarter of 2007. The increase primarily relates to
loan growth of $151.3 million, partially offset by a decline of $88.7 million in
Federal funds sold and a decline in investment securities of $9.5
million. Federal funds sold declined as the proceeds from the sale of
the indirect auto loan portfolio in the second quarter of 2007, initially
invested in Federal funds sold, were later reinvested in loans.
The average yield
on interest-earning assets decreased 72 basis points in the third quarter of
2008 compared to the third quarter in 2007. The decline in yield on
loans was only partially offset by increased yields on investment securities.
The yield on the loan portfolio, which comprised 88.9% and 76.9% of average
interest-earning assets in the quarters ended September 20, 2008 and 2007,
respectively, decreased 117 basis points in the third quarter of 2008 over the
comparable period a year ago due to the downward repricing of variable-rate
loans and new loans originated at lower market rates, as well as maturities and
pay downs of loans with higher yields.
In the quarter
ended September 30, 2008, the yield on the portfolio of agency securities was
essentially unchanged from the same quarter a year ago. Agency securities
comprised 7.8% and 9.8% of average interest-earning assets in the third quarter
of 2008 and 2007, respectively. These securities generally have shorter lives
than other securities in the portfolio and mature or are called more quickly.
The flat yield on agency securities in a declining rate environment is primarily
due to increased demand for safe securities in a volatile economic climate. The
yield on municipal bond securities, which comprised 2.2% or less of
interest-earning assets in each of these two quarters, increased 66 basis points
at quarter end September 30, 2008 from the same quarter a year ago. The increase
relates to the purchase of municipal bonds at higher market rates than those
maturing. In 2008,
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 and investor concern over the credit risk of certain
municipalities. At the same time, investor demand moved toward safer treasury
securities because of the current volatile market conditions. These market
conditions required some municipalities to offer higher rates to attract
investors.
The yield on
Federal funds sold decreased 325 basis points in the quarter ended September 30,
2008 compared to the quarter ended September 30, 2007 as a direct result of the
decline in the Federal funds target rate.
The average balance
of interest-bearing liabilities increased $39.1 million, or 6.3%, in the third
quarter of 2008 compared to the same period a year ago. The increase was
comprised of $26.9 million in interest-bearing deposit accounts and $12.2
million in funds purchased to support loan growth.
The rate on
interest-bearing liabilities decreased 159 basis points in the third quarter of
2008 compared to the same quarter a year ago. The overall cost of liabilities
was affected by lower offered deposit rates and the mix between deposits and
other interest-bearing liabilities. The rate on savings and money market
accounts, which comprised 70.0% and 71.3% of average interest-bearing
liabilities in the quarters ended September 20, 2008 and 2007, respectively,
decreased 191 basis points compared to the same quarter a year ago and the rate
on time deposits, which comprised 12.6% and 13.9% of interest-bearing
liabilities in the two periods, respectively, decreased 136 basis points in the
same comparable periods. The decreases reflected sharply declining
market rates. The rate on purchased funds decreased 220 basis points in the
third quarter of 2008 compared to the same quarter last year, primarily
reflecting the decline in the Federal funds target rate. The rate on the
subordinated debenture decreased 279 basis points due to a decline in the LIBOR
rate, to which the borrowing is indexed.
BANK
OF MARIN BANCORP
In the third
quarter of 2008, the mix of deposits was consistent with the composition of
deposits in the third quarter of 2007.
Third Quarter of
2008 Compared to Second Quarter of 2008
The tax equivalent
net interest margin decreased to 5.35% in the third quarter of 2008, down 17
basis points from the prior quarter. In the third quarter of 2008, there were no
changes in the Federal funds target rate. Rates offered on the
largest component of interest-bearing liabilities, savings and money market
accounts, were unchanged while the yield on loans, the largest component of
interest-earning assets, declined slightly due to factors discussed below,
negatively impacting the net interest margin. The margin was also impacted by a
shift in the mix of deposits from demand deposits, on which no interest is paid,
to savings and money market accounts.
Total average
interest-earning assets increased $48.8 million, or 5.6%, in the third quarter
of 2008 compared to the prior quarter. The increase primarily relates to $43.1
million loan growth and $4.9 million in increased Federal funds
sold.
The average yield
on total interest-earning assets decreased 21 basis points in the quarter ended
September 30, 2008 compared to the prior quarter. The yield on the loan
portfolio, which comprised 88.9% of average interest-earning assets in each of
the quarters ended September 30, 2008 and June 30, 2008, decreased 23 basis
points due to the downward re-pricing of variable-rate loans and new loans
originated at lower market rates. The decline in loan yields was partially
offset by increased yields on municipal bonds and other investments due to
factors previously discussed.
The average balance
of interest-bearing liabilities increased $46.7 million, or 7.7%, in the third
quarter of 2008 compared to the prior quarter. Increases of $59.0
million in savings and money market accounts, $6.8 million in CDARSâ reciprocal
deposits, $838 thousand in interest-bearing transaction accounts and $921
thousand in time deposits were partially offset by a decline of $20.9 million in
purchased funds.
The rate on
interest-bearing liabilities decreased 9 basis points in the third quarter of
2008 compared to the prior quarter, primarily due to the repricing of time
accounts and lower cost of purchased funds. The rate on savings and money market
accounts, which comprised 70.0% and 65.7% of average interest-bearing
liabilities in the quarters ended September 20, 2008 and June 30, 2008,
respectively, was unchanged from the prior quarter while the rate on time
deposits, which comprised 12.6% and 13.5% of interest-bearing liabilities in
these two periods, respectively, decreased 49 basis points reflecting maturities
of higher-rate deposits. The rate on purchased funds declined 22 basis points
reflecting the injection of liquidity into the market by the Federal Reserve
late in the third quarter of 2008.
In the third
quarter of 2008, the average balance of demand deposits, on which no interest is
paid, decreased to 25.4% of average deposits, down from 27.3% in the prior
quarter. Savings and money market accounts increased to 54.6% of
average deposits in the third quarter of 2008, up from 51.9% in the second
quarter of 2008, while the proportion of time deposits, including CDARSâ reciprocal
deposits, remained essentially unchanged at approximately 11%, and
interest-bearing transaction accounts declined slightly to 9.3% from
10.1%.
Nine Months ended
September 30, 2008 Compared to Nine Months ended September 20, 2007
The tax-equivalent
net interest margin increased to 5.43% in the first nine months of 2008, up 43
basis points from the first nine months of 2007. Lower rates on deposits,
purchased funds and subordinated debt were only partially offset by lower loan
yields.
Average
interest-earning assets increased $41.8 million, or 5.0%, in the first nine
months of 2008 compared to the first nine months of 2007. The
increase primarily relates to loan growth of $77.0 million, partially offset by
a $36.7 million decline in Federal funds sold. Federal funds sold declined as
the proceeds from the sale of the indirect auto portfolio in the second quarter
of 2007, which were initially invested in Federal funds, were later reinvested
in loans.
The average yield
on interest-earning assets decreased 65 basis points in the nine-month period
ended September 30, 2008 compared to the same period a year ago. The
decline in yield on loans was only partially offset by increased yields on most
categories of investment securities. The yield on the loan portfolio, which
comprised 88.3% and 83.6% of average earning assets in the nine-months ended
September 30, 2008 and 2007, respectively, decreased 88 basis points in the
first nine months of 2008 compared to the first nine months of 2007 due to the
downward repricing of variable rate loans and new loans originated at lower
market rates, as well as maturities and pay downs of higher yielding
loans.
BANK
OF MARIN BANCORP
The yield on the
portfolio of agency securities, which comprised 8.2% and 8.9% of
interest-earning assets the first nine months of 2008 and 2007, respectively,
remained fairly consistent between these periods. The yield on municipal bonds,
which comprised approximately 2% of interest-earning assets in both of the
nine-month periods ended September 30, 2008 and 2007, increased 73 basis points
in the nine months ended September 30, 2008 compared to the same period in 2007
due to higher rates on new securities as discussed earlier.
The average balance
of interest-bearing liabilities increased $25.6 million, or 4.3%, in the first
nine months of 2008 compared to the first nine months of
2007. Increases in savings and money market accounts of $15.0
million, purchased funds of $10.1 million, CDARSâ reciprocal
deposits of $2.8 million and interest-bearing transaction accounts of $2.3
million were partially offset by a decline of $4.6 million in time
deposits.
The rate on
interest-bearing liabilities decreased 149 basis points in the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007,
reflecting generally declining market rates. The rate on savings and
money market accounts decreased 185 basis points in the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007. The
rate on time deposits declined only 86 basis points in the same comparable
period since time deposits have longer maturities and the rates on customer
accounts change less frequently. The rate on purchased funds declined 257 basis
points, primarily due to declines in the target Federal funds rate. The rate on
borrowed funds declined 204 basis points due to a decline in LIBOR, to which the
borrowing rate is indexed.
The mix of deposits
was relatively unchanged in the nine-month period ended September 30, 2008
compared to the same period a year ago.
Provision
for Loan Losses
The Bank formally
assesses the adequacy of the allowance for loan losses 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 for loan losses charged to expense. For further discussion,
see sections captioned “Critical Accounting Policies.”
The Bank's
provision for loan losses was $1.7 million in the third quarter of 2008 compared
to $200 thousand in the third quarter of 2007, and $510 thousand in the second
quarter of 2008. During the first nine months of 2008, the provision
for loan losses totaled $2.8 million compared to $340 thousand in the first nine
months of 2007. The allowance for loan losses as a percentage of loans totaled
1.11% at September 30, 2008, compared to 1.07% at June 30, 2008, and 1.05% at
September 30, 2007. The increases to the provision and allowance for loan losses
reflect the significant level of loan growth that the Bank experienced in 2007
and 2008, an increased allocation for economic uncertainty, and increases to the
specific reserve where needed. The U.S. economies are experiencing significantly
reduced business activity as a result of, among other factors, disruptions in
the financial system dramatic declines in the housing market and increasing
unemployment rate. Over the last quarter, there has been unprecedented
volatility and deterioration in the financial markets, witnessing the failure of
well-known companies and inducing a national recession. In this environment,
loan quality has already shown softness as a result of general economic
conditions, and could deteriorate even further. Consequently, the
Bank has increased the economic factor from 0.20% at September 30, 2007 to
0.225% at June 30, 2008 and 0.25% at September 30, 2008, resulting in increases
in allowance for loan losses related to economic uncertainty of $648 thousand in
the nine months ended September 30, 2008 and $299 thousand in the third quarter
of 2008. The specific reserve increased from zero at September 30,
2007 to $251 thousand at June 30, 2008 and to $363 thousand at September 30,
2008.
Net charge-offs in
the first nine months of 2008 totaling $1.1 million and in the third quarter of
2008 totaling $969 thousand primarily relate to the charge-off of one unsecured
commercial line of credit and one commercial term loan collateralized by a
residence where the Bank holds the second deed of trust. Net
charge-offs in the first nine months of 2007 totaled $88 thousand and in the
third quarter of 2007 totaled $26 thousand.
BANK
OF MARIN BANCORP
Non-interest
Income
The table below
details the components of non-interest income.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
compared to
June 30, 2008
|
|
|
September 30, 2008
compared to
September 30, 2007
|
|
|
|
Three months
ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(dollars in
thousands)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
417 |
|
|
$ |
430 |
|
|
$ |
325 |
|
|
$ |
(13 |
) |
|
|
(3.0 |
%) |
|
$ |
92 |
|
|
|
28.3 |
% |
Wealth
Management Services
|
|
|
330 |
|
|
|
310 |
|
|
|
331 |
|
|
|
20 |
|
|
|
6.5 |
% |
|
|
(1 |
) |
|
|
(0.3 |
%) |
Unrealized
gain on Visa portfolio
|
|
|
--- |
|
|
|
--- |
|
|
|
387 |
|
|
|
--- |
|
|
|
--- |
|
|
|
(387 |
) |
|
NM
|
|
Other
non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings on
bank owned life insurance
|
|
|
154 |
|
|
|
151 |
|
|
|
146 |
|
|
|
3 |
|
|
|
2.0 |
% |
|
|
8 |
|
|
|
5.5 |
% |
Customer
banking fees and other charges
|
|
|
97 |
|
|
|
116 |
|
|
|
133 |
|
|
|
(19 |
) |
|
|
(16.4 |
%) |
|
|
(36 |
) |
|
|
(27.1 |
%) |
Other
income
|
|
|
196 |
|
|
|
272 |
|
|
|
264 |
|
|
|
(76 |
) |
|
|
(27.9 |
%) |
|
|
(68 |
) |
|
|
(25.8 |
%) |
Total other
non-interest income
|
|
|
447 |
|
|
|
539 |
|
|
|
543 |
|
|
|
(92 |
) |
|
|
(17.1 |
%) |
|
|
(96 |
) |
|
|
(17.7 |
%) |
Total
non-interest income
|
|
$ |
1,194 |
|
|
$ |
1,279 |
|
|
$ |
1,586 |
|
|
$ |
(85 |
) |
|
|
(6.6 |
%) |
|
$ |
(392 |
) |
|
|
(24.7 |
%) |
NM-Not
Meaningful
|
|
Nine months
ended
|
|
|
Amount
|
|
|
Percent
|
|
(dollars in
thousands)
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
1,253 |
|
|
$ |
894 |
|
|
$ |
359 |
|
|
|
40.2 |
% |
Wealth
Management Services
|
|
|
976 |
|
|
|
904 |
|
|
|
72 |
|
|
|
8.0 |
% |
Unrealized
gain on indirect auto and Visa portfolio
|
|
|
--- |
|
|
|
1,097 |
|
|
|
(1,097 |
) |
|
NM
|
|
Net gain on
redemption of shares in Visa, Inc
|
|
|
457 |
|
|
|
--- |
|
|
|
457 |
|
|
NM
|
|
Other
non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings on
bank owned life insurance
|
|
|
452 |
|
|
|
429 |
|
|
|
23 |
|
|
|
5.4 |
% |
Customer
banking fees and other charges
|
|
|
307 |
|
|
|
408 |
|
|
|
(101 |
) |
|
|
(24.8 |
%) |
Other
income
|
|
|
730 |
|
|
|
755 |
|
|
|
(25 |
) |
|
|
(3.3 |
%) |
Total other
non-interest income
|
|
|
1,489 |
|
|
|
1,592 |
|
|
|
(103 |
) |
|
|
(6.5 |
%) |
Total
non-interest income
|
|
$ |
4,175 |
|
|
$ |
4,487 |
|
|
$ |
(312 |
) |
|
|
(7.0 |
%) |
NM
- Not Meaningful
Non-interest income
for the third quarter of 2008 decreased $392 thousand, or 24.7%, as compared to
the third quarter of 2007 and decreased $85 thousand, or 6.6%, compared to the
prior quarter. The third quarter of 2007 included a net gain of $387 thousand on
the sale of the Visa portfolio. Excluding this gain, non-interest income in the
third quarter of 2008 remained constant with the same quarter a year
ago.
Service charges on
deposit accounts for the third quarter of 2008 increased $92 thousand, or 28.3%,
from the comparable quarter a year ago and decreased $13 thousand, or 3.0%, from
the preceding quarter. The increase from the third quarter of 2007 is primarily
attributable to an increase in fees from the Bank’s business analysis accounts,
primarily reflecting a reduced earnings credit, as well as an increase in the
volume of fees on checks drawn against insufficient funds. Wealth
Management Services (WMS) income remained relatively unchanged from the third
quarter of 2007, and increased $20 thousand, or 6.5%, from the prior quarter,
reflecting new assets under management and one-time estate settlement fees,
partially offset by market declines affecting fees. Other non-interest income
for the third quarter of 2008 decreased $96 thousand, or 17.7%, from the third
quarter of 2007 and decreased $92 thousand, or 17.1%, from the prior quarter.
The decrease from the same quarter a year ago is primarily due to decreases in
reverse mortgage fees (the
Bank terminated this service on May 1, 2008), cash manager fees, Visa fees (due
to the start-up of the new program following the sale of the Visa portfolio in
the third quarter of 2007), and remote deposit capture fees (which are charged
as part of business analysis account fees). The decrease compared to the prior
quarter primarily relates to decreases in miscellaneous income (due to interest
the Bank received on amended tax returns in the second quarter of 2008) and
cash manager fees (due to temporary waiver of cash manager fees when customers
agreed to switch to a new on balance sheet sweep product), partially offset by
an increase in merchant card interchange fees.
BANK
OF MARIN BANCORP
Non-interest income
totaled $4.2 million for the first nine months of 2008, a decrease of $312
thousand, or 7.0%, from the first nine months of 2007. The adoption of SFAS No.
159 and the subsequent sale of the indirect auto loan portfolio and Visa
portfolio generated a net gain in the first nine months of 2007 of $1.1 million,
while in the first nine months of 2008, the sale of shares of Visa Inc.
generated a net gain of $457 thousand. Excluding these nonrecurring gains,
non-interest income in the first nine months of 2008 increased 9.7% from the
comparable period a year ago. The net gain on sale of the auto portfolio is
comprised of $520 thousand recorded in the first quarter of 2007 representing
the change in the fair value of the portfolio during the quarter, plus a net
gain recorded in the second quarter representing the pre-tax gain on the sale
totaling $489 thousand based on actual proceeds, net of selling expenses of $299
thousand, including commissions, legal fees and conversion costs. The $387
thousand gain recorded in the third quarter of 2007 represents the premium
received on the sale of the Visa portfolio. The $457 thousand gain recorded in
the first quarter of 2008 represents the mandatory redemption of a portion of
the Bank’s shares of Visa, Inc.
Service charges on
deposit accounts in the first nine months of 2008 increased $359 thousand, or
40.2%, compared to the first nine months of 2007, primarily attributable to an
increase effective April 1, 2007 in the fees the Bank charges for checks drawn
against insufficient funds combined with higher volume, as well as reduced
earnings credits provided to certain customer accounts, driving higher business
analysis fees. WMS income totaled $976 thousand during the first nine months of
2008, an increase of $72 thousand, or 8.0%, compared to the same period in 2007,
primarily reflecting new assets under management and one-time estate settlement
fees, partially offset by market declines affecting fees. Other
non-interest income for the first nine months of 2008 totaled $1.5 million and
reflected lower remote deposit capture fees, Visa fees, reverse mortgage fees
(this service was terminated on May 1, 2008), and cash manager fees, partially
offset by higher miscellaneous income (due to interest the Bank received in the
second quarter of 2008 on amended tax returns).
Non-interest
Expense
The table below
details the components of non-interest expense.
|
|
|
|
|
September 30, 2008
compared to
June 30, 2008
|
|
|
September 30, 2008
compared to
September 30, 2007
|
|
|
|
Three months
ended
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
(dollars in
thousands)
|
|
September 30, 2008
|
|
|
June 30, 2008
|
|
|
September 30, 2007
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
Salaries and
related benefits
|
|
$ |
4,179 |
|
|
$ |
4,035 |
|
|
$ |
3,938 |
|
|
$ |
144 |
|
|
|
3.6 |
% |
|
$ |
241 |
|
|
|
6.1 |
% |
Occupancy and
equipment
|
|
|
802 |
|
|
|
793 |
|
|
|
716 |
|
|
|
9 |
|
|
|
1.1 |
% |
|
|
86 |
|
|
|
12.0 |
% |
Depreciation
& amortization
|
|
|
351 |
|
|
|
327 |
|
|
|
318 |
|
|
|
24 |
|
|
|
7.3 |
% |
|
|
33 |
|
|
|
10.4 |
% |
Data
processing
|
|
|
480 |
|
|
|
430 |
|
|
|
411 |
|
|
|
50 |
|
|
|
11.6 |
% |
|
|
69 |
|
|
|
16.8 |
% |
Professional
services
|
|
|
336 |
|
|
|
419 |
|
|
|
536 |
|
|
|
(83 |
) |
|
|
(19.8 |
%) |
|
|
(200 |
) |
|
|
(37.3 |
%) |
Other
non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC
insurance
|
|
|
131 |
|
|
|
112 |
|
|
|
97 |
|
|
|
19 |
|
|
|
17.0 |
% |
|
|
34 |
|
|
|
35.1 |
% |
Advertising
|
|
|
101 |
|
|
|
87 |
|
|
|
79 |
|
|
|
14 |
|
|
|
16.1 |
% |
|
|
22 |
|
|
|
27.8 |
% |
Director
expense
|
|
|
105 |
|
|
|
117 |
|
|
|
65 |
|
|
|
(12 |
) |
|
|
(10.3 |
%) |
|
|
40 |
|
|
|
61.5 |
% |
Other
expense
|
|
|
957 |
|
|
|
820 |
|
|
|
766 |
|
|
|
137 |
|
|
|
16.7 |
% |
|
|
191 |
|
|
|
24.9 |
% |
Total other
non-interest expense
|
|
|
1,294 |
|
|
|
1,136 |
|
|
|
1,007 |
|
|
|
158 |
|
|
|
13.9 |
% |
|
|
287 |
|
|
|
28.5 |
% |
Total
non-interest expense
|
|
$ |
7,442 |
|
|
$ |
7,140 |
|
|
$ |
6,926 |
|
|
$ |
302 |
|
|
|
4.2 |
% |
|
$ |
516 |
|
|
|
7.5 |
% |
|
|
Nine months
ended
|
|
|
Amount
|
|
|
Percent
|
|
(dollars in
thousands)
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
Increase (Decrease)
|
|
|
Increase (Decrease)
|
|
Salaries and
related benefits
|
|
$ |
12,372 |
|
|
$ |
12,064 |
|
|
$ |
308 |
|
|
|
2.6 |
% |
Occupancy and
equipment
|
|
|
2,363 |
|
|
|
2,155 |
|
|
|
208 |
|
|
|
9.7 |
% |
Depreciation
& amortization
|
|
|
996 |
|
|
|
929 |
|
|
|
67 |
|
|
|
7.2 |
% |
Data
processing
|
|
|
1,355 |
|
|
|
1,254 |
|
|
|
101 |
|
|
|
8.1 |
% |
Professional
services
|
|
|
1,161 |
|
|
|
1,239 |
|
|
|
(78 |
) |
|
|
(6.3 |
%) |
Other
non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC
insurance
|
|
|
366 |
|
|
|
141 |
|
|
|
225 |
|
|
|
159.6 |
% |
Advertising
|
|
|
291 |
|
|
|
250 |
|
|
|
41 |
|
|
|
16.4 |
% |
Director
expense
|
|
|
335 |
|
|
|
291 |
|
|
|
44 |
|
|
|
15.1 |
% |
Other
expense
|
|
|
2,344 |
|
|
|
2,322 |
|
|
|
22 |
|
|
|
0.9 |
% |
Total other
non-interest expense
|
|
|
3,336 |
|
|
|
3,004 |
|
|
|
332 |
|
|
|
11.1 |
% |
Total
non-interest expense
|
|
$ |
21,583 |
|
|
$ |
20,645 |
|
|
$ |
938 |
|
|
|
4.5 |
% |
BANK
OF MARIN BANCORP
Non-interest
expense for the third quarter of 2008 increased $516 thousand, or 7.5%, as
compared to the third quarter of 2007, and increased by $302 thousand, or 4.2%,
from the prior quarter.
Salaries and
benefits for the third quarter of 2008 increased $241 thousand, or 6.1%, when
compared to the third quarter of 2007 and increased by $144 thousand, or 3.6%,
when compared to the prior quarter. The increase from the third quarter of 2007
primarily reflects higher salaries, payroll taxes, employee insurance and bonus
accrual due to a higher level of full-time equivalent employees (FTE), which
totaled 197, 187 and 188 in September 2008, June 2008 and September 2007,
respectively. These expenses are partially offset by lower capitalization of
deferred loan costs as defined in SFAS No. 91 “Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases” and lower stock-based
compensation. The increase from the prior quarter reflects higher expenses
associated with a higher level of FTE and higher commissions, partially offset
by lower retirement benefit plan contributions (as company matching contribution
maximums were met) and lower capitalization of deferred loan costs.
Occupancy and
equipment expenses increased $86 thousand, or 12.0%, from the third quarter of
2007 and increased $9 thousand, or 1.1% from the prior quarter. The
increase from the third quarter of 2007 is primarily due to higher maintenance
and repair costs and higher rent associated with a new branch facility opened in
June 2008. The increase from the prior quarter primarily reflects an
increase in property taxes, maintenance and repairs and utilities.
Depreciation and
amortization expenses for the third quarter of 2008 increased $33 thousand, or
10.4%, from the third quarter of 2007 and increased $24 thousand or 7.3% from
the previous quarter. These increases are primarily due to addition
of leasehold improvements associated with the remodeling of the San Rafael
branch and the addition of the Mill Valley branch during the second quarter of
2008.
Data processing
expense for the third quarter of 2008 increased $69 thousand, or 16.8% when
compared to the third quarter of 2007 and increased $50 thousand, or 11.6%,
compared to the previous quarter. The increases are due to the contractually
stipulated price increases that are part of the Bank’s long-term agreement with
its data processing provider as well as one time fees associated with network
upgrades, set-up of the Bank’s new cash manager sweep program, and the related
training costs.
Professional
services for the third quarter of 2008 decreased $200 thousand, or 37.3%, from
the third quarter of 2007 and decreased $83 thousand, or 19.8% from the second
quarter of 2008. The decreases primarily relate to lower professional fees
related to expenses associated with the formation of the holding company in 2007
and the discontinuation of a consulting agreement that began in July of 2006 and
ended in June of 2008.
Other non-interest
expense for the third quarter of 2008 increased by $287 thousand, or 28.5%
compared to the third quarter of 2007 and increased by $158 thousand, or 13.9%,
from the second quarter of 2008. The increase from third quarter 2007 is
primarily due to higher correspondent bank charges, related to reduced earnings
credits, cash sweep management expense related to the new sweep program,
provision for losses on off-balance sheet commitments, FDIC insurance (for an
industry-wide FDIC assessment) and higher marketing research. The increase from
the prior quarter reflects higher
provision for losses on off-balance sheet commitments, other processing costs,
special events, FDIC insurance and marketing research.
Non-interest
expense totaled $21.6 million for the first nine months of 2008, an increase of
$938 thousand, or 4.5%, from the corresponding period of
2007. Excluding the $242 thousand Visa litigation reversal in the
first quarter of 2008 (see Note 11 of the Notes to Consolidated Financial
Statements in this Form 10-Q), non-interest expense for the nine months ended
September 30, 2008 increased $1.2 million, or 5.7%. Salaries and
benefits increased by $308 thousand, or 2.6%, primarily reflecting a higher
bonus accrual, salaries and commissions. Occupancy and equipment expense
increased by $208 thousand, or 9.7%, in the first nine months of 2008 compared
to the same period in 2007, mainly due to increases in premise rent associated
with the new branch facility as well as higher maintenance and
repairs. Depreciation and amortization in the nine month period ended
September 30, 2008 increased by $67 thousand, or 7.2% from the same period a
year ago. This increase reflects the remodeling of the San Rafael and
Northgate branches in the second quarter of 2008 and 2007,
respectively. Data processing expense increased by $101 thousand, or
8.1%, which primarily reflects a one time de-conversion fee that was booked in
the first nine months of 2008 related to credit card customers. Professional
services decreased in the first nine months of 2008 compared to the same period
in the prior year by $78 thousand, or 6.3%, largely attributable to a decrease
in expenses associated with the holding company formation in 2007 and other Bank
initiatives. Other non-interest expense increased by $332 thousand,
or 11.1%, reflecting increases
in FDIC insurance (for an industry-wide FDIC assessment), other processing
costs, information technology (for new products and special projects) and
marketing research.
BANK
OF MARIN BANCORP
FDIC insurance is
expected to increase approximately 10% for the added surcharge for increased
unlimited coverage on non-interest-bearing transaction deposit beginning in the
fourth quarter of 2008 through December of 2009. FDIC insurance is
also expected to increase from 5 basis points to 12 basis points per $100
covered for the first quarter of 2009, related to a proposed uniform increased
assessment. This new base assessment rate for all FDIC member banks
will be subject to adjustment beginning April 1, 2009 based on the member bank’s
risk.
Provision
for Income Taxes
Bancorp reported a
provision for income taxes of $1.7 million, $2.2 million, and $2.1 million for
the quarters ended September 30, 2008, June 30, 2008, and September 30, 2007,
respectively. The effective tax rates were 38.4%, 38.9% and 39.2% for
those same periods. These provisions reflect accruals for taxes at
the applicable rates for federal income tax and California franchise tax 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, bank owned life insurance policies
and certain tax-exempt loans). 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
nine months of 2008, total assets increased $50.8 million to $984.7 million from
December 31, 2007. This increase in assets primarily reflects an increase in net
loans of $112.4 million, offset by declines in Federal funds sold of $47.5
million and investment securities of $6.3 million. The decrease in Federal funds
sold and related increase in borrowings of $28.6 million are attributable to the
increase in loans net of deposit changes. Total liabilities increased by $43.9
million from December 31, 2007, with an increase in deposits of $14.6 million.
Deposit balances at December 31, 2007 included a $53.0 million deposit from one
customer placed with the Bank in the last week of 2007, which left the Bank in
January 2008. Excluding this deposit, the increase in deposit balances from
December 31, 2007 to September 30, 2008 totaled $67.6 million. As
shown in the table below, the increase in loans primarily reflects increases in
commercial real estate, residential and commercial loans.
(Dollars in
thousands)
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Commercial
loans
|
|
$ |
136,879 |
|
|
$ |
124,336 |
|
Real
estate
|
|
|
|
|
|
|
|
|
Commercial
owner-occupied
|
|
|
146,413 |
|
|
|
132,614 |
|
Commercial
investor
|
|
|
304,477 |
|
|
|
257,127 |
|
Construction
|
|
|
105,977 |
|
|
|
97,153 |
|
Residential
(a)
|
|
|
110,561 |
|
|
|
78,860 |
|
Installment
and other consumer
|
|
|
34,700 |
|
|
|
34,788 |
|
Total
loans
|
|
|
839,007 |
|
|
|
724,878 |
|
Allowance for
loan losses
|
|
|
9,271 |
|
|
|
7,575 |
|
Total net
loans
|
|
$ |
829,736 |
|
|
$ |
717,303 |
|
(a) The residential
loan portfolio includes no sub-prime loans at September 30, 2008 and December
31, 2007.
At September 30,
2008, the Bank had six non-accrual loans totaling $823 thousand. At
December 31, 2007 the Bank had one non-accrual loan totaling $144
thousand. Impaired loan balances at each period-end approximated the
balance of nonaccrual loans.
BANK
OF MARIN BANCORP
The Bank’s
investment securities portfolios declined by $6.3 million, to $93.9 million
during the first nine months of 2008. For more information on
investment securities, see Note 4 to the Consolidated Financial Statements and
Item 1A “Risk Factors” in this Form 10-Q.
During August 2008,
the Bank purchased $2.2 million in new bank owned life insurance policies
(BOLI). BOLI totaled $16.8 million at September 30, 2008, compared to $14.1
million at December 30, 2007, and is recorded in other assets. Other assets also
include net deferred tax assets of $6.3 million and $5.1 million at September
30, 2008 and December 31, 2007, respectively. These deferred tax assets consist
primarily of tax benefits expected to be realized in future periods related to
temporary differences of allowance for loan losses, depreciation, net unrealized
loss on securities available for sale 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
nine months of 2008, total liabilities increased $43.9 million to $890.1
million. The increase in total liabilities was primarily due to an
increase in overnight borrowings of $13.6 million, a new 2.07% fixed-rate
putable 10-year advance of $15.0 million from the FHLB, and an increase in
deposits of $14.6 million. Excluding the $53.0 million short-term deposit placed
with the Bank over year-end of 2007 discussed above, deposits increased $67.6
million from December 31, 2007. The growth in deposits was positively impacted
by the introduction of an on-balance sheet sweep account program in June of
2008. The previous program swept customer balances over an agreed amount to a
vendor who invested the funds outside the Bank. The current program provides for
these funds to remain at the Bank. This allowed $33.7 million of customer
deposits, which previously would have been swept off the balance sheet, to
remain on the balance sheet at September 30, 2008. In addition, recent failures
in certain banks led to increased customer concern over deposit safety. The Bank
believes that it has successfully attracted new money due to the financial
soundness of the Bank. In March 2008, the Bank introduced a new deposit product,
Certificate of Deposit Account Registry Service (CDARS®). CDARS® is a network
through which the bank offers full FDIC insurance coverage in excess of the
regulatory maximum by placing deposits in multiple banks participating in the
network. CDARS® reciprocal deposits totaled $16.7 million at September 30,
2008.
Stockholders’
equity increased $6.9 million to $94.7 million during the first nine months of
2008. The increase in stockholders’ equity primarily reflects the
Bank’s earnings of $9.4 million and the exercise of stock options (including the
associated excess tax benefits) of $1.4 million, partially offset by the
repurchase of the Bank’s common stock of $2.5 million and the payment of cash
dividends of $2.2 million. In September 2008, Bancorp suspended common stock
repurchases to preserve capital during a time of extreme economic
turbulence.
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 September 30, 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.
BANK
OF MARIN BANCORP
Capital
Ratios for Bancorp
(in
thousands)
|
|
Actual
Ratio
|
|
|
|
|
Ratio for Capital Adequacy
Purposes
|
|
As of
September 30, 2008
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
Ratio
|
Total Capital
(to risk-weighted assets)
|
|
$ |
109,479 |
|
|
|
11.62 |
% |
≥
$75,389
|
≥
8.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
94,705 |
|
|
|
10.05 |
% |
≥
$37,694
|
≥
4.00%
|
Tier I
Capital (to average assets)
|
|
$ |
94,705 |
|
|
|
9.74 |
% |
≥
$38,881
|
≥
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%
|
Capital
Ratios for the Bank
(in
thousands)
|
|
Actual
Ratio
|
|
|
|
|
Ratio for Capital Adequacy
Purposes
|
|
Ratio to be Well Capitalized
under Prompt Corrective Action
Provisions
|
|
As of
September 30, 2008
|
|
Amount
|
|
|
Ratio
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Total Capital
(to risk-weighted assets)
|
|
$ |
107,288 |
|
|
|
11.39 |
% |
≥
$75,378
|
≥
8.00%
|
≥
$94,223
|
≥
10.00%
|
Tier I
Capital (to risk-weighted assets)
|
|
$ |
92,515 |
|
|
|
9.82 |
% |
≥
$37,689
|
≥
4.00%
|
≥
$56,534
|
≥
6.00%
|
Tier I
Capital (to average assets)
|
|
$ |
92,515 |
|
|
|
9.52 |
% |
≥
$38,880
|
≥
4.00%
|
≥
$48,600
|
≥
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%
|
≥
$45,374
|
≥
5.00%
|
Liquidity
The goal of
liquidity management is to provide adequate funds to meet both loan demand 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 and correspondent banks
that enable the Bank to borrow funds as needed. The Bank’s Asset/Liability
Management Committee (ALCO) 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 and FHLB
advances, and other borrowings. The Bank’s primary uses of funds are the
origination of loans, the purchase of investment securities, withdrawals of
deposits, maturity of certificate of deposits, 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, as well as the Bank’s financial strength. 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 worthiness 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
September 30, 2008 totaled $20.5 million. The primary sources of funds during
the nine months ended September 30, 2008 were $28.6 million in Federal
funds purchased and FHLB borrowings, $36.5 million in the maturities and
paydowns of securities available for sale, $21.5 million in securities sales,
$16.8 million net cash provided by operating activities and $14.6 million
increase in deposits. The primary uses of funds were $115.5 million in loan
originations (net of principal collections), and $52.2 million investment
securities purchases.
BANK
OF MARIN BANCORP
The Bank
anticipates that it will be in a borrowing position in the short-term. If
competition for deposits in the marketplace increases, the Bank’s liquidity and
net interest margin may be negatively affected. Conversely, Bank of
Marin’s financial strength may draw deposits to its franchise in time of
economic uncertainty.
At September 30,
2008, the Bank’s cash and cash equivalents, Federal funds sold and unpledged
securities maturing within one year totaled $21.7 million. The remainder of the
unpledged available for sale securities portfolio of $64.7 million provides
additional liquidity. Taken together, these liquid assets equaled 8.8% of the
Bank’s assets at September 30, 2008, compared to 16.2% at December 31, 2007. The
decreased liquidity at September 30, 2008 was primarily due to a lower Federal
funds sold level resulting from loan growth in excess of deposit
growth.
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 9.6% equity to assets ratio, 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 $3.0 million line of
credit with the Federal Reserve Bank to borrow overnight, which were not drawn
upon at September 30, 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
certain assets) for advances of $170.7 million, of which $142.1 million was
available at September 30, 2008, at an interest rate determined daily. The
overnight borrowing rate generally approximates the Federal funds target rate,
however due to market volatility, the rate ranged from 0.20% to 3.31% in the
nine months ended September 30, 2008. Borrowings under the line of
credit are limited to eligible collateral.
Undisbursed loan
commitments and standby letters of credit, which are not reflected on the
statement of condition, totaled $251.2 million at September 30, 2008 at
rates ranging from 3.73% to 10.25%. This amount included $128.7
million under commercial lines of credit (these commitments are contingent upon
customers maintaining specific credit standards), $74.0 million under
revolving home equity lines, $37.4 million under undisbursed construction loans,
$4.0 million under standby letters of credit, and the remaining $7.1 million
under personal and other lines of credit. 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, $74.4
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 (prior to the discontinuation
of the stock repurchase program in September 2008) 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 ALCO, 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.
BANK
OF MARIN BANCORP
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. The simulation model, prepared on a quarterly basis, uses
actual loans, investments and deposit detail as a starting point. If potential
changes to capital 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.
Sensitivity refers
to the impact interest rate movements will have on earnings. Asset sensitivity
arises when net interest income changes more than net interest expense, and
liability sensitivity arises when the cost of funds changes more than interest
income as a result of interest rate movements. The decrease in 2008 in Federal
funds sold and increase in loans in 2008 from 2007 has caused the Bank’s assets
to be less sensitive to short-term interest rate changes. In a
declining rate environment, the Bank is expected to be asset
sensitive. The Bank is currently in a position in which deposit
offered rates are low, and may not be lowered enough to offset the decline in
loan interest income if market rates fall further. If rates rise, the
Bank is expected to be liability sensitive since deposit rates are likely to
rise faster than loan rates. In addition, fluctuations in rates will have an
immediate impact on the cost of overnight purchased funds which have supported
loan growth in 2008. 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 is 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
prior to Visa U.S.A.’s merger into Visa Inc. In March of 2008, Bancorp reversed
this liability because, subsequent to Visa Inc.’s initial public offering on
March 19, 2008, Visa Inc. established an escrow account from which it plans to
pay any potential settlements.
On October 27, 2008
Visa Inc. announced a settlement with one of the litigants, Discover Card, for
$1.9 billion, of which $1.7 billion is the responsibility of member
banks. As of the settlement date, the escrow account was underfunded
by $1.1 billion. The Bank’s proportionate share of the shortfall is $75
thousand. Visa Inc. expects to further fund the escrow account in the fourth
quarter of 2008 to cover the settlement through a reduction in the conversion
factor of Class B shares held by member banks that are available for conversion
to Class A as allowed by the “Retrospective Responsibility Plan” outlined in the
Form S-1 filed by Visa Inc. on November 9, 2007. The Bank expects that its
liability will be fully covered by the additional escrow funding, with no cash
payment required by the Bank.
Securities
Guaranteed by FNMA or FHLMC May Lose Value if the Guarantee is Deemed Less
Certain.
The Bank holds
approximately $52.5 million worth of securities issued and/or guaranteed by FNMA
and FHLMC. If either of these entities comes under further financial
stress, or if they experience further deterioration in credit worthiness, the
fair value of the Bank’s securities issued or guaranteed by these entities could
be negatively affected. On September 9, 2008, the Federal Housing Finance
Agency (FHFA) announced it was placing both FNMA and FHLMC under
conservatorship. Besides authorizing the FHFA to inject up to $100 billion into
the preferred equity (senior to the current preferred equity) of FNMA and FHLMC,
the U.S.Treasury also established a new secured lending credit facility which
will be available to both FNMA and FHLMC. However, it cannot be
predicted whether this recent step taken by the federal government will result
in continuous improvement in credit worthiness of these two agencies.
BANK
OF MARIN BANCORP
Other than noted above,
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.
|
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. In the first nine months of 2008, Bancorp
repurchased a total of 88,316 shares at an average price of $28.55 for a total
cost of $2.5 million, plus commissions. In September 2008, Bancorp discontinued
common stock repurchases under this plan to preserve capital during a time of
extreme economic turbulence.
A schedule of
purchases during the quarter ended September 30, 2008 follows.
(Dollars in
thousands, except average price)
Period
|
|
Total Number of
Shares Purchased
|
|
|
Average Price
|
|
|
Total Number of Shares
Purchased as Part of Publicly Announced
Program
|
|
|
Approximate dollar Value
that May Yet be Purchased Under the
Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1-31,
2008
|
|
|
16,207 |
|
|
$ |
26.43 |
|
|
|
16,207 |
|
|
$ |
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1-31,
2008
|
|
|
13,500 |
|
|
$ |
29.28 |
|
|
|
13,500 |
|
|
$ |
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1-30, 2008
|
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
$ |
929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,707 |
|
|
$ |
27.73 |
|
|
|
29,707 |
|
|
$ |
929 |
|
|
Defaults
Upon Senior Securities
|
None.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
None.
The following
exhibits are filed as part of this report or hereby incorporated by reference to
filings previously made with the SEC.
|
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.
|
BANK
OF MARIN BANCORP
|
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 Bancorp’s Current Report on 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.
|
|
14.01
|
Code of
Ethics dated June 30, 2008 is incorporated by reference to Exhibit 14.01
to Bancorp’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 26,
2008.
|
|
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.
|
BANK
OF MARIN BANCORP
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
Bank of Marin
Bancorp
|
|
|
|
(registrant)
|
|
|
|
|
|
|
|
|
|
November 4,
2008
|
|
/s/ Russell
A. Colombo
|
|
Date
|
|
Russell A.
Colombo
|
|
|
|
President
&
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 4,
2008
|
|
/s/ Christina
J. Cook
|
|
Date
|
|
Christina J.
Cook
|
|
|
|
Executive
Vice President &
|
|
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 4,
2008
|
|
/s/ Larry R.
Olafson
|
|
Date
|
|
Larry R.
Olafson
|
|
|
|
Senior Vice
President &
|
|
|
|
Controller
|
|
EXHIBIT
INDEX
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.
|
Page -
37