UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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T
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended: December 31, 2008
or
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£
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from __________________ to __________________
Commission
File number: 001-33572
Bank
of Marin Bancorp
(Exact name of
Registrant as specified in its charter)
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California
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20-8859754
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(State or
other jurisdiction of incorporation)
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(IRS Employer
Identification No.)
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504 Redwood Blvd., Suite 100, Novato,
CA
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94947
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(Address of
principal executive office)
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(Zip
Code)
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(415)
763-4520
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12 (b) of the Act:
None
Securities
registered pursuant to section 12(g) of the Act:
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Common
Stock, No Par Value,
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and attached Share Purchase
Rights
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NASDAQ Capital Market
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(Title of
each class)
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(Name of each
exchange on which
registered)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes £
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No T
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Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
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Yes £
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No T
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Note – checking the
box above will not relieve any registrant required to file reports pursuant to
section 13 or 15(d) of the Exchange Act from their obligations under these
sections.
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 T No £ (See
Explanatory Note.)
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
One):
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Large
accelerated filer £
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Accelerated
filer T
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Non-accelerated
filer £
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Smaller
reporting company £
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Indicate by check
mark if the registrant is a shell company, as defined in Rule 12b(2) of the
Exchange Act.
Yes £ No T
As of June 30,
2008, the last business day of the registrant’s most recently completed second
fiscal quarter, the aggregate market value of the voting and non-voting common
equity held by non-affiliates, based upon the closing price per share of the
registrant’s common stock as reported by the NASDAQ, was approximately $118
million. For the purpose of this response, directors and officers of
the Registrant are considered the affiliates at that date.
As
of February 27, 2009 there were 5,154,151 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the
registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held
on May 12, 2009 are incorporated by reference into Part III.
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. Bank
of Marin 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 “1934
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 1934
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 our 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.
Page
- 3
BANK
OF MARIN BANCORP
TABLE OF CONTENTS
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PART
I
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6
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FOWARD-LOOKING
STATEMENTS
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6
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ITEM
1.
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6
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ITEM
1A.
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11
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ITEM
1B.
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16
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ITEM
2.
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16
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ITEM
3.
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17
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ITEM
4.
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17
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PART
II
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18
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ITEM
5.
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18
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ITEM
6.
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21
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ITEM
7.
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22
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24
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27
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30
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33
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34
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34
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36
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38
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38
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40
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40
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ITEM
7A.
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42
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ITEM
8.
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44
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51
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ITEM
9.
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77
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ITEM
9A.
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77
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ITEM
9B.
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77
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PART
III
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78
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ITEM
10.
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78
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ITEM
11.
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78
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ITEM
12.
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78
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ITEM
13.
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78
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ITEM
14.
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78
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PART
IV
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79
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ITEM
15.
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79
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81
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83
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PART I
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.
Our forward-looking
statements include descriptions of plans or objectives of Management for future
operations, products or services, and forecasts of our 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 our 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’s
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 our operations, pricing, products and services.
These and other important factors are detailed in Item 1A Risk Factors section
of this report. Forward-looking statements speak only as of the date they are
made. We do 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.
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ITEM 1.
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BUSINESS
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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 (the “Bank”), its sole subsidiary. References in this report to “Bancorp”
mean the holding company. References to “we,” “our,” “us” mean the
holding company and its subsidiary that are consolidated for financial reporting
purposes. Upon formation of the holding company, Bancorp became subject to
regulation under the Bank Holding Company Act of 1956, as amended, which
subjects Bancorp to Federal Reserve Board reporting and examination
requirements. The Bank was incorporated in August 1989, received its charter
from the California Superintendent of Banks (now the California Department of
Financial Institutions) and commenced operations in January 1990. The Bank is an
insured bank under the Federal Deposit Insurance Act.
Virtually all of
our business is conducted through Bancorp’s sole subsidiary, the
Bank. We operate through twelve branch offices in Marin and southern
Sonoma counties, north of San Francisco, California. We also have a
loan production office in San Francisco. Our customer base is made up of
business and personal banking relationships from the communities near the branch
office locations. Our business banking focus is on small to
medium-sized businesses, professionals and not-for-profit
organizations.
We offer a broad
range of commercial and retail lending programs designed to meet the needs of
our target markets. These include commercial loans and lines of
credit, construction financing, consumer loans, and home equity lines of
credit. Through a third party vendor, we offer a proprietary Visa(R)
credit card combined with a rewards program to our customers, as well as a
Business Visa® program for
business and professional customers. We also offer cash management sweep to
business clients through a third party vendor.
We offer a variety
of checking and savings accounts, and a number of time deposit alternatives,
including interest bearing and non-interest bearing personal and business
checking accounts and time certificates of deposit. In March 2008, we
introduced a new deposit product, Certificate of Deposit Account Registry
Service (“CDARS®”). CDARS® is a network
through which we offer full FDIC insurance coverage in excess of the regulatory
maximum by placing deposits in multiple banks participating in the
network. We also offer remote deposit capture and direct deposit of
payroll, social security and pension checks. A valet deposit pick-up
service is available to our professional and business
clients. Automatic teller machines (“ATM's”) are available at each
branch location and at the Marin Airporter terminal in Larkspur.
Our ATM network is
linked to the STAR, PLUS and NYCE networks. In January 2009, we began
offering free access to a network of nation-wide surcharge-free ATM’s called
MoneyPass. We also offer our depositors 24-hour access to their
accounts by telephone and through our internet banking products available to
personal and business account holders.
We
offer Wealth Management Services which include customized investment portfolio
management, financial planning, trust administration, estate settlement and
custody services. We also offer 401(k) plan services to small and
medium businesses through a third party vendor.
We offer
branch-based Private Banking as a natural extension of our services. Our Private
Banking includes deposit services, loans, investment management, trust
administration, financial planning and advice on charitable giving.
We do not directly
offer international banking services, but do make such services available to our
customers through other financial institutions with whom we have correspondent
banking relationships.
We hold no patents,
licenses (other than licenses required by the appropriate banking regulatory
agencies), franchises or concessions. The Bank has registered the
service mark "The Spirit of Marin" with the United States Patent & Trademark
Office. The Bank also has three pending service mark applications
with the United States Patent & Trademark Office for the words “Bank of
Marin”, the Bank of Marin logo, and the Bank of Marin tagline “Committed to your
business and our community.” In addition, Bancorp has two pending
service mark applications with the United States Patent & Trademark Office
for the words “Bank of Marin Bancorp” and for the Bank of Marin Bancorp
logo.
Market
Area
Our primary market
area reaches from southern Sonoma County to and including San Francisco and
lies between the Pacific Ocean on the west and San Francisco Bay to the
east. Our customer base is made up of business and personal banking
relationships from the communities near the branch office
locations.
We attract deposit
relationships from individuals, merchants, small to medium-sized businesses,
not-for-profit organizations and professionals who live and/or work in the
communities comprising our market areas. Approximately 89% of our
deposits are from Marin and southern Sonoma counties, and approximately 63% of
our deposits are from businesses and 37% are from individuals.
Competition
The banking
business in California generally, and in our market area specifically, is highly
competitive with respect to attracting both loan and deposit
relationships. The increasingly competitive environment is impacted
by changes in regulation, technology and product delivery systems, as well as
the accelerating pace of consolidation among financial service providers. The
Marin County market area is dominated by three major national banks, each
of which has more branch offices than us in the defined service
area. Additionally, there are several thrifts, including the major
thrift institutions operating in the California market, credit unions and other
independent banks.
Approximately 77
banking offices with $6.3 billion in total deposits as of June 30, 2008 served
the Marin County market. As of that same date, there were
approximately 11 thrift offices in Marin with $1.8 billion in total deposits.
Compared with our share of 9.3%, the four financial institutions with the
greatest market share, Wells Fargo Bank, Bank of America, Washington Mutual (now
part of J.P. Morgan Chase) and Westamerica Bank had deposit market shares of
19.4%, 18.1%, 9.9% and 9.6%, respectively, as of June 30, 2008, the most recent
date for which data is available to us.
In the southern
Sonoma County area of Petaluma, there are approximately 27 banking and
thrift offices with $1.4 billion in total deposits as of June 30,
2008. Compared with our share of 2.9%, the four banking institutions
with the greatest market share, Wachovia (now part of Wells Fargo), Wells Fargo
Bank, Bank of America, and Washington Mutual (now part of J.P. Morgan Chase),
had deposit market shares in Petaluma of 22.4%, 14.5%, 15.0%, and 9.5%,
respectively, as of June 30, 2008.
We also compete for
depositors' funds with money market mutual funds and with non-bank financial
institutions such as brokerage firms and insurance companies. Among
the competitive advantages held by some of these non-bank financial institutions
is the ability to finance extensive advertising campaigns, and to allocate
investment assets to regions of California or other states with areas of highest
demand and often, therefore, highest yield.
Large commercial
banks also have substantially greater lending limits than us and have the
ability to offer certain services which are not offered directly by
us.
In order to compete
with the numerous, and often larger, financial institutions in our primary
market area, we use, to the fullest extent possible, the flexibility and rapid
response capabilities which are accorded by our independent
status. This includes an emphasis on specialized services, community
involvement, local promotional activities and personal contacts. The
commitment and dedication of our organizers, directors, officers and staff have
also contributed greatly to our success in competing for business.
Employees
At December 31,
2008, we employed 197 full-time equivalent (“FTE”) staff. The actual
number of employees at year-end 2008 included 5 executive officers, 75 other
corporate officers and 136 staff. None of our employees are presently
represented by a union or covered by a collective bargaining
agreement. We believe that our employee relations are
good.
SUPERVISION
AND REGULATION
Bank holding
companies and banks are extensively regulated under both federal and state
law. The following discussion summarizes certain significant laws,
rules and regulations affecting Bancorp and the Bank.
Transactions
between Bancorp and the Bank are quantitatively and qualitatively restricted
under the Federal Reserve Act. Sections 23A and 23B of the Act and Federal
Reserve Regulation W. Section 23A places restrictions on the Bank’s “covered
transactions” with Bancorp, including loans and other extensions of credit,
investments in the securities of, and purchases of assets from Bancorp. Section
23B requires that certain transactions, including all covered transactions, be
on market terms and conditions. Federal Reserve Regulation W combines statutory
restrictions on transactions between the Bank and Bancorp with Board
interpretations in an effort to simplify compliance with Sections 23A and
23B.
Capital
Requirements
The Federal Reserve
and the FDIC have adopted risk-based capital guidelines for bank holding
companies and banks. Banks are classified as either well capitalized,
adequately capitalized or undercapitalized. Holding companies are classified as
either adequately capitalized or under capitalized. Bancorp meets the definition
of adequately capitalized and the Bank meets the definition for well
capitalized. Undercapitalized depository institutions may be subject
to significant restrictions. Payment of interest and principal on subordinated
debt of the Bank could be restricted or prohibited, with some exceptions, if the
Bank were categorized as "critically undercapitalized" under applicable FDIC
regulations. For further information on risk-based capital, see Note 17 to the
Consolidated Financial Statements in Item 8 of this
report.
Sarbanes-Oxley
Act of 2002
We are subject to
the requirements of the Sarbanes-Oxley Act of 2002 which implemented legislative
reforms intended to address corporate and accounting
improprieties. Since we file periodic reports under the Securities
and Exchange Commission regulations, we are subject to the provisions of the
Sarbanes-Oxley Act of 2002 and related rules and regulations.
Emergency Economic Stabilization Act
of 2008 (the
“EESA”)
In response to the
financial crisis affecting the banking system and financial markets and going
concern threats of investment banks and other financial institutions, on
October 3, 2008, the EESA was signed into law, which gave the U.S. Treasury
the authority to, among other things, inject $700 billion capital
into the market to stabilize the financial industry. Pursuant to the EESA,
the U.S. Treasury is purchasing up to a total of $250 billion of senior
preferred shares from the largest nine financial institutions in the nation and
the other financial institutions in a program known as the Treasury Capital
Purchase Program (“TCPP”) that was carved out of the Troubled Asset Relief
Program (“TARP”). As a result of our participation in the TCPP as
discussed in Note 10 to the Consolidated Financial Statements in Item 8 of this
report, we must comply with restrictions on executive compensation during the
period that the U.S. Treasury holds an equity position in us through the TCPP,
and as a part of the transaction, we have agreed to limitations on dividends and
stock repurchases. For additional information regarding our ability
to pay dividends to common shareholders, see discussion in Note 9 to the
Consolidated Financial Statement, under the heading “Dividends,” in Item 8 of
this report. Our Board of Directors has approved a resolution to
terminate our participation in the TCPP. See also “Executive Summary” in Item 7
and Note 10 to the Consolidated Financial Statements in Item 8 of this
report.
The American
Recovery and Reinvestment Act of 2009 (the “Recovery
Act”)
The Recovery Act
was signed into law on February 17th, 2009 in an effort, among other things, to
jumpstart the U.S. economy, prevent job losses, expand educational
opportunities, and provide affordable health care and tax
relief. Among the various measures in the Recovery Act, it imposes
further restriction on executive compensation and corporate expenditure limits
of recipients of the TCPP funds, while allowing them to repurchase the preferred
stock at liquidation amount without regard to the original TCPP transaction
terms. See Note 10 to the Consolidated Financial Statements in Item 8 of this
report for discussion regarding our pending repurchase of preferred stock issued
under the TCPP.
Bank
Holding Company Regulation
Upon formation of
the bank holding company on July 1, 2007, we became subject to regulation under
the Bank Holding Company Act of 1956, as amended (“BHCA”) which subjects Bancorp
to Federal Reserve Board reporting and examination
requirements. Under the Federal Reserve Board’s regulations, a bank
holding company is required to serve as a source of financial and managerial
strength to its subsidiary banks.
The BHCA regulates
the activities of holding companies including acquisitions, mergers, and
consolidations and, together with the Gramm-Leach Bliley Act of 1999, the scope
of allowable banking activities.
Bank
Regulation
Banking regulations
are primarily intended to protect depositors’ funds, federal deposit insurance
funds and the banking system as a whole. These regulations affect our
lending practices, consumer protections, capital structure, investment practices
and dividend policy.
As a state
chartered bank, we are subject to regulation and examination by the California
Department of Financial Institutions (“DFI”). We are also subject to regulation,
supervision and periodic examination by the FDIC. If, as a result of an
examination of the Bank, the FDIC or the DFI should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of our operations are unsatisfactory or that we have
violated any law or regulation, various remedies are available to those
regulators including restricting our growth or removing officers and
directors.
Dividends
The payment of cash
dividends by the Bank to Bancorp is subject to restrictions set forth in the
California Financial Code (the “Code”). Prior to any distribution
from the Bank to Bancorp, a calculation is made to ensure compliance with the
provisions of the Code and to ensure that the Bank remains within capital
guidelines set forth by the DFI and the FDIC. In the event that the intended
distribution from the Bank to Bancorp exceeds the restriction in the Code,
advance approval from DFI is required. While advance approval may be required
from the DFI for up to three years if we terminate our participation in the
TCPP, Management does not believe that these regulations will limit dividends
from the Bank to meet the operating requirements of Bancorp for the foreseeable
future. See Note 9 to the Consolidated Financial Statements, under the heading
“Dividends” in Item 8 of this report.
As long as the U.S.
Treasury holds an equity position in us, we are restricted from increasing our
dividends per common share (currently $0.14 per share) without prior approval
from the U.S. Treasury until December 5, 2011. We are also precluded from paying
any dividends on common shares if we are in arrears on payment of dividends on
preferred shares which are payable quarterly at an annual rate of
5%.
FDIC
Insurance Assessments
Our deposits are
insured by the FDIC to the maximum amount permitted by law which is currently
$250,000 per depositor. On October 14, 2008, the FDIC announced the Temporary
Transaction Account Guarantee Program to strengthen confidence in the banking
system. The new rule also allows, at the participating FDIC-insured
institutions’ option, full deposit insurance coverage for non-interest bearing
transaction accounts regardless of the dollar amount until December 31,
2009. We have elected to participate in the program by paying a 10
basis point surcharge on the non-interest bearing transaction accounts over
$250,000. In addition, the FDIC has finalized a new premium rate
structure and has imposed a uniform increase in minimum assessment from five
cents to twelve cents annually for every $100 of domestic deposits on
institutions that are assigned to the lowest risk category for the first
calendar quarter of 2009. Effective April 1, 2009, assessment rates
will be adjusted to differentiate for risk. Banks in the best
risk category will pay a base rate from twelve to sixteen cents per $100 of
deposits. Further, on February 27, 2009, the FDIC announced the
imposition of a 20-basis-point emergency special assessment on all insured
depository institutions on June 30, 2009 (will be collected on September 30,
2009). The rule also gives the FDIC the ability to impose future emergency
special assessments of up to 10 basis points if necessary.
Community
Reinvestment Act
We are subject to
the provisions of the Community Reinvestment Act (“CRA”), under which all banks
and thrifts have a continuing and affirmative obligation, consistent with safe
and sound operations, to help meet the credit needs of their entire communities,
including low and moderate income neighborhoods. The act requires a
depository institution’s primary federal regulator, in connection with its
examination of the institution, to assess the institution’s record in meeting
the requirements in CRA. The regulatory agency’s assessment of the institution’s
record is made available to the public. The record is taken into
consideration when the institution establishes a new branch that accepts
deposits, relocates an office or applies to merge or consolidate, or expand into
other activities. CRA performance is evaluated by the FDIC under the
intermediate small bank requirements. The FDIC’s last CRA and
consumer compliance examination performed on us was completed on April 17, 2006
with a rating of “Outstanding.”
Anti-Money
Laundering Regulations
A series of banking
laws and regulations beginning with the Bank Secrecy Act in 1970 require banks
to prevent, detect, and report illicit or illegal financial activities to the
federal government to prevent money laundering, international drug trafficking,
and terrorism. Under the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
financial institutions are subject to prohibitions against specified financial
transactions and account relationships as well as enhanced due diligence and
“know your customer” standards in their dealings with high risk customers,
foreign financial institutions, and foreign individuals and
entities. We have extensive controls to comply with these
requirements.
Privacy
and Data Security
The Gramm-Leach
Bliley Act (“GLBA”) of 1999 imposed requirements on financial institutions with
respect to consumer privacy. The GLBA generally prohibits disclosure
of consumer information to non-affiliated third parties unless the consumer has
been given the opportunity to object and has not objected to such
disclosure. Financial institutions are further required to disclose
their privacy policies to consumers annually. The GLBA also directs
federal regulators, including the FDIC, to prescribe standards for the security
of consumer information. We are subject to such standards, as well as
standards for notifying consumers in the event of a security
breach. We must disclose our privacy policy to consumers and permit
consumers to “opt out” of having non-public customer information disclosed to
third parties. We are required to have an information security
program to safeguard the confidentiality and security of customer information
and to ensure proper disposal. Customers must be notified when
unauthorized disclosure involves sensitive customer information that may be
misused.
Consumer
Protection Regulations
Our lending
activities are subject to a variety of statutes and regulations designed to
protect consumers, including the Fair Credit Reporting Act, Equal Credit
Opportunity Act, the Fair Housing Act, and the Truth-in-Lending Act. Our deposit
operations are also subject to laws and regulations that protect consumer rights
including Funds Availability, Truth in Savings, and Electronic Funds Transfers.
Additional rules govern check writing ability on certain interest earning
accounts and prescribe procedures for complying with administrative subpoenas of
financial records.
Available
Information
On our internet web
site, www.bankofmarin.com,
we post the following filings as soon as reasonably practicable after they are
filed with or furnished to the SEC: Annual Report on Form 10-K, Proxy Statement
for the Annual Meeting of Shareholders, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. The text of the Code of Ethics for Bancorp and the Bank is also
included on the website. All such filings on our site are available free of
charge.
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ITEM 1A.
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RISK
FACTORS
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An investment in
our common stock is subject to risks inherent to our business. The material
risks and uncertainties that Management believes may affect our business are
described below. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the
other information included or incorporated by reference in this report. The
risks and uncertainties described below are not the only ones facing our
business. Additional risks and uncertainties that Management is not aware of or
focused on or that Management currently deems immaterial may also impair
business operations. This report is qualified in its entirety by these risk
factors.
If any of the
following risks actually occur, our financial condition and results of
operations could be materially and adversely affected.
Our
Earnings are Significantly Affected by General Business and Economic
Conditions
We are operating in
a challenging and uncertain economic environment. Economic indices have shown
that since the fourth quarter of 2007, the United States economy has been in a
recession. This has been reflected in significant business failures and job
losses. Business activity across a wide range of industries and regions is
greatly affected, and local and State governments are in serious difficulty due
to the lack of consumer spending and liquidity in the credit
markets. Financial institutions continue to be affected by the
contraction of the real estate market, elevated foreclosure rates, increase in
unemployment rates and constrained liquidity in the financial
markets. While the Bank does not offer first mortgages and has no
sub-prime residential loans or securities backed by such loans in the portfolio,
we nevertheless are not immune from the effect of these events. The full extent
of the repercussion to our nation’s economy in general and to our business in
particular is not fully known at this time. Continued declines in
real estate values and home sales volumes, financial stress on borrowers as a
result of the national economic recession, including job losses, and customers’
inability to pay debt could adversely affect our financial condition and results
of operations in the following aspects:
|
|
·
|
Demand for
our products and services may
decline
|
|
|
·
|
Low cost or
non-interest bearing deposits may
decrease
|
|
|
·
|
Collateral
for our loans, especially real estate, may decline in
value
|
|
|
·
|
Loan
delinquencies, problem assets and foreclosures may
increase
|
Our serving area
has not experienced the same degree of challenges as other areas. In November
2008, preliminary results show the unemployment rate in Marin County at
5.0% and in the Santa Rosa/Petaluma area 6.5% while the preliminary total
unemployment in California reported in December 2008 was 9.3%. During the past
year, our loan loss was not significant to our overall loan
portfolio and was contained mainly in the construction industry. Given current
volatile market conditions, we cannot predict with certainty what effect a
continuing economic recession in the United States and California will have on
commercial and consumer markets, and ultimately, our business.
Recently
Enacted Legislation and Other Measures Undertaken by the Government May not Help
Stabilize the U.S. Financial System and the Current Volatile Market
As discussed in
Item 1, Section captioned “Bank Regulation” above, on October 3, 2008,
President Bush signed into law the EESA, which, among other measures directed at
bolstering the economy, authorized the Treasury Secretary to establish the TARP.
On February 17, 2009, President Obama signed into law the Recovery Act, more
commonly known as the “Stimulus Bill”. The Stimulus Bill includes a
wide variety of programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health and education needs. In
addition, the Stimulus Bill imposes certain new executive compensation and
corporate expenditure limits on all current and future TARP
recipients.
The actual impact
that EESA, the Stimulus Bill and such related measures undertaken to alleviate
the credit crisis will have generally on the financial markets, including the
extreme levels of volatility and limited credit availability currently being
experienced, is unknown. The failure of such measures to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could adversely affect our business, financial condition, results of
operations, and access to credit. The capital and credit markets have been
experiencing volatility and disruption at an unprecedented level. In
some cases, the markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those issuers’
underlying financial strength. If current levels of market disruption and
volatility continue or worsen, there can be no assurance that we will not
experience an adverse effect on our ability to access credit or
capital.
Negative
Conditions Affecting Real Estate May Harm Our Business
Concentration of
our lending activities in the California real estate sector could be negatively
impacted if any adverse changes in the real estate market in our lending area
intensify. Although we do not offer traditional first mortgages,
approximately 84% of our loans were secured by real estate at December 31, 2008,
of which 50% were secured by commercial real estate and the remaining 34% by
residential real estate. Therefore, the value of the real estate loan
collateral could be negatively affected by a steep decline in the real estate
market in which we conduct our business. Most of the properties that
secure our loans are located within Marin and Sonoma Counties. In 2008, the
median residential home values fell 9.2% in Marin County and 29.5% in
Sonoma County, which includes some markets not in our serving area. Our
loans secured by real estate could be affected by market declines in the
future.
Loans secured by
commercial real estate include those secured by small office buildings,
owner-user office/warehouses, mixed-use residential/commercial properties and
retail properties. In 2008, office and industrial vacancy rates in
Marin County have held steady at generally low vacancy rates, while in the
third quarter of 2008, retail vacancy rates have shown an increase to 5.6% from
4.2% the prior quarter. In Sonoma County, vacancy rates are generally
higher than in Marin County, and beginning in the third quarter of 2008,
the rate of industrial and retail vacancies increased from 11.9% and 4.7% to
12.8% and 6.5%, respectively, while office vacancy rates have remained
relatively unchanged at about 20%. There can be no assurance that the companies
or properties securing our loans will generate sufficient cash flows to allow
the borrowers to make full and timely loan payments to us.
In late 2006,
Federal banking regulators issued final guidance regarding commercial real
estate lending to address a concern that rising commercial real estate lending
concentrations may expose institutions to unanticipated earnings and capital
volatility in the event of adverse changes in the investor commercial real
estate market. This guidance suggests that institutions that are potentially
exposed to significant commercial real estate concentration risk will be subject
to increased regulatory scrutiny. Institutions that have experienced
rapid growth in commercial real estate lending, have notable exposure to a
specific type of commercial real estate lending, or are approaching or exceed
certain supervisory criteria that measure an institution’s commercial real
estate portfolio against its capital levels, may be subject to such increased
regulatory scrutiny. Although regulators have not notified us of any
concern, there is no assurance that we will not be subject to additional
scrutiny in the future.
We
are Subject to Interest Rate Risk
Our earnings and
cash flows are largely dependent upon our net interest income. Net
interest income is the difference between interest income earned on
interest-earning assets, such as loans and securities, and interest expense paid
on interest-bearing liabilities, such as deposits and borrowed funds. Interest
rates are sensitive to many factors outside our control, including general
economic conditions and policies of various governmental and regulatory agencies
and, in particular, the Board of Governors of the Federal Reserve System, which
regulates the supply of money and credit in the United States. Changes in
monetary policy, including changes in interest rates, could influence not only
the interest we receive on loans and securities and interest we pay on deposits
and borrowings, but could also affect (i) our ability to originate loans and
obtain deposits, (ii) the fair value of our financial assets and liabilities,
and (iii) the average duration of our mortgage-backed securities portfolio. Our
portfolio of securities is subject to interest rate risk and will generally
decline in value if market interest rates increase, and generally increase in
value if market interest rates decline.
In
response to the recessionary state of the national economy, the gloomy housing
market and the volatility of financial markets, the Federal Open Market
Committee of the Federal Reserve Board (“FOMC”) started a series of decreases in
Federal funds target rate from 4.75% in September 2007. The Federal
Reserve decreased the Federal funds target rate by 50 basis points in 2007 and
followed that with seven subsequent decreases over the past 12 months bringing
the target rate to a historically low range of 0% to 0.25% in December of
2008. The dramatic decline in market rates significantly reduced our
cost of funds and widened our interest rate spread. The net interest margin may
compress if rates continue to fall since we may not be able to lower deposit
rates further without jeopardizing deposit volume. In addition, some
variable rate loans are already at negotiated floors and will be unaffected if
rates fall further. If interest rates rise, we anticipate that
net interest income will rise which may be partially offset by deposit rate
sensitivity. In addition, it may take several upward market rate movements for
variable rate loans at floors to move above the floor
rate.
Interest rate
changes can create fluctuations in the net interest margin due to an imbalance
in the timing of repricing or maturity of assets or liabilities. We manage
interest rate risk exposure with the goal of minimizing the impact of interest
rate volatility on the net interest margin. Although we believe we have
implemented effective asset and liability management strategies, any
substantial, prolonged change in market interest rates could have a material
adverse effect on our financial condition and results of
operations. See the sections captioned “Net Interest Income” and
“Market Rate Risk” in Management’s Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of this report for further
discussion related to management of interest rate risk.
Loan
Losses May Exceed Our Allowance for Loan Losses in the Future
We maintain an
allowance for loan losses, which is a reserve established through a provision
for loan losses charged to expense, that represents Management’s best estimate
of probable losses that may be incurred within the existing portfolio of loans.
The level of the allowance reflects Management’s continuing evaluation of
industry concentrations, specific credit risks, loan loss experience, current
loan portfolio quality and present economic, political and regulatory
conditions. The determination of the appropriate level of the allowance for loan
losses inherently involves a high degree of subjectivity and requires us to make
significant estimates of current credit risks and future trends, all of which
may undergo material changes. Further, we rely on appraisals of the collateral
to determine the level of specific reserve on certain impaired loans. Inaccurate
assumptions in the appraisals may lead to inappropriate level of specific
reserve established.
Changes in economic
conditions affecting borrowers, new information regarding existing loans,
identification of additional problem loans and other factors, may require an
increase in our allowance for loan losses. In addition, bank
regulatory agencies periodically review our allowance for loan losses and may
require an increase in the provision for loan losses or the recognition of
further loan charge-offs. In addition, if charge-offs in future
periods exceed the allowance for loan losses, we will need to record additional
loan loss provisions. Any increases in the allowance for loan losses
will result in an adverse impact on net income and capital.
We
Face Intense Competition for Deposits with Other Financial
Instruments
Checking and
savings account balances and other forms of deposits can decrease when our
deposit customers perceive alternative investments as providing superior
expected returns. In addition, in current market conditions, certain depositors
are wary of placing funds in financial institutions irrespective of the
temporary increase in FDIC insurance to $250,000 per customer as evidenced by a
strong demand for U.S. Treasury securities in the wake of bank failures.
Technology and other changes have made it more convenient for bank customers to
transfer funds into alternative investments or other deposit accounts such as
online virtual banks and non-bank service providers. The current low
interest rate environment could increase such transfers of deposits to higher
yielding deposits or other investments. Efforts and initiatives we
undertake to retain and increase deposits, including deposit pricing, can
increase our costs. When our customers move money into higher
yielding deposits or in favor of alternative investments, we can lose a
relatively inexpensive source of funds, thus increasing our funding
costs.
We also compete
with national banks much larger than our size, which may be able to benefit from
economy of scale through their wide branch network in the country, national
advertising campaign and sophisticated technology.
Our
Growth May be Inhibited If We Cannot Attract Deposits
Our current loan
growth level is outpacing our deposit growth, which may lead to our increased
reliance on borrowed funds. We intend to seek additional deposits by
continuing to establish and strengthen our personal relationships with our
existing customers and by offering deposit products that are competitive with
those offered by other financial institutions in our markets. If these efforts
are unsuccessful, we may need to fund our asset growth through borrowings, other
non-core funding or public offerings of our common stock which could be
leveraged. Increased debt would further increase our leverage, reduce
our borrowing capacity and increase our reliance on non-core funds and
counterparties’ credit availability. A public offering would have a
dilutive effect on earnings per share and share ownership.
Bancorp
and the Bank are Subject to Extensive Government Regulation and
Supervision
Bancorp and the
Bank are subject to extensive federal and state governmental supervision,
regulation and control. Holding company regulations affect the range of
activities in which Bancorp is engaged. Banking regulations affect the Bank’s
lending practices, capital structure, investment practices and dividend policy
among other controls. Future legislative changes or interpretations may also
alter the structure and competitive relationship among financial institutions.
In light of recent economic conditions as well as regulatory and congressional
criticism, further restrictions on financial service companies should be
considered likely.
Compliance risk is
the current and prospective risk to earnings or capital arising from violations
of, or nonconformance with, laws, rules, regulations, prescribed practices,
internal policies, and procedures, or ethical standards set forth by
regulators. Compliance risk also arises in situations where the laws
or rules governing certain bank products or activities of our clients may be
ambiguous or untested. This risk exposes Bancorp and the Bank to
potential fines, civil money penalties, payment of damages and the voiding of
contracts. Compliance risk can lead to diminished reputation, reduced
franchise value, limited business opportunities, reduced expansion potential and
an inability to enforce contracts.
For further
information on supervision and regulation, see the section captioned
“Supervision and Regulation” in Item 1 above.
Bancorp
Relies on Dividends from the Bank to Pay Cash Dividends to
Shareholders
Bancorp is a
separate legal entity from its subsidiary, the Bank. It receives all
of its revenue from dividends received from the Bank. This revenue is
the principal source of funds to pay cash dividends to Bancorp’s common
shareholders. Various federal and state laws and regulations limit the amount of
dividends that the Bank may pay to Bancorp. In the event that the Bank is unable
to pay dividends to Bancorp, Bancorp may not be able to pay dividends to its
shareholders which could have an adverse effect on Bancorp’s stock price and
investment value.
Under federal law,
capital distributions from the Bank would become prohibited, with limited
exceptions, if the Bank were categorized as "undercapitalized" under applicable
Federal Reserve or FDIC regulations. In addition, as a California
bank, the Bank is subject to state law restrictions on the payment of
dividends. For further information on the distribution limit from the Bank
to Bancorp, see the section captioned “Bank Regulation” in Item 1
above.
Dividends
on Our Common Stock are Subject to Restrictions of Our Preferred
Shareholder
If we become unable
to pay all or part of the dividends on preferred shares as stipulated in our
agreement with the U.S. Treasury, our preferred shareholder, we will be
precluded from paying dividends on our common stock which will likely reduce our
price per common share. For further information on our dividend, see the
section captioned “Dividend” in Item 1 above and Note 9 and 10 to the
Consolidated Financial Statement in Item 8 of this report.
The
Trading Volume of Bancorp’s Common Stock is Less than That of Other Larger
Financial Services Companies
Our common stock is
listed for trading on the NASDAQ’s Capital Market. Our trading volume
is less than that of other larger financial institutions. A public
trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence of willing buyers and sellers of common
stock at any given time. This presence depends on the individual
decisions of investors and general economic and market conditions over which we
have no control. Given the lower trading volume of our common stock,
significant sales of the stock, or the expectations of these sales, could cause
the stock price to fall.
Deterioration
of Credit Quality of Correspondent Banks and Counterparties May Affect our
Liquidity
Since mid-2007 and
particularly during the second half of 2008, the financial services industry in
general was materially and adversely affected by significant declines in the
values of nearly all asset classes and by a serious reduction in
liquidity. We rely on our correspondent banks for borrowing lines of
credit. We also rely on two correspondent banks as counterparties in
our derivative transactions (see Note 19 to the Consolidated Financial
Statements). While we continually monitor the financial health of our
correspondent banks and we have diverse sources of liquidity should any one of
our correspondent banks become financially impaired, our available credit may
decline and/or they may be unable to honor their commitments.
Unexpected
Early Termination of Our Interest Rate Swap Agreements May Impact Our
Earnings
We have entered
into interest-rate swap agreements, primarily as an asset/liability management
strategy, in order to mitigate the changes in the fair value of specified
long-term fixed-rate loans and firm commitments to enter into long-term
fixed-rate loans caused by changes in interest rates. These hedges
allow us to offer long-term fixed rate loans to customers without assuming the
interest rate risk of a long-term asset by swapping our fixed-rate interest
stream for a floating-rate interest stream. In the event of default by the
borrowers on our hedged loans, we may have to terminate these designated
interest-rate swap agreements early, resulting in severe prepayment penalties
charged by our counterparties. On the other hand, when these
interest-rate swap agreements are in an asset position, we are subject to the
credit risk of our counterparties, who may default on the interest-rate swap
agreements, leaving us vulnerable to interest rate movements.
Securities
May Lose Value due to Credit Quality of the Issuers
We hold
approximately $51.2 million in securities issued and/or guaranteed by Federal
National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage
Corporation (“FHLMC”) at December 31, 2008. If either of these
entities comes under further financial stress, or if they experience further
deterioration in credit worthiness, the fair value of our 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. Starting in December 2008, the U.S. Government also began
purchasing mortgage-backed securities issued by FNMA. We cannot
predict whether these steps taken by the federal government will result in
continuous improvement in credit worthiness of these two entities.
At December 31,
2008, we also hold $23.6 million in obligations of state and political
subdivisions, some of which are experiencing financial difficulties in part due
to loss of property tax from falling home values and decline in sales tax
revenues from reduction in retail activities. While we seek to
minimize our exposure by diversifying our portfolio and investing in investment
grade securities, there is no guarantee that the issuers will remain financially
sound to be current with their payments on these debentures.
Further, we are
required to maintain a certain level of investment in the Federal Home Loan Bank
of San Francisco (“FHLB”) through the purchase of stock, which is bought from
and sold to the FHLB at $100 par. Both stock and cash dividends may be received
on FHLB stock. Recently, the FHLB announced that in order to preserve capital,
they are temporarily suspending dividends on FHLB stock and stock
repurchases. This has raised concern as to the FHLB’s ability to
redeem capital stock as they face increasing regulation on their required level
of capital.
Deterioration
of Credit Quality or Insolvency of Insurance Companies May Impede our Ability to
Recover Losses
The recent
financial crisis has led certain major insurance companies to the verge of
bankruptcy. We have property, casualty and financial institution risk coverage
underwritten by several insurance companies, who may not avoid the insolvency
risk permeated in the insurance industry. While we closely monitor credit
ratings of our insurers and are poised to make quick changes if needed, we
cannot predict an unexpected inability to honor commitments. We also
invest in bank-owned life insurance policies on certain members of senior
management, which may lose value in the event of the carriers’
insolvency. In the event that our bank-owned life insurance policy
carriers’ credit ratings fall below investment grade, we may exchange policies
underwritten by them to another carrier at a cost charged by the original
carrier, or we may terminate the policies which may result in adverse tax
consequences.
Our loan portfolios
are also secured by properties located in earthquake or fire-prone
zones. In the event of a disaster that causes pervasive damage to the
region in which we operate, not only the Bank, but also the loan collateral may
suffer losses not recovered by insurance.
We
May Experience a Breach in Security
Our business
requires the secure handling of sensitive client information. A
breach of security in the Bank, at our vendors, or widely publicized breaches of
other financial institutions could significantly harm our reputation, result in
a loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability. While
we have systems and procedures designed to prevent security breaches, we cannot
be certain that advances in criminal capabilities, physical system or network
break-ins or inappropriate access will not compromise or breach the technology
protecting our networks or proprietary client information.
We
Rely on Third-Party Vendors for Important Aspects of Our Operation
We depend on the
accuracy and completeness of information provided by certain of our vendors,
including but not limited to, our data processing and payroll processing
vendors, and security pricing vendor. Our ability to operate, as well
as the our financial condition and results of operations, could be negatively
affected in the event of interruptions of information systems, an undetected
error, or in the event of a natural disaster whereby certain vendors are unable
to maintain business continuity.
Severe
Weather or Natural Disasters Could Significantly Impact Our
Business
Severe weather or
disasters, such as severe rainstorms, an earthquake or flood, could affect our
loan portfolio by damaging properties pledged as collateral and by impairing the
ability of certain borrowers to repay their loans. The ultimate
impact of a natural disaster on our future financial results and condition is
difficult to predict and will be affected by a number of factors, including the
extent of damage to the collateral, the extent to which damaged collateral is
not covered by insurance, the extent to which unemployment and other economic
conditions caused by the natural disaster adversely affect the ability of
borrowers to repay their loans, and the cost to us of collection and
foreclosure.
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
|
ITEM 2.
|
PROPERTIES
|
We lease our
corporate headquarters building, which houses our primary loan production,
operations, and administrative offices, in Novato, California. We
also lease other branch or office facilities within our primary market areas in
the cities of Petaluma, Novato, San Rafael, Corte Madera, Mill Valley,
Sausalito, and San Francisco, California. We consider our properties
to be suitable and adequate for our present needs. For additional information on
properties, see Notes 5 and 13 to the Consolidated Financial Statements included
in Item 8 of this Form 10-K.
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
There are no
pending, or to Management's knowledge any threatened, material legal proceedings
to which we are a party, or to which any of our properties are
subject. There are no material legal proceedings to which any
director, any nominee for election as a director, any executive officer, or any
associate of any such director, nominee or officer is a party adverse to
us.
We are responsible
for our proportionate share of certain litigation indemnifications provided to
Visa U.S.A. by its member banks in connection with lawsuits related to
anti-trust charges and interchange fees. For further details, see Note 20 to the
Consolidated Financial Statements in Item 8 of this Form 10-K.
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No matters were
submitted to a vote of security holders during the fourth quarter of
2008.
PART
II
|
ITEM 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Bancorp common
stock trades on the NASDAQ Capital Market under the symbol BMRC.
At February 27,
2009, 5,154,151 shares of Bancorp’s common stock, no par value, were
outstanding and held by approximately 700 holders of record. The
following table sets forth, for the periods indicated, the range of high and low
sales prices of the Bank's common stock through the second quarter of 2007 and
Bancorp’s common stock thereafter. The prices have been adjusted to reflect the
effect of all stock dividends and stock splits.
|
Quarter/Year
|
High
|
Low
|
||||||
|
4th Quarter
2008
|
$ | 33.00 | $ | 23.00 | ||||
|
3rd Quarter
2008
|
$ | 33.60 | $ | 24.10 | ||||
|
2nd Quarter
2008
|
$ | 29.99 | $ | 24.00 | ||||
|
1st Quarter
2008
|
$ | 31.00 | $ | 26.90 | ||||
|
4th Quarter
2007
|
$ | 32.63 | $ | 27.00 | ||||
|
3rd Quarter
2007
|
$ | 33.60 | $ | 29.88 | ||||
|
2nd Quarter
2007
|
$ | 36.58 | $ | 32.57 | ||||
|
1st Quarter
2007
|
$ | 39.49 | $ | 35.42 | ||||
The table below shows cash dividends
paid in the last two fiscal years.
|
2008
|
2007
|
|||||||||||||||
|
Per
Share
|
Dollars
|
Per
Share
|
Dollars
|
|||||||||||||
|
1Q
|
$ | 0.14 | $ | 721,000 | $ | 0.12 | $ | 625,000 | ||||||||
|
2Q
|
$ | 0.14 | $ | 721,000 | $ | 0.13 | $ | 680,000 | ||||||||
|
3Q
|
$ | 0.14 | $ | 720,000 | $ | 0.13 | $ | 672,000 | ||||||||
|
4Q
|
$ | 0.14 | $ | 720,000 | $ | 0.13 | $ | 673,000 | ||||||||
For additional
information regarding our ability to pay dividends, see discussion in Note 9 to
the Consolidated Financial Statement, under the heading “Dividends,” in Item 8
of this report.
Included in cash
dividends during the second quarter of 2007 is $5 thousand paid to shareholders
in connection with the redemption of all the preferred share purchase rights
issued pursuant to the Bank’s Rights Agreement of August 11, 2003. Each right
entitled the registered holder to purchase from Bank one one-hundredth of a
share of Series A Junior Participating Preferred stock, no par value of Bank at
a price of $125 per one one-hundredth of a preferred share, subject to
adjustments. The redemption, in anticipation of the formation of a bank holding
company, was effective June 14, 2007 at a redemption price of $0.001 per right.
On that same day, Bancorp’s Board of Directors executed a Rights Agreement
substantially similar to the Bank’s agreement and has issued replacement rights
to purchase shares of Bancorp under the new Rights Agreement to shareholders of
record as of July 23, 2007. The Bank of Marin Bancorp Rights Agreement is
designed to discourage takeovers that involve abusive tactics or do not provide
fair value to shareholders.
In October 2006,
the Bank received approval from the DFI and the FDIC to buy back up to 10%, or
approximately 545,884 of the Bank’s 5,458,838 then-outstanding shares, not to
exceed $15 million. The repurchase program allowed the Bank to
purchase common shares for a period of approximately twelve months from the
approval date in the open market or in privately negotiated transactions. The
Bank executed these transactions pursuant to the Securities and Exchange
Commission’s Rule 10b-18. All shares repurchased were made in open
market transactions and were part of the publicly announced repurchase
program. From October 1, 2006 to December 31, 2006, the Bank
repurchased 115,625 shares at an average price of $34.26 per share for a total
cost of $4.0 million. Through February 28, 2007, the Bank purchased an
additional 289,692 shares at an average price of $38.10 per share, for a total
cost of $11.0 million, thereby concluding this share repurchase
program.
In November 2007,
Bancorp’s Board of Directors approved a second 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 $1.5 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.
A schedule of
purchases during 2006, 2007 and 2008 follows. This schedule reflects
the repurchase, upon formation of the bank holding company on July 1, 2007, of
24,399 common shares of the Bank for $876 thousand from six shareholders who
dissented to the exchange of those shares for Bancorp common
shares.
(Dollars in
thousands, except per share data)
|
Period
|
Total Number
of Shares Purchased
|
Average
Purchase Price per Share
|
Total Number
of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value that May Yet be Purchased Under the Program
|
||||||||||||
|
Plan
#1
|
||||||||||||||||
|
October
24-31, 2006
|
25,004 | $ | 32.53 | 25,004 | $ | 14,187 | ||||||||||
|
November
1-30, 2006
|
29,514 | 33.56 | 29,514 | 13,196 | ||||||||||||
|
December
1-31, 2006
|
61,107 | 35.30 | 61,107 | 11,039 | ||||||||||||
|
Total
2006 Purchases Under Regulatory Approved Plans
|
115,625 | $ | 34.26 | 115,625 | $ | 11,039 | ||||||||||
|
January 1-31,
2007
|
74,980 | $ | 37.10 | 74,980 | $ | 8,257 | ||||||||||
|
February
1-28, 2007
|
214,712 | 38.45 | 214,712 |
Plan
Concluded
|
||||||||||||
|
Subtotal
2007 Plan #1
|
289,692 | $ | 38.10 | 289,692 | --- | |||||||||||
|
Plan
#2
|
||||||||||||||||
|
November
1-30, 2007
|
750 | $ | 27.75 | 750 | 4,979 | |||||||||||
|
December
1-31, 2007
|
50,982 | 29.99 | 50,982 | 3,450 | ||||||||||||
|
Subtotal
2007 Plan #2
|
51,732 | $ | 29.96 | 51,732 | 3,450 | |||||||||||
|
Total
2007 Purchases Under Regulatory Approved Plans
|
341,424 | $ | 36.87 | 341,424 | $ | 3,450 | ||||||||||
|
July 1-31
2007
|
24,399 | $ | 35.92 | N/A | N/A | |||||||||||
|
Shares
Repurchased from Dissenting Shareholders
|
||||||||||||||||
| 24,399 | $ | 35.92 | N/A | N/A | ||||||||||||
|
January 1-31
2008
|
5,100 | $ | 28.75 | 5,100 | $ | 3,303 | ||||||||||
|
February 1-29
2008
|
21,502 | 30.27 | 21,502 | 2,653 | ||||||||||||
|
March 1-31
2008
|
5,000 | 30.20 | 5,000 | 2,502 | ||||||||||||
|
May 1-31
2008
|
11,257 | 28.87 | 11,257 | 2,177 | ||||||||||||
|
June 1-30
2008
|
15,750 | 26.93 | 15,750 | 1,752 | ||||||||||||
|
July 1-31
2008
|
16,207 | 26.43 | 16,207 | 1,324 | ||||||||||||
|
August 1-31
2008
|
13,500 | 29.28 | 13,500 | 929 | ||||||||||||
|
Total
2008 Purchases Under Regulatory Approved Plans
|
88,316 | $ | 28.55 | 88,316 | $ | 929 | ||||||||||
Securities Authorized for Issuance under Equity Compensation Plans
The following table
summarizes information as of December 31, 2008, with respect to equity
compensation plans. All plans have been approved by the
shareholders.
|
(A)
|
(B)
|
(C)
|
||||||||||
|
Shares to be
issued upon exercise of outstanding options
|
Weighted
average exercise price of outstanding options
|
Shares
available for future issuance (Excluding shares in column
A)
|
||||||||||
|
Equity
compensation plans approved by shareholders
|
401,958 | (1) | $ | 26.12 | 438,667 | |||||||
|
|
(1)
|
Represents
shares of common stock issuable upon exercise of outstanding options under
the Bank of Marin 1990 Stock Option Plan, the Bank of Marin 1999 Stock
Option Plan and the Bank of Marin Bancorp 2007 Equity
Plan.
|
Stock
Price Performance Graph
The following
graph, provided by Keefe, Bruyette, & Woods, Inc., shows a comparison of
cumulative total shareholder return on ticker symbol BMRC common stock during
the five fiscal years ended December 31, 2008 compared to Standard & Poors
(“S&P”) 500 Stock index and peer group index of other financial
institutions. The comparison assumes $100 was invested on December
31, 2003 in BMRC common stock and all of the dividends were
reinvested. The chart indicates that BMRC common stock outperformed
both the S&P 500 Stock index and its peer group index by the end of
2008. The performance graph represents past performance and should
not be considered to be an indication of future performance. Ticker symbol BMRC
represents the common stock of Bank of Marin Bancorp subsequent to its formation
July 1, 2007 and represents the common stock of Bank of Marin for periods prior
to the formation of the bank holding company. The sole subsidiary of
Bank of Marin Bancorp is Bank of Marin.
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||||||
|
BMRC
|
100 | 141 | 128 | 142 | 115 | 95 | ||||||||||||||||||
|
Peer
Group*
|
100 | 137 | 159 | 178 | 123 | 64 | ||||||||||||||||||
|
S&P 500
Index
|
100 | 109 | 112 | 128 | 132 | 81 | ||||||||||||||||||
*BMRC Peer Group
represents public California banks with assets between $750 million to $1,575
million as of September 30, 2008: TMCV, HTBK, BSRR, PMBC, FCAL, BBNK,
SAEB, SJQU, NOVB, HEOP, BOCH, UBFO
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
As of For the
Year Ended December 31,
|
2008
|
2007
|
2006
|
2005
|
2004
|
2007/2008 | ||||||||||||||||||
|
(Dollars in
thousands, except per share data)
|
%
change
|
|||||||||||||||||||||||
|
`
|
||||||||||||||||||||||||
|
At December
31
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 1,049,557 | $ | 933,901 | $ | 876,578 | $ | 840,449 | $ | 737,094 | 12.4 | % | ||||||||||||
|
Total
loans
|
890,544 | 724,878 | 719,778 | 686,661 | 576,957 | 22.9 | % | |||||||||||||||||
|
Total
deposits
|
852,290 | 834,642 | 736,697 | 721,172 | 645,079 | 2.1 | % | |||||||||||||||||
|
Total
stockholders' equity
|
125,546 | 87,774 | 89,525 | 78,221 | 65,608 | 43.0 | % | |||||||||||||||||
|
Equity-to-asset
ratio
|
12.0 | % | 9.4 | % | 10.2 | % | 9.3 | % | 8.9 | % | ||||||||||||||
|
For year
ended December 31
|
||||||||||||||||||||||||
|
Net interest
income
|
$ | 48,359 | $ | 42,742 | $ | 41,733 | $ | 39,442 | $ | 32,237 | 13.1 | % | ||||||||||||
|
Provision for
possible loan losses
|
5,010 | 685 | 1,266 | 1,541 | 934 | 631.4 | % | |||||||||||||||||
|
Non-interest
income
|
5,356 | 5,718 | 3,972 | 3,708 | 3,643 | (6.3 | %) | |||||||||||||||||
|
Non-interest
expense
|
28,677 | 27,673 | 25,891 | 22,498 | 19,620 | 3.6 | % | |||||||||||||||||
|
Net
income
|
12,150 | 12,324 | 11,883 | 11,737 | 9,518 | (1.4 | %) | |||||||||||||||||
|
Net income
per share (diluted)*
|
2.31 | 2.31 | 2.11 | 2.12 | 1.76 | --- | ||||||||||||||||||
|
Cash dividend
payout ratio on common stock
|
23.9 | % | 21.4 | % | 20.8 | % | 8.4 | % | 20.1 | % | ||||||||||||||
*Restated for all
stock dividends and stock splits.
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following
discussion of financial condition and results of operations for each
of the years in the three-year period ended December 31, 2008 should be read in
conjunction with Bancorp’s financial statements and related notes thereto,
included in Part II Item 8 of this report. Average balances,
including balances used in calculating certain financial ratios, are generally
comprised of average daily balances.
Forward-Looking Statements
The disclosures set
forth in this item are qualified by important factors detailed in Part I
captioned Forward-Looking
Statements and Item 1A captioned Risk Factors of this report
and other cautionary statements set forth elsewhere in the
report.
Executive Summary
Since 2007,
financial markets have been experiencing significant disruptions beginning with
dramatic declines in the housing market leading to declines in home values and
increased foreclosures followed by an economic recession and high unemployment
rates. For the banking industry, this has led to increased loan losses and
significantly reduced liquidity.
Despite difficult
economic conditions, we continue to produce solid results, and we achieved $1
billion in assets by year-end, a milestone for us. Earnings were
stable at $12.2 million for the year, loan growth in 2008 was exceptional at
$165.7 million and deposits increased $17.6 million during the year. We grew our
loan portfolio without compromising our prudent underwriting standards. The 2007
year-end deposit balance includes a $53.0 million short-term deposit placed with
us in the last week of December that was held approximately two
weeks. Excluding this short-term deposit, growth in 2008 totaled
$70.7 million. We were able to take advantage of exceptionally low market
borrowing rates to fund loan growth in excess of deposit growth. Both our
taxable equivalent net interest margin and our efficiency ratio showed
significant year over year improvement as described below.
While we serve an
affluent community, we are not immune from the impact of the national economic
recession. Earnings were affected by a loan loss provision charged to expense of
$5.0 million in 2008 compared to $685 thousand in 2007. Net charge-offs totaled
$2.6 million in 2008 compared to $85 thousand in 2007. The
charge-offs in 2008 primarily relate to commercial and construction loans
secured by real property where the value of collateral has declined. Recovery of
the losses, if any, will depend on the value of the collateral when the property
is sold. Loan charge-offs represent less than 0.3% of our loan portfolio.
Non-accrual loans at December 31, 2008 of $6.7 million represented 0.8% of our
loan portfolio.
In October 2008,
the federal government announced various programs under the Emergency Economic
Stabilization Act of 2008 intended to inject liquidity and stabilize the
financial industry. As of February 20, 2009, the U.S. Treasury has
injected $196 billion of capital into financial institutions through the
purchase of preferred stock under the $250 billion TCPP which was carved out of
the $700 billion TARP funds. Initially $125 billion of TCPP funds were given to
the nine largest banks in the nation to bolster their capital. The
remaining $125 billion was set aside to enhance the capital of financially sound
banks and to promote responsible lending.
In November 2008,
we were approved for participation in the TCPP. On December 5, 2008, we received
$28 million in capital under the program through our issuance of preferred stock
and warrants to purchase our common stock. Following receipt of the
TCPP funds, we deployed $27.1 billion of the funds into loans through the end of
2008. On February 27, 2009, our Board of Directors approved a
resolution to repurchase all 28,000 shares of outstanding preferred stock
following the U.S government’s recent actions, interpretations, and commentary
regarding various aspects of the TCPP program, as we have determined that
continued participation in the TCPP is not in the best interests of our common
shareholders, customers or our employees, and it would impede our ability to
compete. We have notified the U.S. Treasury of our intent to repurchase the
preferred stock issued under the TCPP. The repurchase is subject to bank
regulatory approval.
In the fourth
quarter of 2008, we elected to participate in the FDIC’s Transaction Account
Guarantee Program, which provides unlimited FDIC insurance coverage to our
depositors, effective October 14, 2008 on transaction accounts until December
31, 2009, by paying a 10 basis point surcharge on top of our current FDIC
assessment rate. This insurance is in addition to the FDIC increase in insurance
coverage from $100 thousand to $250 thousand on all deposit accounts during the
same period.
Our tax-equivalent
net interest margin improved 34 basis points in the year to 5.41%. 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 the
expansion.
Beginning in
September 2007 and continuing through December 2008, the Federal Reserve lowered
its target interest rate by 525 basis points, bringing the target interest rate
to a historic low with a range of 0% to 0.25%. 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. In
addition, some variable rate loans have reached negotiated rate floors. We
lowered deposit offering rates eight times in 2008 in response to declines in
the Federal funds rate resulting in a lower cost of
funds.
The largest factors
likely to affect our net interest margin in 2009 will be the volume of loan and
deposits, which will in turn influence our liquidity level and the level of
borrowing, the Federal funds target rate, which is expected to rise in late
2009, as well as our responsiveness to competitive pricing on loans and deposits
in our market.
Our efficiency
ratio improved to 53.39% in 2008 from 57.10% in 2007. Significantly higher net
interest income and strong growth in non-interest income combined with only
modest growth in non-interest expense has resulted in a marked improvement in
efficiency.
In the beginning of
2008, we 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 2007, we
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® credit card
portfolio.
We continue to
expand our franchise with the opening of a new branch in downtown
Mill Valley in June of 2008 and we are in the process of securing a site
for an additional branch in Greenbrae, which is projected to open in
2009.
Holding Company
On May 8, 2007,
stockholders of the Bank approved the formation of a bank holding
company. On July 1, 2007, the holding company, Bank of Marin Bancorp,
acquired the Bank as its wholly owned subsidiary. The holding company is
expected to provide flexibility in meeting our financing needs 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
Bancorp. Periods prior to the reorganization relate to the Bank
only. The information is comparable as the sole subsidiary of Bancorp
is the Bank.
Critical Accounting Policies
Critical accounting
policies are those that are both most important to the portrayal of our
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 five accounting policies to be critical: Allowance for
Loan Losses, Other-than-temporary Impairment in
Investment Securities, 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 our 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. We
formally assess 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 applying
Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for
Impairment of a Loan (“SFAS No.114”) occurs at least
quarterly.
Our 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 category. 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.
Other-than-temporary
Impairment in Investment Securities
At each financial
statement date, we assess whether declines in the fair value of held-to-maturity
and available-for-sale securities below their costs are deemed to be other than
temporary. We consider, among other things, (i) the length of time
and the extent to which the fair value has been less than cost, (ii) the
financial condition and near-term prospects of the issuer, and (iii) our intent
and ability to retain the investment for a period of time sufficient to allow
for any anticipated recovery in fair value. Evidence evaluated includes, but is
not limited to, the remaining payment terms of the instrument and economic
factors that are relevant to the collectability of the instrument, such as
current prepayment speeds, the current financial condition of the issuer(s),
industry analyst reports, credit ratings, credit default rates, interest rate
trends and the value of any underlying collateral. Other-
than-temporary-impairment results in a charge to earnings and the corresponding
establishment of a new cost basis for the security.
Share-Based
Payment
On January 1, 2006,
we adopted the provisions of SFAS No.123R, Share-Based Payment (“SFAS
No. 123R”), 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.
We determine 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’s
judgment. As a result, if other assumptions had been used, our
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, we are required to estimate the expected
forfeiture rate and only recognize expense for those share-based awards expected
to vest. If our 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 9 to
the Consolidated Financial Statements in this Form 10-K.
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
(“SFAS No. 109”). We recognize 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. We record net deferred tax assets to the
extent it is more likely than not that they will be realized. In
evaluating our 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, we 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 all tax positions met 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, our 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, we elected early adoption of FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”) and FASB Statement No.
157, Fair Value
Measurements,
and elected the fair value option for our 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. We 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, our recorded unrealized gain in the first quarter of 2007 could
have been materially different from that reflected in these financial
statements.
As a result of our
fair value measurement election for the auto loan portfolio, we 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 our 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.
We have established
and documented a process for determining fair value. For detailed information on
our use of fair valuation of financial instruments and our related valuation
methodologies, see Note 16 to the Consolidated Financial Statements in this Form
10-K.
RESULTS OF OPERATIONS
Overview
Highlights of the
financial results are presented in the following table:
|
As of and for
the years ended December 31,
|
||||||||||||
|
(Dollars in
thousands, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
For the
period:
|
||||||||||||
|
Net
income
|
$ | 12,150 | $ | 12,324 | $ | 11,883 | ||||||
|
Net income
per share
|
||||||||||||
|
Basic
|
$ | 2.34 | $ | 2.38 | $ | 2.21 | ||||||
|
Diluted
|
$ | 2.31 | $ | 2.31 | $ | 2.11 | ||||||
|
Return on
average equity
|
12.73 | % | 14.44 | % | 13.83 | % | ||||||
|
Return on
average common equity
|
12.88 | % | 14.44 | % | 13.83 | % | ||||||
|
Return on
average assets
|
1.28 | % | 1.38 | % | 1.38 | % | ||||||
|
Common stock
dividend payout ratio
|
23.93 | % | 21.43 | % | 20.81 | % | ||||||
|
Efficiency
ratio
|
53.39 | % | 57.10 | % | 56.65 | % | ||||||
|
At period
end:
|
||||||||||||
|
Book value
per common share
|
$ | 19.14 | $ | 17.13 | $ | 16.68 | ||||||
|
Total
assets
|
$ | 1,049,557 | $ | 933,901 | $ | 876,578 | ||||||
|
Total
loans
|
$ | 890,554 | $ | 724,878 | $ | 719,778 | ||||||
|
Total
deposits
|
$ | 852,290 | $ | 834,642 | $ | 736,697 | ||||||
|
Loan-to-deposit
ratio
|
104.49 | % | 86.85 | % | 97.70 | % | ||||||
Summary
of Quarterly Results of Operations
Table 1 sets forth
the quarterly results of operations for 2008 and 2007:
|
Table
1
|
Summarized
Statement of Operations
|
|
2008 Quarters
Ended
|
2007 Quarters
Ended
|
|||||||||||||||||||||||||||||||
|
(Dollars in
thousands)
|
Dec.
31
|
Sept.
30
|
Jun.
30
|
Mar.
31
|
Dec.
31
|
Sept.
30
|
Jun.
30
|
Mar.
31
|
||||||||||||||||||||||||
|
Interest
income
|
$ | 15,063 | $ | 15,028 | $ | 14,544 | $ | 14,541 | $ | 15,700 | $ | 15,830 | $ | 15,439 | $ | 14,872 | ||||||||||||||||
|
Interest
expense
|
2,214 | 2,717 | 2,635 | 3,251 | 4,221 | 5,042 | 4,961 | 4,875 | ||||||||||||||||||||||||
|
Net interest
income
|
12,849 | 12,311 | 11,909 | 11,290 | 11,479 | 10,788 | 10,478 | 9,997 | ||||||||||||||||||||||||
|
Provision for
loan losses
|
2,200 | 1,685 | 510 | 615 | 345 | 200 | 75 | 65 | ||||||||||||||||||||||||
|
Net interest
income after provision for loan losses
|
10,649 | 10,626 | 11,399 | 10,675 | 11,134 | 10,588 | 10,403 | 9,932 | ||||||||||||||||||||||||
|
Non-interest
income
|
1,181 | 1,194 | 1,279 | 1,702 | 1,231 | 1,586 | 1,393 | 1,508 | ||||||||||||||||||||||||
|
Non-interest
expense
|
7,094 | 7,442 | 7,140 | 7,001 | 7,028 | 6,926 | 7,030 | 6,689 | ||||||||||||||||||||||||
|
Income before
provision for income taxes
|
4,736 | 4,378 | 5,538 | 5,376 | 5,337 | 5,248 | 4,766 | 4,751 | ||||||||||||||||||||||||
|
Provision for
income taxes
|
1,943 | 1,683 | 2,152 | 2,100 | 2,079 | 2,059 | 1,863 | 1,777 | ||||||||||||||||||||||||
|
Net
income
|
$ | 2,793 | $ | 2,695 | $ | 3,386 | $ | 3,276 | $ | 3,258 | $ | 3,189 | $ | 2,903 | $ | 2,974 | ||||||||||||||||
|
Preferred
stock dividends and accretion
|
$ | (113 | ) | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||
|
Net income
available to common shareholders
|
$ | 2,680 | $ | 2,695 | $ | 3,386 | $ | 3,276 | $ | 3,258 | $ | 3,189 | $ | 2,903 | $ | 2,974 | ||||||||||||||||
|
Net income
per common share
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.52 | $ | 0.53 | $ | 0.66 | $ | 0.64 | $ | 0.63 | $ | 0.62 | $ | 0.56 | $ | 0.57 | ||||||||||||||||
|
Diluted
|
$ | 0.52 | $ | 0.52 | $ | 0.65 | $ | 0.63 | $ | 0.62 | $ | 0.60 | $ | 0.54 | $ | 0.55 | ||||||||||||||||
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. We manage
interest rate risk exposure with the goal of minimizing the impact of interest
rate volatility on the net interest margin.
Table 2, 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 three years 2008, 2007 and 2006. The table
also indicates net interest income, net interest margin and net interest rate
spread for each period presented.
|
Table
2
|
Distribution
of Average Statements of Condition and Analysis of Net Interest
Income
|
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
Interest
|
Interest
|
Interest
|
||||||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Federal funds
sold and other short-term investments
|
$ | 4,212 | $ | 138 | 3.22 | % | $ | 42,584 | $ | 2,209 | 5.19 | % | $ | 4,503 | $ | 226 | 5.01 | % | ||||||||||||||||||
|
Investment
securities
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury
securities (1)
|
--- | --- | --- | 315 | 8 | 2.43 | 3,086 | 76 | 2.45 | |||||||||||||||||||||||||||
|
U.S.
Government agencies (1)
|
72,606 | 3,555 | 4.90 | 75,775 | 3,759 | 4.96 | 84,185 | 3,707 | 4.40 | |||||||||||||||||||||||||||
|
Other
(1)
|
6,124 | 273 | 4.46 | 11,110 | 656 | 5.92 | 5,830 | 297 | 5.10 | |||||||||||||||||||||||||||
|
Obligations of
state and political subdivisions (2)
|
19,541 | 1,106 | 5.66 | 13,067 | 641 | 4.91 | 14,955 | 758 | 5.07 | |||||||||||||||||||||||||||
|
Loans and
banker's acceptances (3)
|
798,369 | 54,475 | 6.82 | 703,087 | 54,730 | 7.78 | 701,732 | 53,447 | 7.62 | |||||||||||||||||||||||||||
|
Total
interest-earning assets
|
900,852 | 59,547 | 6.61 | 845,938 | 62,003 | 7.33 | 814,291 | 58,511 | 7.18 | |||||||||||||||||||||||||||
|
Cash and due
from banks
|
21,990 | 24,364 | 28,322 | |||||||||||||||||||||||||||||||||
|
Bank premises
and equipment, net
|
8,354 | 8,185 | 6,343 | |||||||||||||||||||||||||||||||||
|
Interest
receivable and other assets, net
|
17,325 | 16,301 | 13,307 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 948,521 | $ | 894,788 | $ | 862,263 | ||||||||||||||||||||||||||||||
|
Liabilities
and Stockholders' Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
$ | 78,672 | $ | 344 | 0.44 | % | $ | 76,673 | $ | 301 | 0.39 | % | $ | 75,336 | $ | 293 | 0.39 | % | ||||||||||||||||||
|
Savings and
money market accounts
|
430,621 | 6,910 | 1.60 | 414,592 | 14,161 | 3.42 | 358,027 | 10,979 | 3.07 | |||||||||||||||||||||||||||
|
CDARS®
reciprocal deposits
|
9,039 | 200 | 2.21 | --- | --- | --- | --- | --- | --- | |||||||||||||||||||||||||||
|
Time
accounts
|
83,735 | 2,466 | 2.95 | 86,268 | 3,465 | 4.02 | 104,205 | 3,837 | 3.68 | |||||||||||||||||||||||||||
|
Purchased
funds
|
30,069 | 601 | 2.00 | 16,097 | 765 | 4.76 | 23,008 | 1,078 | 4.68 | |||||||||||||||||||||||||||
|
Subordinated
Debenture
|
5,000 | 296 | 5.92 | 5,000 | 407 | 8.14 | 5,000 | 391 | 7.82 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
637,136 | 10,817 | 1.70 | 598,630 | 19,099 | 3.19 | 565,576 | 16,578 | 2.93 | |||||||||||||||||||||||||||
|
Demand
accounts
|
208,320 | 204,146 | 205,512 | |||||||||||||||||||||||||||||||||
|
Interest
payable and other liabilities
|
7,624 | 6,648 | 5,262 | |||||||||||||||||||||||||||||||||
|
Stockholders'
equity
|
95,441 | 85,364 | 85,913 | |||||||||||||||||||||||||||||||||
|
Total
liabilities & stockholders' equity
|
$ | 948,521 | $ | 894,788 | $ | 862,263 | ||||||||||||||||||||||||||||||
|
Tax-equivalent
net interest income/margin
|
$ | 48,730 | 5.41 | % | $ | 42,904 | 5.07 | % | $ | 41,933 | 5.15 | % | ||||||||||||||||||||||||
|
Reported net
interest income/margin
|
$ | 48,359 | 5.37 | % | $ | 42,742 | 5.05 | % | $ | 41,733 | 4.84 | % | ||||||||||||||||||||||||
|
Net interest
rate spread
|
4.91 | % | 4.14 | % | 4.25 | % | ||||||||||||||||||||||||||||||
|
(1)
|
Yields on
available-for-sale securities are calculated based on amortized cost
balances rather than fair value, as changes in fair value are reflected as
a component of stockholders'
equity.
|
|
(2)
|
Yields and
interest income on tax-exempt securities are presented on a tax-equivalent
basis using the federal statutory rate of 35
percent.
|
|
(3)
|
Average
balances on loans outstanding include non-performing loans, if any. The
amortized portion of net loan origination fees (costs) is included in
interest income on loans, representing an adjustment to the
yield.
|
The net interest
rate spread in 2008 reflects a decline of 72 basis points over 2007 in the yield
on interest-earning assets and a dramatic decline of 149 basis points in the
cost of interest-bearing liabilities, reflecting a sharply declining interest
rate environment in 2008. In contrast, the yield on interest-earning assets
increased 15 basis points in 2007 over 2006 while the cost of interest-bearing
liabilities increased 26 basis points.
The tax-equivalent
net interest margin increased to 5.41% in 2008, up 34 basis points from 2007,
and declined 8 basis points to 5.07% in 2007 from 2006. In 2008, the effects of
lower rates on deposits and borrowings due to sharply declining market rates
outweighed the effects of lower loan yields and an increased level of borrowings
to support loan growth. In 2007, the margin was impacted by a higher cost of
funds in a rising interest rate environment as well as competition for deposits,
partially offset by higher loan yields and a decrease in borrowings. In
addition, the composition of average interest-earning assets shifted in both
2007 and 2008 over the prior year as described below, affecting the
tax-equivalent net interest margin in both years.
The overall
earnings on assets are affected by loan rates and the mix of interest-earning
assets. The composition of interest-earning assets in 2008 over 2007 reflects a
shift to higher-yielding loans from Federal funds sold while 2007 over 2006
reflects the opposite, a shift to Federal funds sold from loans. The
movement follows the sale of the indirect auto portfolio in the second quarter
of 2007 when the proceeds of $76 million were initially invested in Federal
funds sold and gradually reinvested in higher-yielding relationship
loans.
Average
interest-earning assets increased $54.9 million, or 6.5%, in 2008 compared to
2007 and $31.6 million, or 3.9%, in 2007 compared to 2006. The increase in 2008
primarily relates to loan growth of $95.3 million, partially offset by a $38.4
million decline in Federal funds sold, while the increase in 2007 primarily
reflects an increase in Federal funds sold as a result of the indirect auto loan
sale noted above.
The average yield
on interest-earning assets decreased 72 basis points in 2008 compared to 2007
and increased 15 basis points in 2007 over 2006 reflecting very different market
conditions. In 2008 most categories of interest-earning assets
recorded declines in yields, reflecting a sharply declining rate environment,
with the exception of municipal bonds for which state and political subdivisions
were forced to offer higher rates as investors became wary of the insurance
companies which guaranteed the instruments. In addition, the
perceived credit risk of municipalities in general increased. The increase in
yields in most categories of interest-earning assets in 2007 over 2006 is
primarily attributable to the increasing interest rate environment through
August of 2007. The yield on municipal securities declined in 2007 due to
maturities of higher yielding bonds in our portfolio and replacement of bonds at
lower yields.
The yield on the
loan portfolio, which comprised 88.6%, 83.1% and 86.2% of average earning assets
in 2008 and 2007 and 2006, respectively, decreased 96 basis points in 2008 from
2007 and increased 16 basis points in 2007 over 2006. The decrease in 2008 loan
yields reflects 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, partially offset by higher yields on fixed rate loans originated
before the market decline. Although non-accrual loans were $6.7 million at
December 31, 2008 compared to $144 thousand at December 31, 2007, the impact of
forgone interest on the yield on loans in 2008 was only 2 basis points. The
increase in 2007 in the loan yield reflects loan originations at higher yields,
the paydown of loans at lower yields and the write-down to fair value and
subsequent sale of the lower-yielding indirect auto portfolio.
The overall cost of
liabilities is affected by offered rates and the mix of deposits and other
liabilities. The overall rate on interest-bearing liabilities
decreased 149 basis points in 2008 over 2007, and increased 26 basis points in
2007 over 2006, responding to Federal fund target rate movements in both
years.
Market rates are in
part based on the Federal Reserve Open Market Committee (“FOMC”) target Federal
funds interest rate (the interest rate banks charge each other for short-term
borrowings). The change in the Federal funds sold and purchased rates
is the result of target rate changes implemented by the FOMC. In 2008,
there were seven downward adjustments to the target rate totaling 325 basis
points, bringing the target interest rate to a historic low with a range of 0%
to 0.25%. In 2007, beginning in August, there were three downward adjustments
totaling 100 basis points bringing the target interest rate down to 4.25% by
December 31, 2007.
The rate on
purchased funds declined dramatically by 276 basis points in 2008 over 2007,
primarily due to declines in the Federal funds target rate. The rate on
subordinated debt declined 222 basis points reflecting a decline in three-month
LIBOR, to which the borrowing rate is indexed. In 2007 over 2006, the rate on
purchased funds increased 8 basis points reflecting the change in the Federal
funds target rate. The rate on subordinated debt increased 32 basis
points reflecting an increase in three-month LIBOR, to which the borrowing is
indexed.
In 2008, the
average rate on savings and money market accounts, which comprise approximately
68% of interest-bearing liabilities, decreased 182 basis points and the rate on
time deposits decreased 107 basis points, reflecting lower offered rates on
deposits in response to lower market rates. The rate on interest-bearing
transaction accounts remained relatively unchanged. In 2007, the rate on savings
and money market accounts increased 35 basis points over 2006 and the rate on
time deposits increased 34 basis points reflecting the rising Federal fund
target rate. The rate on interest-bearing transaction accounts remained
unchanged from 2006.
The average balance
of interest-bearing liabilities increased $38.5 million, or 6.4%, in 2008
compared to 2007, and $33.1 million, or 5.8%, in 2007 compared to
2006. In 2008 over 2007, deposit increases were recorded in most
deposit categories. Notably, the increase in average savings and money market
accounts of $16.0 million was mainly due to a new on-balance sheet cash sweep
program as discussed in the Deposits section below. A new
CDARS®
product contributed to an increase in average reciprocal time deposits of $9.0
million. The increase in interest-bearing liabilities in 2008 was also the
result of an increase in average purchased funds of $14.0 million as our loan
growth outpaced the deposit growth. Total average interest-bearing deposits
increased $30.1 million in 2007, which reflected higher average savings and
money markets accounts, due to higher offered rates in response to the rising
Federal funds target rate at that time and competitive pricing, partially offset
by declines of $17.9 million in average time deposits and $6.9 million in
average purchased funds, reflecting the lessened need for borrowing following
the sale of the indirect auto portfolio. See Table 12, Distribution of Average
Deposits and Section on Deposits for further detail
and discussion of the shift in the relative mix of deposits during 2008 and
2007.
Table 3, Analysis
of Changes in Net Interest Income, separates the change in net interest income
into two components: (1) volume – change caused by increases or decreases in the
average asset and liability balances outstanding, and (2) yield/rate – changes
in average yields on earning assets and average rates for interest-bearing
liabilities. Table 3 shows the impact on income of balance sheet
changes and the changes in market interest rate levels which occurred during
2008 and 2007.
The table indicates
that in 2008, the decreases in both interest income and interest expense were
heavily impacted by decreases in rate, partially offset by increases related to
volume, while in 2007 the increase in interest income was fairly evenly impacted
by rate and volume, while the increase in interest expense was
more impacted by rate than volume.
|
Table
3
|
Analysis
of Changes in Net Interest Income
|
|
2008 compared
to 2007
|
2007 compared
to 2006
|
|||||||||||||||||||||||
|
Yield/
|
Yield/
|
|||||||||||||||||||||||
|
(Dollars in
thousands)
|
Volume
|
Rate*
|
Total
|
Volume
|
Rate*
|
Total
|
||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Federal funds
sold
|
$ | (1,458 | ) | $ | (613 | ) | $ | (2,071 | ) | $ | 1,975 | $ | 8 | $ | 1,983 | |||||||||
|
Investment
securities
|
||||||||||||||||||||||||
|
U. S.
Treasury securities
|
(8 | ) | --- | (8 | ) | (67 | ) | (1 | ) | (68 | ) | |||||||||||||
|
U. S.
government agencies
|
(155 | ) | (49 | ) | (204 | ) | (391 | ) | 443 | 52 | ||||||||||||||
|
Obligations
of state and political subdivisions
|
(247 | ) | (136 | ) | (383 | ) | 305 | 54 | 359 | |||||||||||||||
|
Municipal
bonds
|
355 | 110 | 465 | (102 | ) | (15 | ) | (117 | ) | |||||||||||||||
|
Loans and
bankers’ acceptances
|
6,938 | (7,193 | ) | (255 | ) | 103 | 1,180 | 1,283 | ||||||||||||||||
|
Total
interest-earning assets
|
5,425 | (7,881 | ) | (2,456 | ) | 1,823 | 1,669 | 3,492 | ||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
8 | 35 | 43 | 5 | 3 | 8 | ||||||||||||||||||
|
Savings and
money market accounts
|
528 | (7,779 | ) | (7,251 | ) | 1,849 | 1,333 | 3,182 | ||||||||||||||||
|
CDARS®
reciprocal deposits
|
200 | --- | 200 | |||||||||||||||||||||
|
Time
accounts
|
(99 | ) | (900 | ) | (999 | ) | (700 | ) | 328 | (372 | ) | |||||||||||||
|
Purchased
funds
|
434 | (598 | ) | (164 | ) | (330 | ) | 17 | (313 | ) | ||||||||||||||
|
Subordinated
Debenture
|
--- | (111 | ) | (111 | ) | - | 16 | 16 | ||||||||||||||||
|
Total
interest-bearing liabilities
|
1,071 | (9,353 | ) | (8,282 | ) | 824 | 1,697 | 2,521 | ||||||||||||||||
|
Tax-equivalent
net Interest Income
|
$ | 4,354 | $ | 1,472 | $ | 5,826 | $ | 999 | $ | (28 | ) | $ | 971 | |||||||||||
*The changes for
each category of interest income and expense are divided between the portion of
change attributable to the variance in volume and the portion of change
attributable to the variance in rate for that category.The unallocated change in
rate or volume variance has been allocated between the rate and volume variances
on a pro rata basis.
Provision for Loan Losses
Management assesses
the adequacy of the allowance for loan losses on a quarterly basis based on
several factors including growth of the loan portfolio, analysis of probable
losses in the portfolio, recent loss experience and the current economic
climate. 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 the section captioned “Critical
Accounting Policies.”
Our provision for
loan losses totaled $5.0 million in 2008 compared to $685 thousand in
2007. The allowance for loan losses as a percentage of loans totaled
1.12% at December 31, 2008, compared to 1.05% at December 31, 2007. The increase
to the provision and allowance for loan losses in 2008 reflected the significant
level of loan growth that we experienced in 2008, and an increased
allocation for economic uncertainty. The U.S. economy is experiencing
significantly reduced business activity as a result of, among other factors,
disruptions in the financial system, dramatic declines in the housing market,
and an increasing unemployment rate. During the second half of 2008,
there has been unprecedented volatility and deterioration in the financial
markets, the failure of well-known companies and the start of a national
recession. We have begun to see financial difficulties experienced by borrowers,
especially in the construction industry, where sale prices have declined and
holding periods have increased. Consequently, we have increased the economic
factor from 0.20% at December 31, 2007 to 0.30% at December 31, 2008, resulting
in an increase in the allowance for loan losses related to economic uncertainty
of $1.2 million in 2008. The specific reserve increased from zero at
December 31, 2007 to $44 thousand at December 31, 2008.
Net charge-offs in
2008 totaling $2.6 million primarily relate to construction loans secured by
real property where the value of collateral has declined. Net
charge-offs in 2007 totaled $85 thousand.
Non-performing
assets included ten loans at December 31, 2008, one loan at December 31, 2007,
one loan at December 31, 2006 and none at the prior two year ends.
|
Table
4
|
Non-performing
Assets at December 31
|
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Non accrual
loans
|
$ | 6,692 | $ | 144 | $ | 49 | $ | --- | $ | --- | ||||||||||
|
Accruing
loans past due 90 days or more
|
--- | --- | --- | --- | --- | |||||||||||||||
|
Other real
estate owned
|
--- | --- | --- | --- | --- | |||||||||||||||
|
Total
non-performing assets
|
$ | 6,692 | $ | 144 | $ | 49 | $ | --- | $ | --- | ||||||||||
Non-interest Income
Non-interest income
includes service charges on deposit accounts, Wealth Management Services (WMS)
income and other income.
|
Table
5
|
Significant
Components of Non-interest Income
|
|
2008 compared
to 2007
|
2007 compared
to 2006
|
|||||||||||||||||||||||||||
|
Year
Ended
|
Amount
|
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||
|
December
31,
|
Increase
|
Increase
|
Increase
|
Increase
|
||||||||||||||||||||||||
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
Service
charges on deposit accounts
|
$ | 1,654 | $ | 1,251 | $ | 1,007 | $ | 403 | 32.2 | % | $ | 244 | 24.2 | % | ||||||||||||||
|
Wealth
Management Services
|
1,292 | 1,229 | 1,067 | 63 | 5.1 | % | 162 | 15.2 | % | |||||||||||||||||||
|
Net gain on
indirect auto and
|
||||||||||||||||||||||||||||
|
Visa
portfolios
|
--- | 1,097 | --- | (1,097 | ) |
NM
|
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
|
640 | 577 | 505 | 63 | 10.9 | % | 72 | 14.3 | % | |||||||||||||||||||
|
Customer
banking fees and other charges
|
409 | 536 | 506 | (127 | ) | (23.7 | %) | 30 | 5.9 | % | ||||||||||||||||||
|
Other
income
|
904 | 1,028 | 887 | (124 | ) | (12.1 | %) | 141 | 15.9 | % | ||||||||||||||||||
|
Total other
non-interest income
|
1,953 | 2,141 | 1,898 | (188 | ) | (8.8 | %) | 243 | 12.8 | % | ||||||||||||||||||
|
Total
non-interest income
|
$ | 5,356 | $ | 5,718 | $ | 3,972 | $ | (362 | ) | (6.3 | %) | $ | 1,746 | 44.0 | % | |||||||||||||
NM
- Not Meaningful
The adoption of
SFAS No. 159 and the subsequent sale of the indirect auto loan portfolio
generated a pre-tax net gain in 2007 of $710 thousand and the sale of the Visa
(R) credit card portfolio generated a pre-tax net gain of $387 thousand in 2007,
resulting in total net gains of $1.1 million. In 2008, the mandatory
redemption of a portion of our shares of Visa, Inc. generated a net gain of $457
thousand. Excluding these nonrecurring gains, non-interest income in
2008 increased $278 thousand or 6.0% from 2007, and increased $649 thousand or
16.3% in 2007 over 2006.
The increase in
service charges on deposit accounts in 2008 was primarily attributable to an
increase in fees from our business analysis accounts, primarily reflecting a
reduced earnings credit, as well as an increase in fees on checks drawn against
insufficient funds effective April 1, 2007, combined with higher
volume. The increase in service charges in 2007 was due to the same
reasons.
The increase in WMS
income in 2008 reflected new assets under management and one-time estate
settlement fees, partially offset by market declines affecting fees. The
increase in 2007 WMS income was primarily the result of growth in assets under
management and market appreciation of assets.
The decrease in the
other non-interest income in 2008 was primarily due to a $91 thousand decrease
in reverse mortgage fees (we terminated this
service on May 1, 2008), an $83 thousand decrease in net remote deposit capture
fees (which are offset by earnings credit through business analysis), a $65
thousand decrease in Visa® fees
following the sale of the Visa® credit card
portfolio in the third quarter of 2007, and a $48 thousand decrease in cash
manager fees (when customers switched to a new on-balance sheet sweep product,
we no longer receive significant fees from the previous cash management reserve
processor). The decreases were partially offset by higher
miscellaneous income due to $42 thousand of interest we received in the second
quarter of 2008 on amended tax returns and a $63 thousand increase in bank-owned
life insurance (“BOLI”) income due to $2.2 million new purchase of policies in
2008. The increase in other income in 2007 primarily resulted from an
increase in BOLI (due to the additional investment of $1.2 million in September
2006 and a gradually increasing yield), and higher miscellaneous income (which
included $89 thousand of indirect auto loan recoveries subsequent to recording
these loans at their fair value).
Non-interest Expense
Table 6,
Significant Components of Non-interest Expense, summarizes the amounts and
changes in dollars and percentages. Our efficiency ratio (the ratio of
non-interest expense divided by the sum of non-interest income and net interest
income) decreased to 53.39% in 2008 from 57.10% in 2007 and from 56.65% in
2006.
|
Table
6
|
Significant
Components of Non-interest Expense
|
|
2008 compared
to 2007
|
2007 compared
to 2006
|
|||||||||||||||||||||||||||
|
Year
Ended
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||||
|
December
31,
|
Increase
|
Increase
|
Increase
|
Increase
|
||||||||||||||||||||||||
|
(Dollars in thousands)
|
2008
|
2007
|
2006
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
|||||||||||||||||||||
|
Salaries and
related benefits
|
$ | 16,097 | $ | 15,900 | $ | 15,490 | $ | 197 | 1.2 | % | $ | 410 | 2.6 | % | ||||||||||||||
|
Occupancy and
equipment
|
3,202 | 2,871 | 2,624 | 331 | 11.5 | % | 247 | 9.4 | % | |||||||||||||||||||
|
Depreciation
& amortization
|
1,340 | 1,246 | 998 | 94 | 7.5 | % | 248 | 24.8 | % | |||||||||||||||||||
|
Data
processing costs
|
1,825 | 1,657 | 1,537 | 168 | 10.1 | % | 120 | 7.8 | % | |||||||||||||||||||
|
Professional
services
|
1,600 | 1,681 | 1,269 | (81 | ) | (4.8 | %) | 412 | 32.5 | % | ||||||||||||||||||
|
Other
non-interest expense
|
||||||||||||||||||||||||||||
|
FDIC
Insurance
|
507 | 263 | 92 | 244 | 92.8 | % | 171 | 185.9 | % | |||||||||||||||||||
|
Advertising
|
439 | 297 | 387 | 142 | 47.8 | % | (90 | ) | (23.3 | )% | ||||||||||||||||||
|
Director
expense
|
444 | 395 | 495 | 49 | 12.4 | % | (100 | ) | (20.2 | )% | ||||||||||||||||||
|
Other
expense
|
3,223 | 3,363 | 2,999 | (140 | ) | (4.2 | %) | 364 | 12.1 | % | ||||||||||||||||||
|
Total other
non-interest expense
|
4,613 | 4,318 | 3,973 | 295 | 6.8 | % | 345 | 8.7 | % | |||||||||||||||||||
|
Total
non-interest expense
|
$ | 28,677 | $ | 27,673 | $ | 25,891 | $ | 1,004 | 3.6 | % | $ | 1,782 | 6.9 | % | ||||||||||||||
Excluding the $242
thousand Visa Inc. litigation cost reversed against other expense in the first
quarter of 2008 (see Note 20 to the Consolidated Financial Statements in this
Form 10-K), non-interest expense for 2008 increased $1.2 million, or
4.5%.
The increase in
salaries and benefits in 2008 from prior year primarily reflected higher
personnel costs associated with branch expansion, including higher salaries,
commissions, and employee insurance due to a higher level of FTE, which totaled
197 and 190 at year-end 2008 and 2007, respectively. These increases were
partially offset by a $179 thousand decrease in our contribution to Employee
Stock Ownership and Savings Plan, a $74 thousand decrease in stock-based
compensation and 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.
The increases in
salaries and benefits costs from 2006 to 2007 were due to normal
inflation-adjusted annual salary increases, partially offset by a slight
decrease in net FTE employees from 194 at year-end 2006.
The increases in
occupancy and equipment expenses in 2008 compared to 2007 were primarily related
to higher premises rent associated with the new Mill Valley branch opened in
June 2008, as well as higher maintenance and repair costs. The
increases in 2007 in occupancy and equipment costs of $247 thousand were largely
due to a full year’s expense related to the lease of our new corporate office,
the addition of a new San Francisco loan office lease, and annual rent increases
in the branch facilities.
The increase in
depreciation and amortization expenses in 2008 was primarily due to the addition
of leasehold improvements associated with the remodeling of the San Rafael
branch in the second quarter of 2008, and the addition of the Mill Valley branch
during June 2008. The increase in depreciation and amortization in 2007
reflected expenses associated with the remodeling of our Northgate branch, a
full year of amortization of the new corporate office, as well as expenses
associated with the opening of the new loan office in San
Francisco.
The increase in
data processing costs in 2008 over 2007 reflected a one-time de-conversion cost
that related to credit card customers, as well as one-time costs associated with
network upgrades, set-up of our new cash manager sweep program, and the related
training costs. The increases in data processing costs in 2007 over
2006 were due to the contractually stipulated price increases that are part of
our long-term agreement with our data processing provider and also due to costs
associated with regulatory compliance and the implementation of new products and
services.
The decrease in
professional services in 2008 over 2007 was largely attributable to a decrease
in expenses associated with the holding company formation in 2007 and the
discontinuation of a consulting agreement that began in July of 2006 and ended
in June of 2008. The increase in professional services in 2007 from 2006
reflected higher legal and accounting expenses, primarily associated with the
formation of the holding company as well as a full year of the consulting
agreement that commenced in July of 2006.
The increases in
other non-interest expense in 2008 over 2007 reflected increases in FDIC
insurance (due to an increase in industry-wide FDIC assessment and growth in our
deposit level), other processing costs, advertising, and investor relations
expenses.
FDIC insurance in
2009 could be more than five times that of 2008 if a recently proposed
one-time assessment of 20 basis points on covered deposits becomes final on top
of already enacted assessment increases. In November 2008, we elected to
provide unlimited insurance coverage on non-interest-bearing transaction
accounts, on which we will pay a 10 basis point surcharge per $100 covered
balances in excess of $250 thousand. In addition, the FDIC insurance
assessment on transaction accounts under $250 thousand will increase from 5
basis points to 12 basis points annually per $100 covered in the first quarter
of 2009, related to a uniform increased assessment. Beginning April
1, 2009, the base rate of banks in the best risk category will range from twelve
to sixteen cents per $100 of covered deposits. Finally, as discussed above,
on February 27, 2009, the FDIC proposed a one-time assessment of 20
basis points on covered deposits as of June 30, 2009, payable on September 30,
2009. The newly issued proposal also gives the FDIC the ability to impose
future emergency special assessments of up to 10 basis points if
necessary.
In 2007, other
non-interest expense includes a pre-tax non-recurring charge of $242 thousand
recorded in the fourth quarter for the potential obligation to Visa U.S.A. in
connection with certain litigation indemnifications provided to Visa U.S.A. by
Visa member banks. The increase in other non-interest expense in 2007
over 2006 also includes increases in FDIC insurance and information technology
costs, partially offset by decreases in other losses, director expenses, and
advertising.
Provision for Income Taxes
We reported a
provision for income taxes of $7.9 million, $7.8 million, and $6.7 million for
the years 2008, 2007, and 2006 respectively. The effective tax rates
were 39.3%, 38.7% and 35.9% 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, BOLI 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. We have 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
Investment Securities
We maintain an
investment securities portfolio to provide liquidity and to generate earnings on
funds that have not been loaned. Management determines the maturities
and the types of securities to be purchased based on the need for liquidity to
fund loans and the desire to attain a high investment yield. Table 7
shows the makeup of the securities portfolio at December 31, 2008 and
2007.
|
Table
7
|
Investment
Securities
|
|
Type and
Maturity Grouping
|
December 31,
2008
|
December 31,
2007
|
||||||||||||||||||||||||||||||
|
Principal
|
Amortized
|
Market
|
Average
|
Principal
|
Amortized
|
Market
|
Average
|
|||||||||||||||||||||||||
|
(Dollars in
thousands)
|
Amount
|
Cost
(2)
|
Value
|
Yield
|
Amount
|
Cost
(2)
|
Value
|
Yield
|
||||||||||||||||||||||||
|
Held to
maturity
|
||||||||||||||||||||||||||||||||
|
State and
municipal (1)
|
||||||||||||||||||||||||||||||||
|
Due within 1
year
|
$ | 200 | $ | 200 | $ | 200 | 3.20 | % | $ | 1,010 | $ | 1,010 | $ | 1,017 | 4.81 | % | ||||||||||||||||
|
Due after 1
but within 5 years
|
5,070 | 5,203 | 5,370 | 3.47 | 4,990 | 5,165 | 5,200 | 3.34 | ||||||||||||||||||||||||
|
Due after 5
but within 10 years
|
5,140 | 5,312 | 5,488 | 3.70 | 3,340 | 3,391 | 3,470 | 3.94 | ||||||||||||||||||||||||
|
Due after 10
years
|
12,635 | 12,843 | 12,077 | 3.80 | 3,550 | 3,616 | 3,551 | 3.44 | ||||||||||||||||||||||||
|
Total held to
maturity
|
23,045 | 23,558 | 23,135 | 3.70 | 12,890 | 13,182 | 13,238 | 3.64 | ||||||||||||||||||||||||
|
Available for
sale
|
||||||||||||||||||||||||||||||||
|
U. S.
government agencies
|
||||||||||||||||||||||||||||||||
|
Due within 1
year
|
6 | 6 | 6 | 2.40 | 17,386 | 17,388 | 17,376 | 4.76 | ||||||||||||||||||||||||
|
Due after 1
but within 5 years
|
46,383 | 46,627 | 47,269 | 5.11 | 44,010 | 44,285 | 44,045 | 4.93 | ||||||||||||||||||||||||
|
Due after 5
but within 10 years
|
25,947 | 26,162 | 26,235 | 4.89 | 4,623 | 4,575 | 4,619 | 5.58 | ||||||||||||||||||||||||
|
Due after 10
years
|
5,000 | 5,097 | 5,072 | 4.86 | 8,573 | 8,715 | 8,475 | 5.41 | ||||||||||||||||||||||||
|
Total
|
77,336 | 77,892 | 78,582 | 5.02 | 74,592 | 74,963 | 74,515 | 4.99 | ||||||||||||||||||||||||
|
Corporate
CMOs
|
||||||||||||||||||||||||||||||||
|
Due within 1
year
|
734 | 734 | 727 | 5.25 | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Due after 1
but within 5 years
|
657 | 658 | 643 | 5.54 | 2,483 | 2,487 | 2,474 | 5.38 | ||||||||||||||||||||||||
|
Due after 5
but within 10 years
|
--- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Due after 10
years
|
--- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Total
|
1,391 | 1,392 | 1,370 | 5.39 | 2,483 | 2,487 | 2,474 | 5.38 | ||||||||||||||||||||||||
|
Corporate
debt securities and other
|
||||||||||||||||||||||||||||||||
|
Due within 1
year
|
--- | --- | --- | --- | 10,000 | 10,000 | 10,000 | 5.60 | ||||||||||||||||||||||||
|
Due after 1
but within 5 years
|
--- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Due after 5
but within 10 years
|
--- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Due after 10
years
|
--- | --- | --- | --- | --- | --- | --- | --- | ||||||||||||||||||||||||
|
Total
|
--- | --- | --- | --- | 10,000 | 10,000 | 10,000 | 5.60 | ||||||||||||||||||||||||
|
Total
available for sale
|
78,727 | 79,284 | 79,952 | 5.03 | 87,075 | 87,450 | 86,989 | 5.07 | ||||||||||||||||||||||||
|
Total
|
$ | 101,772 | $ | 102,842 | $ | 103,087 | 4.73 | % | $ | 99,965 | $ | 100,632 | $ | 100,227 | 4.88 | % | ||||||||||||||||
(1) Interest income
and yields on tax-exempt securities are not presented on a tax-equivalent
basis. Maturities for securities are based on expected versus
contractual maturities.
(2) Book value
reflects cost, adjusted for accumulated amortization and accretion.
Our investment
securities portfolio, consisting primarily of obligations of U.S. government
agencies, state and municipal securities and corporate collateralized mortgage
obligations (“CMOs”), increased $3.3 million or 3.3% in 2008. U.S.
government agency securities, which make up 75.9% of the portfolio, increased
$4.1 million in 2008. State and municipal securities, which
represented 22.8% of the portfolio, increased $10.3 million. Corporate
collateralized mortgage obligation securities decreased by $1.1 million and
corporate debt securities decreased by $10.0 million. The weighted
average maturity of the portfolio at December 31, 2008 was approximately
sixty-eight months.
Total
mortgage-backed securities in the portfolio at December 31, 2008 were $62.9
million which consisted of $8.2 million pass-through securities issued by FNMA
and FHLMC, $53.3 million other mortgage backed securities issued or guaranteed
by FNMA, FHLMC, or Government National Mortgage Association (“GNMA”), and $1.4
million of CMOs issued by corporations. We generally invest in
mortgage-backed securities with borrowers having strong credit scores and/or
collateral compositions reflecting low loan-to-value ratios. See Note 2 to
Consolidated Financial Statements and Item 1A, Risk Factors, for more
information on investment securities.
Loans
Commercial loans
increased $22.1 million in 2008 compared to 2007, which was the result of our
continued emphasis on commercial and industrial lending, specifically
asset-based lines of credit. We have historically targeted well-established
local businesses with strong guarantors that have proven to be resilient in
periods of economic stress. As such, demand in that area did not appear to be
significantly impacted by the recent turmoil in the financial markets.
Commercial real estate loans increased $77.4 million in the same period, mainly
driven by increased demand from existing customers. Construction
loans increased $24.8 million in 2008 due to both the acquisition of new
projects as well as the funding of commitments carried-over from the prior
year. Residential real estate loans increased $41.8 million. A large
part of the residential real estate loan opportunities were for the conversion
of acquisition and development loans to tenant-in-common units in San Francisco,
a trend that will continue through 2009. Further, we had a consumer loan
promotion in 2008, which resulted in significant growth in revolving home equity
loans within our primary market area.
Commercial loans
increased by $6.9 million in 2007 compared to 2006, and real estate loans
increased by $78.0 million in the same period. The increase in commercial loan
totals resulted from a targeted emphasis on commercial and industrial lending,
specifically asset-based lines of credit, as well as the opening of the San
Francisco loan production office. Commercial real estate loans increased due to
ongoing demand complemented by opportunities that surfaced as a result of our
active involvement in our trade area. Residential real estate loans increased
$20.0 million from 2006 to 2007, reflecting the same trend discussed above. The
decrease in indirect auto loans in 2007 is due to our sale of indirect auto
loans in June 2007 and exiting the indirect auto loan business
thereafter.
Approximately 84%
of our outstanding loans are secured by real estate at December 31, 2008 and
2007. Of the real estate loans, 46% are non-owner occupied commercial real
estate loans, 20% are owner occupied commercial real estate loans, 17% are
construction loans, 8% are personal real estate loans and 9% are home equity
loans. Our
commercial real estate loan portfolio is weighted towards term loans for which
the primary source of repayment is cash flow from net operating income of the
real estate property. See also Item 1A, Risk Factors, regarding our
loan concentration risk. Table 8 shows an analysis of loans by
type.
|
Table
8
|
Loans
Outstanding by Type at December 31
|
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Commercial
loans
|
$ | 146,483 | $ | 124,336 | $ | 117,391 | $ | 144,510 | $ | 120,006 | ||||||||||
|
Real
estate
|
||||||||||||||||||||
|
Commercial
|
467,170 | 389,741 | 311,692 | 282,564 | 250,326 | |||||||||||||||
|
Construction
|
121,981 | 97,153 | 116,790 | 112,116 | 81,549 | |||||||||||||||
|
Residential
(a)
|
120,676 | 78,860 | 58,912 | 36,304 | 30,692 | |||||||||||||||
|
Installment
|
||||||||||||||||||||
|
Indirect Auto
loans
|
--- | --- | 84,141 | 77,612 | 68,769 | |||||||||||||||
|
Other
installment and consumer loans
|
34,234 | 34,788 | 30,852 | 33,555 | 25,615 | |||||||||||||||
|
Total
loans
|
890,544 | 724,878 | 719,778 | 686,661 | 576,957 | |||||||||||||||
|
Less
Allowance for loan losses
|
(9,950 | ) | (7,575 | ) | (8,023 | ) | (7,115 | ) | (6,110 | ) | ||||||||||
|
Net
Loans
|
$ | 880,594 | $ | 717,303 | $ | 711,755 | $ | 679,546 | $ | 570,847 | ||||||||||
(a) The residential
loan portfolio includes no sub-prime loans at years presented.
Table 9 shows a
shift towards fixed rate loans within the portfolio in 2008 when compared to
2007. The large majority of the variable rate loans are tied to independent
indices (such as the Wall Street Journal prime rate or the Treasury Constant
Maturities). Substantially all loans with an original term of more than five
years have provisions for the fixed rates to reset, or convert to a variable
rate, after one, three or five years.
|
Table
9
|
Loan
Portfolio Maturity Distribution and Interest Rate
Sensitivity
|
|
December 31,
2008
|
December 31,
2007
|
|||||||||||||||||||||||||||||||
|
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||||||||||||||||||
|
(Dollars in
thousands)
|
Rate
|
Rate
|
Total
|
Percent
|
Rate
|
Rate
|
Total
|
Percent
|
||||||||||||||||||||||||
|
Due within 1
year
|
$ | 52,266 | $ | 153,504 | $ | 205,770 | 23.1 | % | $ | 60,885 | $ | 110,827 | $ | 171,712 | 23.7 | % | ||||||||||||||||
|
Due after 1
but within 5 years
|
162,527 | 105,427 | 267,954 | 30.1 | % | 111,150 | 92,687 | 203,837 | 28.1 | % | ||||||||||||||||||||||
|
Due after 5
years
|
275,101 | 141,719 | 416,820 | 46.8 | % | 196,011 | 153,318 | 349,329 | 48.2 | % | ||||||||||||||||||||||
|
Total
|
$ | 489,894 | $ | 400,650 | $ | 890,544 | 100.0 | % | $ | 368,046 | $ | 356,832 | $ | 724,878 | 100.0 | % | ||||||||||||||||
|
Percentage
|
55.01 | % | 44.99 | % | 100.00 | % | 50.77 | % | 49.23 | % | 100.00 | % | ||||||||||||||||||||
Allowance for Loan Losses
Credit risk is
inherent in the business of lending. As a result, we maintain an
allowance for loan losses to absorb losses inherent in our loan portfolio
through a provision for probable loan losses charged against earnings. All
specifically identifiable and quantifiable losses are immediately charged off
against the allowance. The balance of our allowance for loan losses
is Management’s best estimate of the remaining losses inherent in the portfolio.
The ultimate adequacy of the allowance is dependent upon a variety of factors
beyond our control, including the real estate market, changes in interest rate
and economic and political environments.
The allowance for
loan losses as a percent of total loans at December 31, 2008 was 1.12% versus
1.05% at the end of 2007 and 1.11% at the end of 2006. Based on the current
conditions of the loan portfolio, Management believes that the $10.0 million
allowance for loan losses at December 31, 2008 is adequate to absorb losses
inherent in our loan portfolio. No assurance can be given, however, that adverse
economic conditions or other circumstances will not result in increased losses
in the portfolio. Table 10 shows the activity in the allowance for loan losses
for each of the years in the five-year period ended December 31, 2008. At
December 31, 2008, non-accrual loans, primarily construction loans, totaled $6.7
million. At December 31, 2007, we had one non-accrual loan of $144 thousand.
Impaired loan balances at each period-end approximated the balance of
non-accrual loans. Accruing loans 30-89 days past due were $4.4 million at
December 31, 2008 and $597 thousand at December 31, 2007.
With the adoption
of SFAS No. 159, the indirect auto loan portfolio was recorded at fair value in
2007. As a result, an unrealized loss of $3.5 million was recorded as a
reduction of loans, and the allowance for loan losses was reduced by $1.0
million, which is reflected in the table below.
|
Table
10
|
Allowance
for Loan Losses at December 31
|
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Beginning
balance
|
$ | 7,575 | $ | 8,023 | $ | 7,115 | $ | 6,110 | $ | 5,458 | ||||||||||
|
Cumulative-effect
adjustment of adoption of SFAS No. 159
|
--- | $ | (1,048 | ) | --- | --- | --- | |||||||||||||
|
Provision
charged to expense
|
5,010 | 685 | 1,266 | 1,541 | 934 | |||||||||||||||
|
Loans charged
off
|
||||||||||||||||||||
|
Commercial
|
(1,100 | ) | --- | (172 | ) | (362 | ) | (6 | ) | |||||||||||
|
Construction
|
(1,508 | ) | --- | --- | --- | --- | ||||||||||||||
|
Installment
and other consumer
|
(72 | ) | (115 | ) | (424 | ) | (402 | ) | (421 | ) | ||||||||||
|
Total
|
(2,680 | ) | (115 | ) | (596 | ) | (764 | ) | (427 | ) | ||||||||||
|
Loan loss
recoveries
|
||||||||||||||||||||
|
Commercial
|
24 | --- | 35 | 6 | 1 | |||||||||||||||
|
Installment
and other consumer
|
21 | 30 | 203 | 222 | 144 | |||||||||||||||
|
Total
|
45 | 30 | 238 | 228 | 145 | |||||||||||||||
|
Net loans
charged off
|
(2,635 | ) | (85 | ) | (358 | ) | (536 | ) | (282 | ) | ||||||||||
|
Ending
balance
|
$ | 9,950 | $ | 7,575 | $ | 8,023 | $ | 7,115 | $ | 6,110 | ||||||||||
|
Total loans
outstanding at end of year, before deducting allowance for loan
losses
|
$ | 890,544 | $ | 724,878 | $ | 719,778 | $ | 686,661 | $ | 576,957 | ||||||||||
|
Average total
loans outstanding during year
|
$ | 798,369 | $ | 703,087 | $ | 701,732 | $ | 640,694 | $ | 514,299 | ||||||||||
|
Ratio of
allowance for loan losses to total loans at end of year
|
1.12 | % | 1.05 | % | 1.11 | % | 1.04 | % | 1.06 | % | ||||||||||
The
Components of the Allowance for Loan Losses
As stated
previously in “Critical Accounting Policies,” the overall allowance consists of
a specific allowance for identified impaired loans, an allowance factor for
categories of credits with similar characteristics and trends, and an allowance
for changing environmental factors. The first component, the specific allowance,
results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. Through Management’s
ongoing loan grading process, individual loans are identified that have
conditions that indicate the borrower may be unable to pay all amounts due under
the contractual terms. These loans are evaluated individually by Management
based on SFAS No. 114 and specified allowances for loan losses are established
where applicable.
The second
component, the allowance factor, is an estimate of the probable inherent losses
across the major loan categories in our loan portfolio. This analysis is based
on loan grades by pool and current general economic and business conditions
determined in accordance with SFAS No. 5, Accounting for Contingencies
(SFAS No. 5). Confirmation of the quality of our grading process is obtained by
independent reviews conducted by consultants specifically hired for this purpose
and by various bank regulatory agencies. This analysis covers our entire loan
portfolio but excludes any loans that were analyzed individually for specific
allowances as discussed above. The total amount allocated for this component is
determined by applying loss estimation factors to outstanding
loans.
There are
limitations to any credit risk grading process. The number of loans makes it
impractical to review every loan every quarter. Therefore, it is possible that
in the future some currently performing loans not recently graded will not be as
strong as their last grading and an insufficient portion of the allowance will
have been allocated to them. Grading and loan review often must be done without
knowing whether all relevant facts are at hand. Troubled borrowers may
deliberately or inadvertently omit important information from reports or
conversations with lending officers regarding their financial condition and the
diminished strength of repayment sources.
The third component
of the allowance for credit
losses is an economic component that is not allocated to specific loans
or groups of loans, but rather is intended to absorb losses caused by portfolio
trends, concentration of credit, growth, and economic trends.
At December 31, 2008, the allowance for loan losses was $10.0
million consisting of a specific allowance of $44 thousand, an allowance based
on SFAS No. 5 for categories of credits of $7.3 million, and an economic
allowance of $2.7 million. At December 31, 2007, the allowance for loan losses
was $7.6 million consisting of a specific allowance of zero, an
allowance based on SFAS No. 5 for categories of credits of $6.0 million, and an
economic allowance of $1.6 million. During 2008, the reserves
allocated to commercial, construction and real estate loans increased compared
to 2007, primarily due to increases in general valuation allowances
related to growth in the loan portfolio in these categories. In
addition, we increased the allowance factor for construction loans in 2008,
recognizing an increased risk in these loans, reflecting the softening of the
construction industry, especially in Sonoma
County.
Table 11 shows the
allocation of the allowance by loan type as well as the percentage of total
loans in each of the same loan types.
|
Table
11
|
Allocation
of Allowance for Loan Losses
|
|
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
December 31,
2005
|
December 31,
2004
|
||||||||||||||||||||||||||||||||||||
|
Loans
as
|
Loans
as
|
Loans
as
|
Loans
as
|
Loans
as
|
||||||||||||||||||||||||||||||||||||
|
Allowance
|
percent
|
Allowance
|
percent
|
Allowance
|
percent
|
Allowance
|
percent
|
Allowance
|
percent
|
|||||||||||||||||||||||||||||||
|
balance
|
of
total
|
balance
|
of
total
|
balance
|
of
total
|
balance
|
of
total
|
balance
|
of
total
|
|||||||||||||||||||||||||||||||
|
(Dollars in
thousands)
|
allocation
|
loans
|
allocation
|
loans
|
allocation
|
loans
|
allocation
|
loans
|
allocation
|
loans
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 2,318 | 16.5 | % | $ | 1,989 | 17.2 | % | $ | 1,923 | 16.3 | % | $ | 2,510 | 21.1 | % | $ | 2,320 | 20.8 | % | ||||||||||||||||||||
|
Construction
|
2,118 | 13.6 | 1,659 | 13.4 | 1,995 | 16.2 | 1,764 | 16.3 | 1,315 | 14.1 | ||||||||||||||||||||||||||||||
|
Real
Estate
|
4,951 | 66.0 | 3,292 | 64.6 | 2,533 | 51.5 | 1,435 | 46.4 | 1,260 | 48.7 | ||||||||||||||||||||||||||||||
|
Installment
and other consumer
|
563 | 3.9 | 635 | 4.8 | 1,572 | 16.0 | 1,406 | 16.2 | 1,215 | 16.4 | ||||||||||||||||||||||||||||||
|
Total
allowance for loan losses
|
$ | 9,950 | $ | 7,575 | $ | 8,023 | $ | 7,115 | $ | 6,110 | ||||||||||||||||||||||||||||||
|
Total
percent
|
100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||||||||||||||||||||||||
Other Assets
During August 2008,
we purchased $2.2 million in new BOLI policies. BOLI totaled $17.0 million at
December 31, 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
$6.2 million and $5.5 million at December 31, 2008 and 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, stock-based
compensation and deferred compensation. Management believes these
assets to be realizable due to our consistent record of earnings and the
expectation that earnings will continue at a level adequate to realize such
benefits. In addition, we held $3.9 million and $3.4 million of FHLB
stock recorded at cost in other assets at December 31, 2008 and 2007,
respectively. In January 2009, FHLB notified us that they temporarily suspended
dividend payments on stock in order to build up higher retained earnings and to
preserve their capital. Management does not believe that the temporary
suspension of dividends on FHLB stock resulted in
other-than-temporary-impairment on our investment in FHLB stock as we expect to
be able to redeem this stock at cost.
Deposits
Deposits, which are
used to fund our interest earning assets, increased $17.6 million in 2008.
Excluding a $53.0 million short-term deposit placed with the Bank in December
2007, which was withdrawn in January 2008, deposits grew $70.6
million. The growth in deposits was positively impacted by our
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 as part of money market deposits. This allowed $54.2
million of customer deposits, which previously would have been swept off the
balance sheet, to remain on the balance sheet at December 31,
2008. Further, in March 2008, we 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 $42.9 million at December 31,
2008. Lastly, recent failures in certain banks led to increased
customer concern over deposit safety. We believe that we have successfully
attracted new money due to our financial soundness and our legacy of customer
service. The opening of our new Mill Valley branch in June 2008 also
generated $12.3 million in deposits in 2008. The economic downturn in 2008 also
appears to have a general impact on our customers, many of which are holding
lower balances. In 2008, we experienced a slight decline in savings
accounts. No individual
customer accounted for more than 5% of deposits.
We have experienced
a slight shift in the relative mix of interest-bearing deposits in 2008 compared
to 2007 as the proportion of higher-costing time accounts and money market
deposit accounts has increased while the proportion of savings and demand
deposits have decreased slightly. The shift in relative proportions is mainly
related to the two new products discussed above. Tables 12 and 13
show the relative composition of our average deposits for the years 2008, 2007
and 2006, and the maturity groupings for our time deposits of $100,000 or
more.
|
Table
12
|
Distribution
of Average Deposits
|
|
Year ended
December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
(Dollars in
thousands)
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||
|
Demand
|
$ | 208,320 | 25.7 | % | $ | 204,147 | 26.1 | % | $ | 205,512 | 27.7 | % | ||||||||||||
|
Interest
checking
|
78,671 | 9.7 | 76,673 | 9.8 | 75,336 | 10.1 | ||||||||||||||||||
|
Savings
|
40,239 | 5.0 | 43,754 | 5.6 | 58,881 | 7.9 | ||||||||||||||||||
|
Money
market
|
390,383 | 48.2 | 370,837 | 47.5 | 299,146 | 40.3 | ||||||||||||||||||
|
Time
deposits
|
||||||||||||||||||||||||
|
Less than
$100,000
|
48,535 | 6.0 | 37,417 | 4.8 | 40,732 | 5.5 | ||||||||||||||||||
|
$100,000 or
more
|
44,239 | 5.4 | 48,851 | 6.2 | 63,473 | 8.5 | ||||||||||||||||||
|
Total time
deposits
|
92,774 | 11.4 | 86,268 | 11.0 | 104,205 | 14.0 | ||||||||||||||||||
|
Total Average
Deposits
|
$ | 810,387 | 100.0 | % | $ | 781,679 | 100.0 | % | $ | 743,080 | 100.0 | % | ||||||||||||
|
Table
13
|
Maturities
of Time Deposits of $100,000 or more at December
31
|
|
December
31,
|
||||||||||||
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Three months
or less
|
$ | 27,985 | $ | 19,431 | $ | 19,041 | ||||||
|
Over three
months through six months
|
7,462 | 10,638 | 12,063 | |||||||||
|
Over six
months through twelve months
|
15,907 | 13,164 | 15,023 | |||||||||
|
Over twelve
months
|
4,105 | 7,437 | 7,912 | |||||||||
|
Total
|
$ | 55,459 | $ | 50,670 | $ | 54,039 | ||||||
Borrowings
We currently have
$198.7 million in secured lines with FHLB and Federal Reserve Bank (FRB) of San
Francisco and $75.0 million in unsecured lines with correspondent banks to cover
any short or long-term borrowing needs. Federal funds purchased and
FHLB borrowings increased $56.8 million in 2008 in part to fund our loan growth
in 2008. For additional information, see Note 8 to the Consolidated
Financial Statements in Item 8 of this Form 10-K.
Deferred
Compensation Obligations
We maintain a
nonqualified, unfunded deferred compensation plan for certain key management
personnel. Under this plan, participating employees may defer
compensation, which will entitle them to receive certain payments upon
retirement, death, or disability. The plan provides for payments for
up to fifteen years commencing upon retirement and reduced benefits upon early
retirement, disability, or termination of employment. The participating employee
may elect to receive payments over periods not to exceed fifteen years. At
December 31, 2008 and 2007, our aggregate payment obligations under this plan
totaled $2.6 million and $2.2 million, respectively.
Off
Balance Sheet Arrangements
We make commitments
to extend credit in the normal course of business to meet the financing needs of
our customers. For additional information, see Note 18 to the
Consolidated Financial Statements in Item 8 below.
Commitments
The following is a
summary of our contractual commitments as of December 31, 2008.
|
Table
14
|
Contractual
Obligations at December 31, 2008
|
|
Payments due
by period
|
||||||||||||||||||||
|
(Dollars in
thousands)
|
<1
year
|
1-3
years
|
4-5
years
|
>5
years
|
Total
|
|||||||||||||||
|
Operating
leases
|
$ | 2,160 | $ | 3,497 | $ | 2,836 | $ | 11,565 | $ | 20,058 | ||||||||||
|
Federal Home
Loan Bank Borrowings
|
36,800 | --- | 20,000 | --- | 56,800 | |||||||||||||||
|
Subordinated
debenture
|
--- | --- | --- | 5,000 | 5,000 | |||||||||||||||
|
Total
|
$ | 38,960 | $ | 3,497 | $ | 22,836 | $ | 16,565 | $ | 81,858 | ||||||||||
The contract amount
of loan commitments not reflected on the Consolidated Statement of Condition was
$255.9 million and $224.5 million at December 31, 2008 and 2007,
respectively.
As permitted or
required under California law and to the maximum extent allowable under that
law, we have certain obligations to indemnify our current and former officers
and directors for certain events or occurrences while the officer or director
is, or was serving, at our request in such capacity. These indemnification
obligations are valid as long as the director or officer acted in good faith and
in a manner the person reasonably believed to be in, or not opposed to, the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The maximum potential amount of future payments we could be
required to make under these indemnification obligations is unlimited; however,
we have a director and officer insurance policy that mitigates our exposure and
enables us to recover a portion of any future amounts paid. We
believe the estimated fair value of these indemnification obligations is
minimal.
Capital Adequacy
As discussed in
Note 17 to the Consolidated Financial Statements, the Bank’s capital ratios are
above regulatory guidelines to be considered "well capitalized" and Bancorp’s
ratios exceed the required minimum ratios for capital adequacy
purposes. The Bank’s total risk-based capital ratio increased from
11.61% at December 31, 2007, to 13.95% at December 31, 2008, and Bancorp’s total
risk-based capital ratio increased from 12.06% at December 31, 2007, to 14.08%
at December 31, 2008. The increases in the risk-based capital ratio
are due primarily to a $28.0 million injection in capital we received through
TCPP, which qualifies as Tier 1 Capital. Our capital ratios will be reduced if
we repurchase the preferred stock from the U.S. Treasury. See Note 10 to the
Consolidated Financial Statements for additional information.
In October 2006, we
received approval from the California Department of Financial Institutions
(“DFI”) and the FDIC to buy back up to 10%, or approximately 545,884 of the
Bank’s 5,458,838 then-outstanding shares, not to exceed $15
million. The repurchase program allowed us to purchase common shares
for a period of approximately twelve months from the approval date in the open
market or in privately negotiated transactions. In 2006 we
repurchased 115,625 shares at prices ranging from $32.43 to $36.25 for a total
cost of $4.0 million. In 2007 through February 28, we purchased an
additional 289,692 shares at prices ranging from $36.05 to $39.10 for a total
cost of $11.0 million, thereby concluding this share repurchase
program.
In November 2007
our Board of Directors approved an additional plan to repurchase common shares
of Bancorp up to $5 million. No regulatory approval was required for
this repurchase plan as we were exempt under the provisions of Regulation Y of
the Federal Reserve Board. In November and December 2007, we repurchased a total
of 51,732 shares at an average price of $29.96 for a total cost of $1.5
million. During the first nine months of 2008, we 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 repurchase plan was discontinued to
preserve capital during a time of extreme economic turbulence.
For discussion of
dividends and share repurchases, see Note 9 to the Consolidated Financial
Statements.
Liquidity
The goal of
liquidity management is to provide adequate funds to meet both loan demand and
unexpected deposit withdrawals. We accomplish this goal by
maintaining an appropriate level of liquid assets, and formal lines of credit
with the FHLB and FRB of San Francisco and correspondent banks that enable us to
borrow funds as needed. Our Asset/Liability Management Committee
(“ALCO”), which is comprised of certain directors of the Bank, is responsible
for establishing and monitoring our liquidity targets and
strategies.
Management
regularly adjusts our investments in liquid assets based upon our assessment of
expected loan demand, expected deposit flows, yields available on
interest-earning securities and the objectives of our asset/liability management
program. ALCO has developed a contingency plan should liquidity drop
unexpectedly below internal requirements.
We obtain funds
from the repayment and maturity of loans as well as deposit inflows, investment
security maturities and paydowns, Federal funds purchased, FHLB advances, and
other borrowings. Our 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 and
preferred stockholders.
We must retain and
attract new deposits, which depends upon the variety and effectiveness of our
customer account products, service and convenience, and rates paid to customers,
as well as our financial strength. Any long-term decline in retail deposit
funding would adversely impact our liquidity. Management anticipates that
Federal funds purchased and FHLB advances will continue to be important sources
of funding in the future, and we expect to post adequate collateral for such
funding requirements. A decline in Bancorp’s or the Bank’s credit
worthiness would adversely affect our ability to borrow and/or the related
borrowing costs, thus impacting our liquidity.
As presented in the
accompanying audited consolidated statements of cash flows, the sources of
liquidity vary between periods. Consolidated cash and cash
equivalents at December 31, 2008 totaled $24.9 million. The primary
sources of funds during 2008 were $56.8 million in Federal funds purchased and
FHLB borrowings, $38.6 million in the maturities and paydowns of securities
available for sale, $28 million net proceeds from the issuance of preferred
stock and the related warrants to the U.S. Treasury, $21.5 million from the
proceeds of sale of securities, $21.5 million net cash provided by operating
activities and $17.6 million increase in deposits. The primary uses
of funds were $165.5 million in loan originations (net of principal
collections), and $63.3 million investment securities purchases. The
sources and uses differ from 2007 because the proceeds from the sale of our
indirect auto portfolio of $76 million enhanced our liquidity in
2007.
We anticipate that
we will be in a borrowing position in 2009. If we are unable to attract deposits
in this time of economic uncertainty and competition for deposits in the
marketplace intensifies, our reliance on borrowings will increase. In addition,
if we repurchase our preferred stock from the U.S. Treasury, we may fund the
repurchase through additional borrowings, thus negatively impacting our
liquidity. We will monitor our lending activity to ensure our liquidity position
is not jeopardized.
At December 31,
2008, our cash and cash equivalents and unpledged securities maturing within one
year totaled $25.7 million. The remainder of the unpledged available for sale
securities portfolio of $72.3 million provides additional liquidity. Taken
together, these liquid assets equaled 9.4% of our assets at December 31, 2008,
compared to 16.2% at December 31, 2007. The decreased liquidity in 2008 was
primarily due to loan growth exceeding deposit growth. Since our receipt of the
U.S. Treasury’s $28 million TCPP funds on December 5, 2008, we have increased
net loans by $27.1 million through year end.
We anticipate that
cash and cash equivalents on hand and our sources of funds will provide adequate
liquidity for our operating, investing and financing needs and our regulatory
liquidity requirements for the foreseeable future. Management monitors our
liquidity position daily, balancing loan funding/payments with changes in
deposit activity and overnight investments. Our emphasis on local deposits
combined with our 12.0% equity to assets ratio, provides a very stable funding
base. In addition to cash and cash equivalents, we have substantial additional
borrowing capacity including unsecured lines of credit totaling $75.0 million
with correspondent banks and a $2.9 million line of credit with the FRB to
borrow overnight, which were not drawn upon at December 31, 2008. The Bank is a
member of the FHLB and has a line of credit (secured under terms of a blanket
collateral agreement by a pledge of certain assets) for advances of $195.8
million, of which $139.0 million was available at December 31, 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 0.05% to 3.31% in 2008. Borrowings under the
line of credit are limited to eligible collateral.
The contract amount
of loan commitments not reflected on the Consolidated Statement of Condition was
$255.9 million at December 31, 2008 at rates ranging from 2.25% to
8.00%. This amount included $133.7 million under commercial lines of
credit (these commitments are contingent upon customers maintaining specific
credit standards), $76.3 million under revolving home equity lines, $34.9
million under undisbursed construction loans, $4.0 million under standby letters
of credit, and a remaining $7.0 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, $118.9 million of time deposits will mature. We
expect these funds to be replaced with new time, money market or savings
accounts.
The primary source
of funds for Bancorp is dividends from the Bank and in 2008, proceeds from the
U.S. Treasury through the issuance of preferred stock. The primary
uses of funds are stockholder dividends, investment in our bank subsidiary,
stock repurchases (prior to the discontinuation of the stock repurchase program
in September 2008) and ordinary operating expenses. We anticipate
that there will be sufficient earnings at the Bank level to provide dividends to
Bancorp to meet its funding requirements for the foreseeable future.
Distribution from the Bank to Bancorp is subject to regulatory approval as
discussed in the section captioned “Bank Regulation” in Item 1 above and in Note
9 to the Consolidated Financial Statements in Item 8.
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Our most
significant form of market risk is interest rate risk. The risk is inherent in
our deposit and lending activities. Management, together with ALCO,
has sought to manage rate sensitivity and maturities of assets and liabilities
to minimize the exposure of our 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 our net interest margin.
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.
Activities in asset
and liability management include, but are not limited to, lending, borrowing,
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 Consolidated 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. We use simulation models to
forecast NII and capital.
Exposure to
interest rate risk is reviewed at least quarterly by the ALCO and the Board of
Directors. They utilize interest rate sensitivity simulation models as a tool
for achieving these objectives and for developing ways in which to improve
profitability. A simplified statement of condition is prepared on a quarterly
basis as a starting point, using as inputs, actual loans, investments,
borrowings and deposits. If potential changes to net equity value and net
interest income resulting from hypothetical interest changes are not within the
limits established by the Board of Directors, Management may adjust the asset
and liability mix to bring interest rate risk within approved
limits.
In the following
simulation of NII and capital under various interest rate scenarios, the
simplified statement of condition is processed against three interest rate
change scenarios. In addition to a flat rate scenario, which assumes interest
rates are unchanged, the scenarios include three 100 basis point increases. As
the Federal funds target rate at December 31, 2008 was already at its historic
low of 0-0.25%, there cannot be further reductions in the target rate.
Therefore, a reduction in rate scenario is not considered in the following table
at December 31, 2008. Each of these scenarios assumes that the change
in interest rates is immediate and interest rates remain at the new
levels.
Table 15 summarizes
the effect on NII and capital due to changing interest rates as measured against
the flat rate scenario.
|
Table
15
|
Effect
of Interest Rate Change on Net Interest Income and Capital at December 31,
2008
|
|
Changes in
Interest
|
Estimated
change in NII
|
Estimated
change in capital
|
|
Rates (in
basis points)
|
(as percent
of NII)
|
(as percent
of capital)
|
|
up
300
|
7.7%
|
3.4%
|
|
up
200
|
5.6%
|
2.5%
|
|
up
100
|
1.6%
|
1.6%
|
|
unchanged
|
---
|
---
|
The above table
estimates the impact of interest rate changes. The estimated changes are within
our policy guidelines established by ALCO. The table indicates that at December
31, 2008, we were asset sensitive in a rising interest rate environment. We have
mitigated the earnings sensitivity somewhat through the procurement of fixed
rate borrowings.
As with any
simulation model or other method of measuring interest rate risk, certain
limitations are inherent in the process. For example, although certain of our
assets and liabilities may have similar maturities or repricing time frames,
they may react differently to changes in market interest rates. In addition, the
changes in interest rates on certain categories of either our assets or
liabilities may precede or lag changes in market interest rates.
Also, the actual
rates and timing of prepayments on loans and investment securities could vary
significantly from the assumptions used in the various scenarios. Further,
changes in U.S. Treasury rates accompanied by a change in the shape of the yield
curve could produce different results from those presented in the table.
Accordingly, the results presented should not be relied upon as indicative of
actual results in the event of changing market interest rates.
Interest rate
sensitivity is a function of the repricing characteristics of our assets and
liabilities. One aspect is the time frame within which the interest earning
assets and interest bearing liabilities are subject to change in interest rates
at repricing or maturity. An analysis of the repricing time frames is called a
"gap" analysis because it shows the gap between the amounts of assets and
liabilities repricing in each of several periods of time. Another aspect is the
relative magnitude of the repricing for each category of interest earning asset
and interest bearing liability given various changes in market rates. Gap
analysis gives no indication of the relative magnitude of repricing. Interest
rate sensitivity management focuses on the maturity of assets and liabilities
and their repricing during periods of change in market rates. Interest rate
sensitivity gaps are calculated as the difference between the amounts of assets
and liabilities that are subject to repricing during various time
periods.
Table 16 shows our
repricing gaps as of December 31, 2008. Due to the limitations of gap
analysis, as described above, we do not generally use it in managing interest
rate risk. Instead we rely on the more sophisticated simulation model described
above as its primary tool in measuring and managing interest rate
risk.
|
Table
16
|
Interest
Rate Sensitivity
|
| 1-30 | 31-90 | 91-180 | 181-365 |
Over
|
||||||||||||||||||||
|
(Dollars in
thousands)
|
Days
|
Days
|
Days
|
Days
|
one
year
|
Total
|
||||||||||||||||||
|
At December
31, 2008
|
||||||||||||||||||||||||
|
Interest
Earning Assets
|
||||||||||||||||||||||||
|
Investment
securities
|
$ | 206 | $ | --- | $ | 727 | $ | --- | $ | 102,577 | $ | 103,510 | ||||||||||||
|
Loans
|
262,391 | 14,295 | 31,621 | 17,474 | 564,763 | 890,544 | ||||||||||||||||||
|
Total
|
262,597 | 14,295 | 32,348 | 17,474 | 667,340 | 994,054 | ||||||||||||||||||
|
Interest
Bearing Liabilities
|
||||||||||||||||||||||||
|
Transaction
and savings deposits
|
522,719 | --- | --- | --- | --- | 522,719 | ||||||||||||||||||
|
Other
borrowings
|
21,800 | --- | --- | --- | 40,000 | 61,800 | ||||||||||||||||||
|
Time deposits
less than $100,000
|
6,210 | 7,855 | 8,220 | 9,817 | 4,966 | 37,068 | ||||||||||||||||||
|
Time deposits
$100,000 or more
|
22,194 | 29,213 | 17,921 | 17,421 | 4,391 | 91,140 | ||||||||||||||||||
|
Total
|
572,923 | 37,068 | 26,141 | 27,238 | 49,357 | 712,727 | ||||||||||||||||||
|
Sensitivity
for period
|
(310,326 | ) | (22,773 | ) | 6,207 | (9,764 | ) | 617,983 | 281,327 | |||||||||||||||
|
Sensitivity -
cumulative
|
$ | (310,326 | ) | $ | (333,099 | ) | $ | (326,892 | ) | $ | (336,656 | ) | $ | 281,327 | ||||||||||
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Shareholders
of
Bank of Marin Bancorp
We have audited the
accompanying statement of condition of Bank of Marin Bancorp and subsidiary,
(the Company) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, changes in stockholders’ equity and cash
flows for each of the years in the three year period ended December 31,
2008. We have also audited Bank of Marin Bancorp’s internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Bank of Marin Bancorp’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audits.
We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. An audit of internal
control over financial reporting includes obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinion.
A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of the
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the
2008 consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Bank of Marin Bancorp
and subsidiary as of December 31, 2008 and 2007 and the results of their
operations and cash flows for each of the three years in the three year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion
Bank of Marin Bancorp maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control – Integrated Framework issued by the
COSO.
As discussed in
Note 16 to the consolidated financial statements, effective January 1, 2007, the
Company adopted the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements and SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.
/s/ Moss Adams
LLP
Stockton,
California
March 16,
2009
504 Redwood Blvd,
Suite 100
Novato, CA
94947
March 16,
2009
To the
Shareholders:
Management’s
Report on Internal Control over Financial Reporting and Compliance with
Applicable Laws and Regulations
Management of the
Bank of Marin Bancorp (“Bancorp”) is responsible for preparing the Bancorp’s
annual financial statements. Management is also responsible for establishing and
maintaining internal control over financial reporting in conformity with
generally accepted accounting principles and for complying with applicable laws
and regulations relating to safety and soundness. Bancorp’s internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
There are inherent
limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over
time.
Management assessed
Bancorp’s internal control over financial reporting in conformity with both
generally accepted accounting principles and applicable regulatory reporting
requirements as of December 31, 2008. The assessment was based on criteria for
effective internal control over financial reporting described in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, Management believes that, as of
December 31, 2008, Bancorp maintained effective internal control over financial
reporting presented in conformity with both generally accepted accounting
principles and applicable regulatory reporting requirements in all material
respects. Management also believes that Bancorp complied with applicable laws
and regulations in all material respects during 2008.
Management’s
assessment of the effectiveness of Bancorp’s internal control over financial
reporting as of December 31, 2008 has been audited by Moss Adams LLP, an
independent registered public accounting firm, as stated in their report which
appears on the previous page.
|
/s/ Russell A.
Colombo
|
|
|
Russell A.
Colombo, President and Chief Executive Officer
|
|
|
/s/ Christina J.
Cook
|
|
|
Christina J.
Cook, EVP and Chief Financial Officer
|
|
CONSOLIDATED
STATEMENT OF CONDITION
at
December 31, 2008 and
2007
|
|
(in
thousands, except share data)
|
December 31,
2008
|
December 31,
2007
|
||||||
|
Assets
|
||||||||
|
Cash and due
from banks
|
$ | 24,926 | $ | 28,765 | ||||
|
Fed funds
sold
|
--- | 47,500 | ||||||
|
Cash and cash
equivalents
|
24,926 | 76,265 | ||||||
|
|
||||||||
|
Investment
securities
|
||||||||
|
Held to
maturity, at amortized cost
|
23,558 | 13,182 | ||||||
|
Available for
sale (at fair market value, amortized cost $79,284 and $87,450 at December
31, 2008 and 2007, respectively)
|
79,952 | 86,989 | ||||||
|
Total
investment securities
|
103,510 | 100,171 | ||||||
|
Loans, net of
allowance for loan losses of $9,950 and $7,575 at December 31,
2008 and 2007, respectively
|
880,594 | 717,303 | ||||||
|
Bank premises
and equipment, net
|
8,292 | 7,821 | ||||||
|
Interest
receivable and other assets
|
32,235 | 32,341 | ||||||
|
Total
assets
|
$ | 1,049,557 | $ | 933,901 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Non-interest
bearing
|
$ | 201,363 | $ | 220,272 | ||||
|
Interest
bearing
|
||||||||
|
Transaction
accounts
|
82,223 | 110,174 | ||||||
|
Savings and
money market
|
440,496 | 421,255 | ||||||
|
CDARS®
reciprocal time
|
42,892 | --- | ||||||
|
Other
Time
|
85,316 | 82,941 | ||||||
|
Total
deposits
|
852,290 | 834,642 | ||||||
|
Federal funds
purchased and Federal Home Loan Bank borrowings
|
56,800 | --- | ||||||
|
Subordinated
debenture
|
5,000 | 5,000 | ||||||
|
Interest
payable and other liabilities
|
9,921 | 6,485 | ||||||
|
Total
liabilities
|
924,011 | 846,127 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Preferred
stock, no par value, $1,000 per share liquidation preference
Authorized - 5,000,000 shares; Issued and outstanding - 28,000
shares and none at December 31, 2008 and 2007,
respectively
|
27,055 | --- | ||||||
|
Common stock,
no par value Authorized - 15,000,000 shares Issued and outstanding -
5,146,798 shares and 5,122,971 at December 31, 2008 and 2007,
respectively
|
51,965 | 51,059 | ||||||
|
Retained
earnings
|
46,138 | 36,983 | ||||||
|
Accumulated other
comprehensive income (loss), net
|
388 | (268 | ) | |||||
|
Total
stockholders' equity
|
125,546 | 87,774 | ||||||
|
|
||||||||
|
Total
liabilities and stockholders' equity
|
$ | 1,049,557 | $ | 933,901 | ||||
The accompanying
notes are an integral part of these consolidated financial
statements.
|
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
for
the fiscal years ended December 31, 2008, 2007 and
2006
|
|
(in
thousands, except per share amounts)
|
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
|||||||||
|
Interest
income
|
||||||||||||
|
Interest and
fees on loans held in portfolio
|
$ | 54,475 | $ | 52,668 | $ | 53,447 | ||||||
|
Interest on
auto loans held for sale
|
--- | 2,062 | --- | |||||||||
|
Interest on
investment securities
|
||||||||||||
|
U.S. Treasury
securities
|
--- | 8 | 76 | |||||||||
|
Securities of
U.S. Government agencies
|
3,555 | 3,759 | 3,707 | |||||||||
|
Obligations
of state and political subdivisions (tax exempt)
|
735 | 479 | 558 | |||||||||
|
Corporate
debt securities and other
|
273 | 656 | 297 | |||||||||
|
Interest on
Federal funds sold
|
138 | 2,209 | 226 | |||||||||
|
Total
interest income
|
59,176 | 61,841 | 58,311 | |||||||||
|
Interest
expense
|
||||||||||||
|
Interest on
interest bearing transaction accounts
|
344 | 301 | 293 | |||||||||
|
Interest on
savings and money market deposits
|
6,910 | 14,161 | 10,979 | |||||||||
|
Interest on
CDARS® reciprocal time deposits
|
200 | --- | --- | |||||||||
|
Interest on
other time deposits
|
2,466 | 3,465 | 3,837 | |||||||||
|
Interest on
borrowed funds
|
897 | 1,172 | 1,469 | |||||||||
|
Total
interest expense
|
10,817 | 19,099 | 16,578 | |||||||||
|
Net interest
income
|
48,359 | 42,742 | 41,733 | |||||||||
|
Provision for
loan losses
|
5,010 | 685 | 1,266 | |||||||||
|
Net interest
income after provision for loan losses
|
43,349 | 42,057 | 40,467 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Service
charges on deposit accounts
|
1,654 | 1,251 | 1,007 | |||||||||
|
Wealth
Management Services
|
1,292 | 1,229 | 1,067 | |||||||||
|
Net gain on
indirect auto and Visa® portfolios
|
--- | 1,097 | --- | |||||||||
|
Net gain on
redemption of shares in Visa, Inc.
|
457 | --- | --- | |||||||||
|
Other
income
|
1,953 | 2,141 | 1,898 | |||||||||
|
Total
non-interest income
|
5,356 | 5,718 | 3,972 | |||||||||
|
Non-interest
expense
|
||||||||||||
|
Salaries and
related benefits
|
16,097 | 15,900 | 15,490 | |||||||||
|
Occupancy and
equipment
|
3,202 | 2,871 | 2,624 | |||||||||
|
Depreciation
and amortization
|
1,340 | 1,246 | 998 | |||||||||
|
Data
processing
|
1,825 | 1,657 | 1,537 | |||||||||
|
Professional
services
|
1,600 | 1,681 | 1,269 | |||||||||
|
Other
expense
|
4,613 | 4,318 | 3,973 | |||||||||
|
Total
non-interest expense
|
28,677 | 27,673 | 25,891 | |||||||||
|
Income before
provision for income taxes
|
20,028 | 20,102 | 18,548 | |||||||||
|
Provision for
income taxes
|
7,878 | 7,778 | 6,665 | |||||||||
|
Net
income
|
$ | 12,150 | $ | 12,324 | $ | 11,883 | ||||||
|
Preferred
stock dividends and accretion
|
$ | (113 | ) | $ | --- | $ | --- | |||||
|
Net income
available to common shareholders
|
$ | 12,037 | $ | 12,324 | $ | 11,883 | ||||||
|
Net income
per common share:
|
||||||||||||
|
Basic
|
$ | 2.34 | $ | 2.38 | $ | 2.21 | ||||||
|
Diluted
|
$ | 2.31 | $ | 2.31 | $ | 2.11 | ||||||
|
Weighted
average shares used to compute net income per common
share:
|
||||||||||||
|
Basic
|
5,135 | 5,187 | 5,385 | |||||||||
|
Diluted
|
5,217 | 5,330 | 5,639 | |||||||||
|
Dividends
declared per common share
|
$ | 0.56 | $ | 0.51 | $ | 0.46 | ||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
|
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
for
the fiscal years ended December 31, 2008, 2007 and
2006
|
|
Accumulated
Other
|
||||||||||||||||||||||||
|
Comprehensive
|
||||||||||||||||||||||||
|
Common
Stock
|
Retained
|
Income
(Loss),
|
||||||||||||||||||||||
|
(dollars in
thousands)
|
Preferred Stock
|
Shares
|
Amount
|
Earnings
|
Net of
Taxes
|
Total
|
||||||||||||||||||
|
Balance at
December 31, 2005
|
$ | --- | 4,960,248 | $ | 50,957 | $ | 28,030 | $ | (766 | ) | $ | 78,221 | ||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
--- | --- | --- | 11,883 | --- | 11,883 | ||||||||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||
|
Net change in
unrealized loss on available for sale securities (net of tax effect of
$128)
|
--- | --- | --- | --- | 176 | 176 | ||||||||||||||||||
|
Comprehensive
income:
|
--- | --- | --- | 11,883 | 176 | 12,059 | ||||||||||||||||||
|
Stock options
exercised
|
--- | 258,207 | 3,307 | --- | --- | 3,307 | ||||||||||||||||||
|
Excess tax
benefit - stock-based compensation
|
--- | --- | 1,394 | --- | --- | 1,394 | ||||||||||||||||||
|
Stock
repurchased, including commission costs
|
--- | (115,625 | ) | (3,968 | ) | --- | --- | (3,968 | ) | |||||||||||||||
|
Stock-based
compensation
|
--- | --- | 555 | --- | --- | 555 | ||||||||||||||||||
|
Stock issued
on 5% dividend declared on April 13
|
--- | 250,658 | 8,678 | (8,705 | ) | --- | (27 | ) | ||||||||||||||||
|
Cash
dividends paid on common stock
|
--- | --- | --- | (2,448 | ) | --- | (2,448 | ) | ||||||||||||||||
|
Stock issued
in payment of director fees
|
--- | 12,928 | 432 | --- | --- | 432 | ||||||||||||||||||
|
Balance at
December 31, 2006
|
--- | 5,366,416 | 61,355 | 28,760 | (590 | ) | 89,525 | |||||||||||||||||
|
Cumulative-effect
adjustment of adoption of SFAS
|
||||||||||||||||||||||||
|
No.159
|
--- | --- | --- | (1,452 | ) | --- | (1,452 | ) | ||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
--- | --- | --- | 12,324 | --- | 12,324 | ||||||||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||
|
Net change in
unrealized gain on available for sale securities (net of tax effect 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
|
--- | --- | 502 | 502 | ||||||||||||||||||||
|
Cash
dividends paid on common stock
|
--- | --- | --- | (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
|
--- | --- | --- | 12,150 | --- | 12,150 | ||||||||||||||||||
|
Other
comprehensive income
|
||||||||||||||||||||||||
|
Net change in
unrealized gain (loss) on available for sale securities (net of tax effect
of $475)
|
--- | --- | --- | --- | 656 | 656 | ||||||||||||||||||
|
Comprehensive
income
|
--- | --- | --- | 12,150 | 656 | 12,806 | ||||||||||||||||||
|
Issuance of
preferred stock
|
27,039 | --- | --- | --- | --- | 27,039 | ||||||||||||||||||
|
Issuance of
common stock warrants
|
--- | --- | 961 | --- | --- | 961 | ||||||||||||||||||
|
Stock options
exercised
|
--- | 95,298 | 1,384 | --- | --- | 1,384 | ||||||||||||||||||
|
Excess tax
benefit - stock-based compensation
|
--- | --- | 380 | --- | --- | 380 | ||||||||||||||||||
|
Stock
repurchased, including commission costs
|
--- | (88,316 | ) | (2,526 | ) | --- | --- | (2,526 | ) | |||||||||||||||
|
Stock issued
under employee stock purchase plan
|
--- | 1,253 | 32 | --- | --- | 32 | ||||||||||||||||||
|
Stock-based
compensation - stock options
|
--- | --- | 404 | --- | --- | 404 | ||||||||||||||||||
|
Restricted
stock granted
|
--- | 6,700 | --- | --- | --- | --- | ||||||||||||||||||
|
Stock-based
compensation - restricted stock
|
--- | --- | 24 | --- | --- | 24 | ||||||||||||||||||
|
Cash
dividends paid on common stock
|
--- | --- | --- | (2,882 | ) | --- | (2,882 | ) | ||||||||||||||||
|
Dividends on
preferred stock
|
--- | --- | --- | (97 | ) | --- | (97 | ) | ||||||||||||||||
|
Accretion of
preferred stock
|
16 | --- | --- | (16 | ) | --- | --- | |||||||||||||||||
|
Stock issued
in payment of director fees
|
--- | 8,892 | 247 | --- | --- | 247 | ||||||||||||||||||
|
Balance at
December 31, 2008
|
$ | 27,055 | 5,146,798 | $ | 51,965 | $ | 46,138 | $ | 388 | 125,546 | ||||||||||||||
The accompanying
notes are an integral part of these consolidated financial
statements.
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
for
the fiscal years ended December 31, 2008, 2007 and
2006
|
|
(in
thousands)
|
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
|||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
income
|
$ | 12,150 | $ | 12,324 | $ | 11,883 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Provision for
loan losses
|
5,010 | 685 | 1,266 | |||||||||
|
Compensation
paid and payable in common stock
|
253 | 258 | 465 | |||||||||
|
Stock-based
compensation expense
|
428 | 502 | 555 | |||||||||
|
Excess tax
benefits from exercised stock options
|
(207 | ) | (535 | ) | (1,394 | ) | ||||||
|
Amortization
and accretion of investment security premiums, net
|
247 | 150 | 487 | |||||||||
|
Loss on sale
of investment securities
|
2 | --- | --- | |||||||||
|
Depreciation
and amortization
|
1,340 | 1,246 | 998 | |||||||||
|
Net gain on
indirect auto and Visa® portfolios
|
--- | (1,097 | ) | --- | ||||||||
|
Net gain on
redemption of shares in Visa, Inc.
|
(457 | ) | --- | --- | ||||||||
|
Net loss on
disposition of furniture and equipment
|
14 | --- | 50 | |||||||||
|
Net change in
operating assets and liabilities:
|
||||||||||||
|
Interest
receivable
|
4 | 106 | (257 | ) | ||||||||
|
Interest
payable
|
123 | (1 | ) | 292 | ||||||||
|
Deferred rent
and other rent-related expenses
|
152 | 108 | 164 | |||||||||
|
Other
assets
|
1,847 | (3,412 | ) | (1,870 | ) | |||||||
|
Other
liabilities
|
597 | 1,221 | 1,060 | |||||||||
|
Total
adjustments
|
9,353 | (769 | ) | 1,816 | ||||||||
|
Net cash
provided by operating activities
|
21,503 | 11,555 | 13,699 | |||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchase of
securities held-to-maturity
|
(12,621 | ) | (2,056 | ) | (1,087 | ) | ||||||
|
Purchase of
securities available-for-sale
|
(50,677 | ) | (135,767 | ) | (10,471 | ) | ||||||
|
Proceeds from
paydowns/maturity of:
|
||||||||||||
|
Securities
held-to-maturity
|
1,125 | 2,925 | 8,663 | |||||||||
|
Securities
available-for-sale
|
38,683 | 24,505 | 22,011 | |||||||||
|
Proceeds from
sale of securities
|
21,489 | 100,000 | --- | |||||||||
|
Proceeds from
sale of indirect auto and Visa loans
|
--- | 78,599 | --- | |||||||||
|
Loans
originated and principal collected, net
|
(165,460 | ) | (86,234 | ) | (33,475 | ) | ||||||
|
Purchase of
bank owned life insurance policies
|
(2,219 | ) | --- | (1,159 | ) | |||||||
|
Proceeds from
disposition of assets
|
--- | --- | 12 | |||||||||
|
Additions to
premises and equipment
|
(1,825 | ) | (621 | ) | (3,855 | ) | ||||||
|
Net cash used
in investing activities
|
(171,505 | ) | (18,649 | ) | (19,361 | ) | ||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Net increase
in deposits
|
17,648 | 97,945 | 15,525 | |||||||||
|
Proceeds from
issuance of preferred stock
|
27,039 | --- | --- | |||||||||
|
Proceeds from
issuance of warrants
|
961 | --- | --- | |||||||||
|
Proceeds from
stock options exercised
|
1,384 | 1,620 | 3,307 | |||||||||
|
Net increase
(decrease) in Federal Funds purchased and Federal Home Loan Bank
borrowings
|
56,800 | (39,400 | ) | 8,400 | ||||||||
|
Common stock
repurchased
|
(2,526 | ) | (13,483 | ) | (3,968 | ) | ||||||
|
Cash
dividends paid on common stock
|
(2,882 | ) | (2,649 | ) | (2,448 | ) | ||||||
|
Stock issued
under employee stock purchase plan
|
32 | 8 | --- | |||||||||
|
Cash paid for
fractional shares
|
--- | --- | (27 | ) | ||||||||
|
Excess tax
benefits from exercised stock options
|
207 | 535 | 1,394 | |||||||||
|
Net cash
provided by financing activities
|
98,663 | 44,576 | 22,183 | |||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(51,339 | ) | 37,482 | 16,521 | ||||||||
|
Cash and cash
equivalents at beginning of period
|
76,265 | 38,783 | 22,262 | |||||||||
|
Cash and cash
equivalents at end of period
|
$ | 24,926 | $ | 76,265 | $ | 38,783 | ||||||
|
Supplemental
disclosure of cash flow information:
|
||||||||||||
|
Cash paid for
interest
|
$ | 10,694 | $ | 19,101 | $ | 16,285 | ||||||
|
Cash paid for
income taxes
|
$ | 8,965 | $ | 6,295 | $ | 6,075 | ||||||
Non-Cash
Transactions: The fiscal year ended December 31, 2008 reflects non-cash
financing items of $97 thousand dividend payable to preferred stockholder and
$16 thousand accretion of preferred stock. Non-cash financing items also
included $247 thousand, $328 thousand and $432 thousand of common stock issued
in payment of director fees for the fiscal years ended December 31, 2008, 2007,
and 2006, respectively. The fiscal year ended December 31, 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 fiscal
year ended December 31, 2006 included non-cash increases to both fixed assets
and other liabilities representing tenant improvements paid for by the landlord
for the Bank's administrative facility totaling $617 thousand. This amount is
amortized over the fifteen-year term of the lease.
The accompanying
notes are an integral part of these 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”). On the Effective Date, a tax-free
exchange was completed whereby each outstanding share of the Bank was converted
into one share of Bancorp and the Bank became the sole 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 the Bank only. The information is comparable for all periods as the
sole subsidiary of Bancorp is the Bank.
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 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.
Note
1: Summary of Significant Accounting Policies
Nature of
Operations: Bancorp, through its sole subsidiary, the Bank (a
California state-chartered bank), provides a wide range of financial services to
customers, who are predominantly professionals, small and middle-market
businesses, and individuals who work and/or reside in Marin, San Francisco and
southern Sonoma counties. The Bank operates nine branches in Marin County and
three in southern Sonoma County, as well as a loan production office in San
Francisco. Our accounting and reporting policies conform to generally accepted
accounting principles and general practice within the banking
industry. A summary of our significant policies follows.
Investment Securities are
classified as "held to maturity," "trading securities" or "available for
sale." Investments classified as held to maturity are those that we
have the ability and intent to hold until maturity and are reported at cost,
adjusted for the amortization or accretion of premiums or
discounts. Investments held for resale in anticipation of short-term
market movements are classified as trading securities and are reported at fair
value, with unrealized gains and losses included in
earnings. Investments that are neither held to maturity or trading
are classified as available for sale and are reported at fair value, with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of comprehensive income and included in stockholders' equity until
realized. For discussion of our methodology in determining fair
value, see Note 16.
At each financial
statement date, Management assesses whether declines in the fair value of
held-to-maturity and available-for-sale securities below their costs are deemed
to be other-than-temporary. Management considers, among other things, (i) the
length of time and the extent to which the fair value has been less than cost,
(ii) the financial condition and near-term prospects of the issuer, and (iii)
our intent and ability to retain the investment for a period of time sufficient
to allow for any anticipated recovery in fair value. Other-than-
temporary impairment results in a charge to earnings and the corresponding
establishment of a new cost basis for the security. Premiums and
discounts are amortized or accreted over the life of the related security as an
adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned. Realized gains and losses
for securities are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Loans are reported at the
principal amount outstanding net of deferred fees and the allowance for loan
losses. Interest income is accrued daily using the simple interest
method. Loans are placed on non-accrual status when Management
believes that there is serious doubt as to the collection of principal or
interest, generally when they become contractually past due by 90 days or more
with respect to principal or interest. When loans are placed on
non-accrual status, any accrued but uncollected interest is reversed from
current-period interest income and additional income is recorded only after the
loan is brought current or after all principal and past due interest has been
collected. Loan origination fees and commitment fees, offset by certain direct
loan origination costs, are deferred and amortized as yield adjustments over the
contractual lives of the related loans.
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 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, current
economic conditions, 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, our past loan loss experience and other factors.
The allowance for loan losses is based on estimates and ultimate losses may vary
from current estimates.
Management’s method
for assessing the appropriateness of the allowance includes specific allowances
for identified problem loans, an allowance factor for pools of credits and
allowances for changing environmental factors (e.g., portfolio trends,
concentration of credit, growth, economic factors, etc.). Allowances
for identified problem loans are based on specific analysis of individual
credits. Loss estimation factors for loan pools are based on analysis
of local economic factors, current loan portfolio quality, historical loss
experience and trends applicable to each loan pool. Allowances for
changing environmental factors are Management's best estimate of the probable
impact these changes have had on the loan portfolio as a whole.
Management
considers a loan to be impaired when it is probable we will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. For loans determined to be impaired, the extent of the
impairment is measured based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or based on the loan's
observable market price or the fair value of the collateral, if the loan is
collateral dependent. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through an
allocation of the allowance for loan losses. Our Asset/Liability
Management Committee (“ALCO”) reviews the adequacy of the allowance for loan
losses at least quarterly, to include consideration of the relative risks in the
portfolio and current economic conditions. The allowance is adjusted
based on that review if, in the judgment of the ALCO and Management, changes are
warranted.
Transfers of Financial
Assets: We have entered into certain participation agreements with other
organizations. We account for these transfers of financial assets as sales when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Bank, (2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain effective control over
the transferred assets through either (a) an agreement to repurchase them before
their maturity or (b) the ability to otherwise cause the holder to return
specific assets. No gain or loss has been recognized by us on the sale of these
participation interests.
Premises and Equipment
consist of leasehold improvements, furniture, fixtures and equipment and are
stated at cost, less accumulated depreciation and amortization, which are
calculated on a straight-line basis over the estimated useful life of the
property or the term of the lease (if less). Furniture and fixtures
are depreciated over 8 years and equipment is generally depreciated over 3 to 20
years. Leasehold improvements are amortized over the terms of the
leases or their estimated useful lives, whichever is shorter. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation or amortization are removed from the accounts and any resulting
gain or loss is recognized in income for the period. The cost of
maintenance and repairs is charged to expense as incurred.
Employee Stock Ownership Plan
(“ESOP”) and Related Debt: We account for shares acquired by
its ESOP in accordance with the guidelines established by the American Institute
of Certified Public Accountants Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans. As we recognize compensation cost for the ESOP,
these funds become committed for the purchase of Bancorp’s common shares into
the plan. To the extent that the fair value of Bancorp’s ESOP
shares committed to be released differ from the cost of those shares, the
differential is charged or credited to equity. The ESOP may be
externally leveraged and, as such, the ESOP debt is recorded as a liability and
interest expense is recognized on such debt. The ESOP shares not yet
committed to be released are accounted for as a reduction in stockholders'
equity.
Income Taxes reported in the
financial statements are computed based on an asset and liability
approach. We recognize the amount of taxes payable or refundable for
the current year, and deferred tax assets and liabilities for the future tax
consequences that have been recognized in the financial statement or tax
returns. The measurement of tax assets and liabilities is based on
the provisions of enacted tax laws. Bancorp files consolidated federal and
combined state income tax returns.
Cash and Cash Equivalents
include cash, due from banks and Federal funds sold. $610 thousand
and $851 thousand of cash and cash equivalents were pledged to collateralize
interest rate swaps at December 31, 2008 and 2007, respectively. In addition, at
December 31, 2008, our Federal Home Loan Bank (“FHLB”) line of credit was
secured under terms of a blanket collateral agreement by a pledge of certain
qualifying collateral, including cash and cash equivalents. See Note 8 for
further details.
Earnings per share are based
upon the weighted average number of common shares outstanding during each
year. The following table shows: 1) weighted average basic shares, 2)
potential common shares related to stock options, nonvested restricted stock,
and stock warrants, and 3) weighted average diluted shares. Net income available
to common stockholders is calculated as net income reduced by dividends
accumulated on preferred stock and amortization of discounts on the preferred
stock. Basic earnings per share are calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during each period. Diluted earnings per share are based
upon the weighted average number of common shares and potential common shares
outstanding during each period.
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted
average basic shares outstanding
|
5,135 | 5,187 | 5,385 | |||||||||
|
Add:
Potential common shares related to stock options and nonvested restricted
stock
|
81 | 143 | 254 | |||||||||
|
Add:
Potential common shares related to warrants
|
1 | --- | --- | |||||||||
|
Weighted
average diluted shares outstanding
|
5,217 | 5,330 | 5,639 | |||||||||
|
Anti-dilutive
shares not included in the calculation of diluted earnings per
share
|
248 | 80 | 88 | |||||||||
|
Net
income
|
$ | 12,150 | $ | 12,324 | $ | 11,883 | ||||||
|
Preferred
stock dividends and accretion
|
(113 | ) | --- | --- | ||||||||
|
Net income
available to common stockholders
|
$ | 12,037 | $ | 12,324 | $ | 11,883 | ||||||
|
Earnings per
share (basic)
|
$ | 2.34 | $ | 2.38 | $ | 2.21 | ||||||
|
Earnings per
share (diluted)
|
$ | 2.31 | $ | 2.31 | $ | 2.11 | ||||||
Share-Based Compensation: On
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS
No. 123R”), which requires that all share-based payments to employees, including
stock options and restricted stock, be recognized as a stock-based compensation
expense in the income statement based on the grant date fair value of the award
with a corresponding increase in common stock. The fair value, as
defined in SFAS No.123R, is amortized over the requisite service period, which
is generally the vesting period.
Under SFAS No.
123R, we determine fair value at grant date using the Black-Scholes pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the underlying stock,
the expected dividend yield and the risk-free interest rate over the expected
life of the option. The Black-Scholes option valuation model requires
the input of highly subjective assumptions, including the expected life of the
stock-based award and stock price volatility. The assumptions used
represent Management’s best estimates, but these estimates involve inherent
uncertainties and the application of Management’s judgment. As a result, if
other assumptions had been used, the recorded stock-based compensation expense
could have been materially different from that recorded in its financial
statements. In addition, we are required to estimate the expected
forfeiture rates. If our actual forfeiture rate is materially
different from the estimate, the share-based compensation expense could be
materially different.
We adopted SFAS No.
123R using the modified-prospective-transition method. Under that
method, compensation cost recognized in 2006 includes a) compensation cost for
all share-based option awards granted prior to, but not yet vested as of January
1, 2006 and b) compensation cost for all share-based option awards granted
subsequent to January 1, 2006.
Derivative
Financial Instruments and Hedging Activities:
Fair Value Hedges: All of our interest rate
swap contracts are designated and qualified as fair value hedges. We apply
short-cut hedge accounting for one of our interest rate swap contracts in
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 133”), as amended, as it is
aligned to offset the change in the fair value of the designated fixed-rate
loan. The interest rate swap is carried on the balance sheet at its
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. As a result of interest rate fluctuations, the hedged
fixed-rate loan will gain or lose market value. In this fair value
hedging strategy, this unrealized gain or loss in market value will be recorded
as an adjustment to the hedged loan and offset in other non-interest income.
Under this scenario, the change in fair value of the interest rate swap
perfectly offsets the change in fair value of the loan, resulting in zero impact
to net income.
Certain of our
interest rate swap contracts are accounted for using non-short cut accounting
treatment under SFAS No. 133. The interest rate swaps are closely
aligned to offset the change in the fair value of the designated fixed-rate loan
and are tested for effectiveness on a quarterly basis. 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 interest income. In this fair value
hedging strategy, the unrealized gain or loss due to changes in fair value of
the hedged fixed-rate loan is recorded as an adjustment to the hedged loan and
offset in interest income. Prior to loan funding, the yield
maintenance agreement was carried on the balance sheet in other assets or other
liabilities with the changes in fair value offset in interest
income. The yield maintenance agreement was recognized on the balance
sheet as an asset at its fair value upon loan funding and simultaneous
designation. Since designation, it is amortized using the
effective yield method over the life of the designated loan. The net
effect of the change in fair value of interest rate swaps, the amortization of
yield maintenance agreement and the change in the fair value of the hedged loans
results in an insignificant amount of hedge ineffectiveness recognized in
interest income.
Non-designated Hedges: Both yield maintenance
agreements with net settlement features that meet the definition of a derivative
and the undesignated interest rate swaps used to mitigate the agreement’s change
in value are recorded as assets or liabilities with offsetting gains and losses
recorded directly to interest income. Our forward swap was considered to be a
non-designated hedge prior to its designation in the third quarter of
2007.
Advertising Costs: Advertising costs are
expensed as incurred.
Comprehensive Income for
Bancorp includes net income reported on the statement of operations and changes
in the fair value of available for sale investments, net of related taxes,
reported as a component of stockholders' equity.
Segment Information: Our two
operating segments include the traditional community banking activities provided
through our twelve branches and our Wealth Management Services. The
activities of these two segments are monitored and reported by Management as
separate operating segments. The accounting policies of the segments
are the same as those described in this note. We evaluate segment
performance based on total segment revenue and do not allocate expenses between
the segments. Wealth Management Services revenues were $1,292
thousand, $1,229 thousand and $1,067 thousand in 2008, 2007, and 2006,
respectively, which are included in non-interest income in the statement of
operations. The revenues of the community banking segment are
reflected in all other income lines in the statement of operations.
Use of Estimates: The
preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Recently
Issued Accounting Standards
In January 2009,
the Financial Accounting Standard Board (“FASB”) issued FASB Staff Position
(“FSP”) EITF 99-20-1, Amendments to the Impairment
Guidance of EITF Issue No. 99-20, which amends the impairment guidance in
Emerging Issues Task Force (“EITF”) Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets. FSP
EITF 99-20-1 provides a more consistent determination of whether an
other-than-temporary impairment has occurred. It also retains and emphasizes the
objective of an other-than-temporary impairment assessment and the related
disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and other related guidance. FSP EITF
99-20-1 is effective for interim and annual reporting periods ending after
December 15, 2008, and shall be applied prospectively. Retrospective application
to a prior interim or annual reporting period is not permitted. As we do not
hold beneficial interests, adoption of FSP EITF 99-20-1 did not have an impact
on our financial condition or results of operations.
On October 10,
2008, the FASB issued 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 SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”), 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. FSP FAS 157-3 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 our financial condition or results of
operations.
On June 16, 2008,
the FASB issued FSP 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. Our
presentation, but not the amount, of earnings per share will be affected upon
adoption of FSP EITF 03-6-1 due to our issuance of nonvested restricted common
shares on May 1, 2008. See Note 9 for further
discussion.
In May 2008, the
FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, which 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 became effective on November 15, 2008. SFAS No. 162 has had no
impact on our 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,
which 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, 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, we
expect that upon adoption in the first quarter of 2009, SFAS No. 161 will have
no impact on our 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. We expect SFAS No. 141R would have an impact on our
consolidated financial statements when effective if we acquire another company,
but the specific effects will depend upon the nature, terms and size of the
acquisitions we consummate after the effective date.
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 us after January 1,
2008. At adoption, there was no impact on our financial position or results of
operations.
Note
2: Investment Securities
Our investment
securities portfolio at December 31, 2008 and 2007 consists primarily of U.S.
government agency securities, including mortgage-backed securities (“MBS”) and
collateralized mortgage obligations (“CMOs”) issued or guaranteed by FNMA,
FHLMC, or GNMA. Our 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.
|
December 31,
2008
|
December 31,
2007
|
|||||||||||||||||||||||||||||||
|
Amortized
|
Fair
|
Gross
Unrealized
|
Amortized
|
Fair
|
Gross
Unrealized
|
|||||||||||||||||||||||||||
|
(Dollars in
thousands)
|
Cost
|
Value
|
Gains
|
Losses
|
Cost
|
Value
|
Gains
|
Losses
|
||||||||||||||||||||||||
|
Held
to maturity
|
||||||||||||||||||||||||||||||||
|
Obligations
of state and political subdivisions
|
$ | 23,558 | $ | 23,135 | $ | 373 | $ | (796 | ) | $ | 13,182 | $ | 13,238 | $ | 139 | $ | (83 | ) | ||||||||||||||
|
Available
for sale
|
||||||||||||||||||||||||||||||||
|
Securities of
U. S. government agencies:
|
||||||||||||||||||||||||||||||||
|
MBS
pass-through securities issued by FNMA and FHLMC
|
8,135 | 8,249 | 114 | --- | 8,715 | 8,475 | 5 | (245 | ) | |||||||||||||||||||||||
|
CMOs issued
by FNMA
|
15,289 | 15,468 | 183 | (4 | ) | 17,401 | 17,389 | 71 | (83 | ) | ||||||||||||||||||||||
|
CMOs issued
by FHLMC
|
24,308 | 24,452 | 165 | (21 | ) | 21,721 | 21,480 | --- | (241 | ) | ||||||||||||||||||||||
|
CMOs issued
by GNMA
|
13,160 | 13,341 | 219 | (38 | ) | 4,575 | 4,620 | 45 | --- | |||||||||||||||||||||||
|
Debentures of
government sponsored agencies
|
17,000 | 17,072 | 116 | (44 | ) | 22,551 | 22,551 | 11 | (11 | ) | ||||||||||||||||||||||
|
Corporate
CMOs
|
1,392 | 1,370 | --- | (22 | ) | 2,487 | 2,474 | 4 | (17 | ) | ||||||||||||||||||||||
|
Corporate
debt securities and other
|
--- | --- | --- | --- | 10,000 | 10,000 | --- | --- | ||||||||||||||||||||||||
|
Total
available for sale
|
79,284 | 79,952 | 797 | (129 | ) | 87,450 | 86,989 | 136 | (597 | ) | ||||||||||||||||||||||
|
Total
investment securities
|
$ | 102,842 | $ | 103,087 | $ | 1,170 | $ | (925 | ) | $ | 100,632 | $ | 100,227 | $ | 275 | $ | (680 | ) | ||||||||||||||
The amortized cost
and fair value of investment securities at December 31, 2008 by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because the issuers of the securities may have the right
to call or prepay obligations with or without call or prepayment
penalties.
|
December 31,
2008
|
||||||||||||||||
|
Held to
Maturity
|
Available for
Sale
|
|||||||||||||||
|
(Dollars in
thousands)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
||||||||||||
|
Within one
year
|
$ | 200 | $ | 200 | $ | 740 | $ | 733 | ||||||||
|
After one but
within five years
|
5,203 | 5,370 | 47,285 | 47,912 | ||||||||||||
|
After five
years through ten years
|
5,312 | 5,488 | 26,162 | 26,235 | ||||||||||||
|
After ten
years
|
12,843 | 12,077 | 5,097 | 5,072 | ||||||||||||
|
Total
|
$ | 23,558 | $ | 23,135 | $ | 79,284 | $ | 79,952 | ||||||||
In 2008, we sold
one security due to deterioration of the issuer’s
creditworthiness. The proceeds from the sale totaled $1.0 million and
the transaction resulted in a loss of $2 thousand. Also in 2008, we sold 10,677
shares of Class B common stock of Visa Inc., which was carried at its cost basis
of zero, for $457 thousand resulting in a gain of the same amount. Also see Note
20 for further details. In 2008 and 2007, respectively, we sold $20.0 million
and $100.0 million in available for sale securities. These securities
were sold at no gain or loss as they were very short-term in nature, with an
average holding period from seven to twenty-eight days. In the year ended
December 31, 2006, no investment securities were sold and accordingly no gains
or losses were recognized.
At December 31,
2008, investment securities totaling $28.4 million were pledged, excluding
securities pledged under a blanket lien to the FHLB. At December 31,
2008, investment securities carried at $4.3 million were pledged with the
Federal Reserve Bank of San Francisco: $1.4 million to secure our Treasury, Tax
and Loan account, and $2.9 million to provide collateral for potential future
line of credit drawdowns to meet unusual short-term liquidity
needs. At December 31, 2008, investment securities carried at $18.5
million were pledged with the State of California: $17.8 million to
secure public deposits in compliance with the Local Agency Security Program and
$782 thousand to provide collateral for trust deposits. In addition, at December
31, 2008, investment securities carried at $1.6 million were pledged to
collateralize an internal Wealth Management Services checking account and $4.0
million were pledged with Pacific Coast Bankers’ Bank to serve as collateral on
derivatives. At December 31, 2008, our FHLB line of credit was
secured under terms of a blanket collateral agreement by a pledge of certain
qualifying collateral, including investment securities. See Note 8 for further
details.
Thirty-seven and
twenty-three investment securities were at unrealized loss positions at December
31, 2008 and 2007, respectively. They are summarized and classified according to
the duration of the loss period as follows:
|
December 31,
2008
|
||||||||||||||||||||||||
|
< 12
continuous months
|
> 12
continuous months
|
Total
Securities in a loss position
|
||||||||||||||||||||||
|
(Dollars in
thousands)
|
Fair
value
|
Unrealized
loss
|
Fair
value
|
Unrealized
loss
|
Fair
value
|
Unrealized
loss
|
||||||||||||||||||
|
Held-to-maturity
|
||||||||||||||||||||||||
|
Obligations
of state & political subdivisions
|
$ | 10,449 | $ | (430 | ) | $ | 1,819 | $ | (366 | ) | $ | 12,268 | $ | (796 | ) | |||||||||
|
Available for
sale
|
||||||||||||||||||||||||
|
Securities of
U. S. Government Agencies
|
23,369 | (107 | ) | --- | --- | 23,369 | (107 | ) | ||||||||||||||||
|
Corporate
CMOs
|
643 | (15 | ) | 727 | (7 | ) | 1,370 | (22 | ) | |||||||||||||||
|
Total
available for sale
|
24,012 | (122 | ) | 727 | (7 | ) | 24,739 | (129 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 34,461 | $ | (552 | ) | $ | 2,546 | $ | (373 | ) | $ | 37,007 | $ | (925 | ) | |||||||||
|
December 31,
2007
|
||||||||||||||||||||||||
|
< 12
continuous months
|
> 12
continuous months
|
Total
Securities in a loss position
|
||||||||||||||||||||||
|
(In
thousands)
|
Fair
value
|
Unrealized
loss
|
Fair
value
|
Unrealized
loss
|
Fair
value
|
Unrealized
loss
|
||||||||||||||||||
|
Held-to-maturity
|
||||||||||||||||||||||||
|
Obligations
of state & political subdivisions
|
$ | --- | $ | --- | $ | 4,461 | $ | (83 | ) | $ | 4,461 | $ | (83 | ) | ||||||||||
|
Available for
sale
|
||||||||||||||||||||||||
|
Securities of
U. S. Government Agencies
|
2,855 | (22 | ) | 39,144 | (558 | ) | 41,999 | (580 | ) | |||||||||||||||
|
Corporate
CMOs
|
--- | --- | 1,994 | (17 | ) | 1,994 | (17 | ) | ||||||||||||||||
|
Total
available for sale
|
2,855 | (22 | ) | 41,138 | (575 | ) | 43,993 | (597 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 2,855 | $ | (22 | ) | $ | 45,599 | $ | (658 | ) | $ | 48,454 | $ | (680 | ) | |||||||||
Management
periodically evaluates each investment security in an unrealized loss position
to determine if the impairment is temporary or other than
temporary. Management has determined that no investment security is
other-than-temporarily impaired as Management believes that it is probable that
we will be able to collect all amounts due according to the contractual terms
and we have the ability and
intent to hold the securities until their cost has been
recovered.
Note
3: Loans
The majority of our
loan activity is with customers located in California, primarily in the counties
of Marin, San Francisco and southern Sonoma. Although we have a
diversified loan portfolio, more than half of the loans are for commercial real
estate, and many of our loans are secured by real estate in Marin, San Francisco
and Sonoma Counties. Approximately 84% of the loans were secured by
real estate at both December 31, 2008 and 2007.
Effective January
1, 2007, we elected the early-adoption provisions of SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which permits entities
to choose to measure eligible financial instruments at fair value at specified
election dates. Upon adoption, we elected the fair value option to account for
the indirect auto loan portfolio, which was subsequently sold on June 5, 2007.
See Note 16 for further details.
Outstanding loans
by type, net of deferred loan fees of $3.1 million and $2.9 million at December
31, 2008 and 2007, respectively, are as follows:
|
(Dollars in
thousands)
|
2008
|
2007
|
||||||
|
Commercial
loans
|
$ | 146,483 | $ | 124,336 | ||||
|
Real
estate
|
||||||||
|
Commercial
owner-occupied
|
140,977 | 132,614 | ||||||
|
Commercial
investor
|
326,193 | 257,127 | ||||||
|
Construction
|
121,981 | 97,153 | ||||||
|
Residential
|
120,676 | 78,860 | ||||||
|
Installment
and other consumer
|
34,234 | 34,788 | ||||||
|
Total
loans
|
890,544 | 724,878 | ||||||
|
Less
Allowance for loan losses
|
(9,950 | ) | (7,575 | ) | ||||
|
Net
Loans
|
$ | 880,594 | $ | 717,303 | ||||
At December 31,
2008 and 2007, our FHLB line of credit was secured under terms of a blanket
collateral agreement by a pledge of certain qualifying collateral, including
loans. See Note 8 for further details.
The Bank has, and
expects to have in the future, banking transactions in the ordinary course of
its business with directors, officers, principal stockholders and their
associates. These transactions, including loans, are granted on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with
others. Likewise, these transactions do not involve more than the
normal risk of collectability or present other unfavorable
features.
An analysis of net
loans to related parties for the years ended December 31, 2008 and 2007 is as
follows:
|
(In
thousands)
|
2008
|
2007
|
||||||
|
Balance at
beginning of year
|
$ | 7,899 | $ | 3,394 | ||||
|
Additions
|
72 | 4,811 | ||||||
|
Repayments
|
(550 | ) | (306 | ) | ||||
|
Balance at
end of year
|
$ | 7,421 | $ | 7,899 | ||||
The undisbursed
commitment to related parties was $1.1 million as of December 31,
2008.
Note
4: Allowance for Loan Losses
Activity in the
allowance for loan losses for each of the three years ended December 31
follows:
|
(Dollars in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Beginning
balance
|
$ | 7,575 | $ | 8,023 | $ | 7,115 | ||||||
|
Cumulative-effect
adjustment of adoption of SFAS No. 159
|
--- | (1,048 | ) | --- | ||||||||
|
Provision for
loan loss charged to expense
|
5,010 | 685 | 1,266 | |||||||||
|
Loans charged
off
|
(2,680 | ) | (115 | ) | (596 | ) | ||||||
|
Loan loss
recoveries
|
45 | 30 | 238 | |||||||||
|
Ending
balance
|
$ | 9,950 | $ | 7,575 | $ | 8,023 | ||||||
|
Total loans
outstanding at end of year, before deducting allowance for loan
losses
|
$ | 890,544 | $ | 724,878 | $ | 719,778 | ||||||
|
Average total
loans outstanding during the year
|
$ | 798,369 | $ | 703,087 | $ | 701,438 | ||||||
|
Ratio of
allowance for loan losses to total loans at end of year
|
1.12 | % | 1.05 | % | 1.11 | % | ||||||
Non-accrual loans
totaled $6.7 million at December 31, 2008. At December 31, 2007, we had one
non-accrual loan totaling $144 thousand. The gross interest income that would
have been recorded had non-accrual loans been current totaled $180 thousand, $11
thousand and $223 thousand in the years ended December 31, 2008, 2007 and 2006,
respectively. We recognized interest income of $367 thousand, $5 thousand and
zero for cash payments received during the years ended December 31, 2008, 2007
and 2006, respectively. There were no accruing loans past due more than 90 days
at December 31, 2008 or 2007.
Impaired loan
balances at each period-end approximated the balance of non-accrual loans, with
a specific valuation allowance of $44 thousand and zero at December 31, 2008 and
2007, respectively. We charged off substantially all of our estimated
losses related to specific loans during each year presented. These impaired
loans were primarily comprised of collateral dependent construction, personal,
and commercial loans. The average recorded investment in impaired loans was $2.0
million, $104 thousand and $1.8 million for the years ended December 31, 2008,
2007 and 2006, respectively. No interest income was recognized on these loans
subsequent to their classification as impaired. At December 31, 2008, there were
no commitments to extend credit on impaired loans.
The principal
balance on loans whose contractual terms have been restructured in a manner
which grants a concession to a borrower experiencing financial difficulties was
$119 thousand at December 31, 2008 and zero at December 31, 2007.
In conjunction with
the adoption of SFAS No. 159 effective January 1, 2007 and our election of the
fair value option to account for our indirect auto loan portfolio, the allowance
for loan losses was reduced by $1.0 million in 2007, which is reflected in the
table above. See Note 16 for further details.
Note
5: Bank Premises and Equipment
A summary of Bank
premises and equipment at December 31 follows:
|
(Dollars in
thousands)
|
2008
|
2007
|
||||||
|
Leasehold
improvements
|
$ | 10,479 | $ | 9,501 | ||||
|
Furniture and
equipment
|
8,710 | 8,617 | ||||||
|
Subtotal
|
19,189 | 18,118 | ||||||
|
Accumulated
depreciation and amortization
|
(10,897 | ) | (10,297 | ) | ||||
|
Bank premises
and equipment, net
|
$ | 8,292 | $ | 7,821 | ||||
The amount of
depreciation and amortization was $1.3 million, $1.2 million and $998 thousand
for the years ended December 31, 2008, 2007 and 2006, respectively.
In October 2008, we
contracted with McDevitt & McDevitt Construction Corporation (“MMC”), which
is a construction company located in Petaluma, California, managed and owned by
a member of the Board of Directors of the Bank and Bancorp. Under the contract,
MMC constructed a new branch office for us. During 2008, we paid $611 thousand
to MMC under the contract.
Note
6: Bank Owned Life Insurance
We have purchased
life insurance policies on the lives of certain officers designated by the Board
of Directors to finance employee benefit programs. Death benefits are
provided under the specific terms of these programs. The investment in the Bank
owned life insurance (“BOLI”) policies are reported in interest receivable and
other assets at their cash surrender value of $17.0 million and $14.1 million at
December 31, 2008 and 2007, respectively. The cash surrender value includes both
the original premiums we paid in the life insurance policies and the accumulated
accretion of policy income since inception of the policies. Income of
$640 thousand, $577 thousand and $504 thousand was recognized on the life
insurance policies in 2008, 2007 and 2006, respectively, and is reported in
other non-interest income. The income is net of mortality costs recognized,
which totaled $89 thousand, $79 thousand and $67 thousand for the years ended
December 31, 2008, 2007 and 2006, respectively. We regularly monitor the credit
ratings of our four insurance carriers to ensure that they are in compliance
with our policy.
Note
7: Deposits
Total time deposits
were $128.2 million and $82.9 million at December 31, 2008 and 2007,
respectively. Of these amounts, $55.5 million and $50.7 million
represented time deposits greater than $100,000 at December 31, 2008 and 2007,
respectively. Interest on time deposits was $2.7 million, $3.5 million and $3.8
million in 2008, 2007 and 2006, respectively. Scheduled maturities of
these deposits at December 31, 2008 are presented as follows:
|
(Dollars in
thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Scheduled
maturities of time deposits
|
$ | 118,851 | $ | 5,060 | $ | 1,279 | $ | 1,515 | $ | 1,503 | --- | $ | 128,208 | |||||||||||||||
Late in the first
quarter of 2008, we began to offer the CDARS® deposit product,
short for Certificate of Deposit Account Registry Service. Through CDARS®, we may accept
deposits in excess of the Federal Deposit Insurance Corporation (“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 we receive an equal
dollar amount of deposits from other member banks in exchange for the deposits
we place into the network, we record these as CDARS® reciprocal
deposits. At December 31, 2008, CDARS® reciprocal
deposits totaled $42.9 million.
As of December 31,
2008, $17.8 million in securities held to maturity were pledged as collateral
for our local agency deposits.
The aggregate
amount of demand deposit overdrafts that have been reclassified as loan balances
were $197 thousand and $5.2 million at December 31, 2008 and 2007,
respectively.
The Bank accepts
deposits from shareholders, directors and employees in the normal course of
business, and the terms are comparable to those with non-affiliated parties. The
total deposits from directors and their businesses, and executive officers were
$8.8 million and $9.0 million at December 31, 2008 and 2007,
respectively.
Note
8: Borrowings
Purchased Funds – We have
unsecured lines of credit totaling $75.0 million with correspondent banks for
overnight borrowings. In general, interest rates on these lines
approximate the Federal funds target rate. At December 31, 2008 and 2007, we had
no overnight borrowings under these credit facilities.
Federal Home Loan Bank Advance
– As of December 31, 2008 and 2007, we had lines of credit with the FHLB
totaling $195.8 million and $184.8 million, respectively. At December 31, 2008
overnight borrowings totaled $21.8 million with the FHLB under the line of
credit. At December 31, 2007, we had no outstanding borrowings with
FHLB. The interest rate for overnight borrowings, determined daily, was 0.05% at
December 31, 2008.
On February 5,
2008, we 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.
We must comply with the put date, but are not required to accept replacement
funding.
On December 16,
2008, we entered into a five-year borrowing agreement under the FHLB line of
credit for $20.0 million at a fixed rate of 2.54%. Interest-only payments are
required every month until maturity.
On January 23,
2009, we entered into a three-year borrowing agreement under the FHLB line of
credit for $20.0 million at a fixed rate of 2.29%.
At December 31,
2008, $139.0 million was remaining as available for borrowing from the FHLB
under a formula based on eligible collateral, mainly a portfolio of loans. The
FHLB overnight borrowing and the FHLB line of credit are secured by essentially
all of our financial assets, including loans, investment securities, cash and
cash equivalents under a blanket lien.
Federal Reserve Line of
Credit – We also have available a line of credit with the Federal Reserve
Bank of San Francisco totaling $2.9 million and $3.7 million as of December 31,
2008 and 2007, respectively. This line of credit is collateralized by
an agency security. At December 31, 2008 and 2007, we had no outstanding
borrowings with the Federal Reserve.
Subordinated Debt – On June
17, 2004 we issued a 15-year, $5.0 million subordinated debenture through a
pooled trust preferred program, which matures on June 17, 2019. We
have the right to redeem the debenture, in whole or in part, at the redemption
price at principal amounts in multiples of $1.0 million on any interest payment
date on or after June 17, 2009. The interest rate on the debenture
changes quarterly and is paid quarterly at the three-month LIBOR plus 2.48%. The
rate at December 31, 2008 was 4.35%. The debenture is subordinated to the claims
of depositors and our other creditors.
Borrowings at
December 31, 2008 and 2007 are summarized as follows:
|
2008
|
2007
|
|||||||||||||||||||||||
|
(Dollars in
thousands)
|
Carrying
Value
|
Average
Balance
|
Average
Rate
|
Carrying
Value
|
Average
Balance
|
Average
Rate
|
||||||||||||||||||
|
Overnight
borrowings
|
$ | 21,800 | $ | 15,629 | 1.89 | % | $ | --- | $ | 6,836 | 5.35 | % | ||||||||||||
|
FHLB
fixed-rate advances
|
35,000 | 14,440 | 2.12 | % | --- | 9,260 | 4.23 | % | ||||||||||||||||
|
Subordinated
debenture
|
5,000 | 5,000 | 5.92 | % | 5,000 | 5,000 | 8.14 | % | ||||||||||||||||
The maximum amount
outstanding at any month end for overnight borrowings was $42.7 million and
$38.5 million, during 2008 and 2007, respectively.
Note
9: Stockholders' Equity and Stock Option Plans
Preferred
Stock
At December 31,
2008, 28,000 shares of preferred shares were outstanding. For information
regarding our preferred stock, see Note 10 below.
Common
Stock
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 shareholders 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 Bancorp
and the Bank became a wholly-owned subsidiary of the holding
company.
In October 2006, we
received approval from the California Department of Financial Institutions
(“DFI”) and the FDIC to buy back up to 10%, or up to 545,884 of the Bank’s
5,458,838 then-outstanding shares, not to exceed $15 million. The
repurchase program allowed the Bank to purchase common shares for a period of
twelve months from the approval date in the open market or in privately
negotiated transactions. In 2006, the Bank purchased 115,625 shares at an
average price of $34.26 per share for a total cost of $4.0
million. In the first quarter of 2007, the Bank purchased an
additional 289,692 shares at an average price of $38.10 for a total cost of
$11.0 million, thereby completing the share repurchase under the approved
program.
In November 2007
Bancorp’s Board of Directors approved an additional plan to repurchase common
shares of Bancorp up to $5 million. No regulatory approval was required for this
repurchase plan as Bancorp was exempt under the provisions of Regulation Y of
the Federal Reserve Board. In November and December 2007, Bancorp repurchased a
total of 51,732 shares at an average price of $29.96 per share for a total cost
of $1.5 million. During 2008, we repurchased 88,316 shares at an
average price of $28.55, plus commissions, for a total cost of $2.5 million. In
September 2008, we discontinued the repurchases under the plan to preserve
capital during a time of extreme economic turbulence.
We 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.
Retained
Earnings
Upon the adoption
of SFAS No. 159 for our indirect auto loan portfolio, we recorded a
cumulative-effect adjustment as a charge to retained earnings totaling $1.5
million effective January 1, 2007. See Note 16 for details.
Dividends
A summary of
preferred dividends accrued and/or paid, as well as cash dividends paid to
common shareholders, both of which are recorded as a reduction of retained
earnings, is presented below.
|
Years ended
December 31
|
||||||||||||
|
(in thousands
except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Preferred
dividends
|
$ | 97 | $ | --- | $ | --- | ||||||
|
Cash
dividends to common shareholders
|
$ | 2,882 | $ | 2,649 | $ | 2,448 | ||||||
|
Cash
dividends per common share
|
$ | 0.56 | $ | 0.51 | $ | 0.46 | ||||||
Included in cash
dividends to common shareholders in 2007 is $5 thousand paid to shareholders in
connection with the redemption of all the preferred share purchase rights issued
pursuant to the Bank’s Rights Agreement of August 11, 2003. Each right entitled
the registered holder to purchase from the Bank one one-hundredth of a share of
Series A Junior Participating Preferred stock, no par value of Bank at a price
of $125 per one one-hundredth of a preferred share, subject to adjustments. The
redemption, in anticipation of the formation of a bank holding company, was
effective June 14, 2007 at a redemption price of $0.001 per right. On that same
day, Bancorp’s Board of Directors executed a Rights Agreement substantially
similar to the Bank’s agreement and has issued replacement rights to purchase
shares of Bancorp under the new Rights Agreement to shareholders of record as of
July 23, 2007. The Bank of Marin Bancorp Rights Agreement is designed to
discourage takeovers that involve abusive tactics or do not provide fair value
to shareholders.
The holders of
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 included in stock-based compensation
expense. Tax benefits on dividends paid on the portion of share-based awards
expected to vest are recorded as an increase to common stock with a
corresponding decrease in current taxes payable.
Under the
California Financial Code, payment of dividends is restricted to the lesser of
retained earnings or the amount of undistributed net profits from the three most
recent fiscal years. Under this restriction, approximately $10.9
million of the retained earnings balance was available for payment of dividends
as of December 31, 2008.
As long as our
preferred shares are held by the U.S. Treasury, we are restricted from
increasing our dividends per common share (currently $0.14 per share) until
December 5, 2011 without prior approval from the U.S. Treasury. We are also
precluded from paying any dividends on common shares if we are in arrears on the
payment of dividends on preferred shares, which are payable quarterly at an
annual rate of 5%. If dividends on the senior preferred shares are not paid in
full for six dividend periods, the U.S. Treasury will have the right to elect
two directors to our board until full dividends have been paid for four
consecutive dividend periods according to the original terms of the agreement
with the U.S. Treasury in effect at December 31, 2008.
If we repurchase
the preferred stock issued as part of the TCPP (see Note 10), the Bank will need
to pay a dividend to Bancorp to fund such repurchase. Under the
restrictions noted above, advance approval of such dividend and any subsequent
dividends from the Bank to Bancorp may be required from the DFI for up to three
years depending on our earnings level.
On April 13, 2006,
the Board of Directors declared a 5% common stock dividend. Cash was paid in
lieu of issuing fractional shares.
Share-Based
Awards
Effective July 1,
2007, we adopted an Employee Stock Purchase Plan whereby our employees may
purchase Bancorp common shares through payroll deductions of between one percent
and fifteen percent of pay in each pay period. Shares are purchased
quarterly at a five percent discount from the closing market price on the last
day of the quarter. The plan calls for 200,000 common shares to be
set aside for employee purchases.
As of May 8, 2007,
the 2007 Equity Plan was approved by shareholders. The 2007 Equity Plan was
subsequently adopted by Bancorp as part of the holding company
formation. Awards under the 2007 Equity Plan now relate to shares of
common stock of Bancorp. All new share-based awards from the approval date
forward are granted through the 2007 Equity Plan.
The 2007 Equity
plan provides financial incentives for selected employees, advisors and
non-employee directors. Terms of the plan provide for the issuance of up to
500,000 shares of common stock for these employees, advisors and non-employee
directors. As of December 31, 2008, there were 438,667 shares available for
future grants under the plan. The Compensation Committee of the Board of
Directors has the authority in its discretion to determine those employees,
advisors and non-employee directors who will receive an award, the timing of
awards, the vesting schedule for each award, the type of award to be granted,
the number of shares of Bancorp stock to be subject to each option and
restricted stock award, and all other terms and conditions of any award. On May
1, 2008, 31,651 stock options were granted under the 2007 Equity
Plan. In addition, certain senior employees were granted 6,700
restricted common shares of Bancorp. In 2008, our directors were awarded a total
8,892 common shares in addition to their monthly compensation.
We have two
additional stock option plans, the 1999 Stock Option Plan and the 1989 Stock
Option Plan for full-time, salaried officers and employees who have substantial
responsibility for the successful operation of the Bank. Upon
approval of the 1999 Stock Option Plan, no new awards were granted under the
1989 Stock Option Plan. Upon approval of the 2007 Equity Plan, no new awards
were granted under the 1999 Stock Option Plan.
Stock options
granted pursuant to the 1989 and 1999 Stock Option Plans were subsequently
adopted by Bancorp as part of the holding company formation. Stock
options under these plans now relate to shares of common stock of
Bancorp.
Options are issued
at the fair market value of the stock at the date of grant. Options
to officers and employees granted prior to January 1, 2006, vested 20%
immediately and 20% on each anniversary of the grant for four years. Options
granted subsequent to January 1, 2006, including grants of restricted stock,
vested 20% on each anniversary of the grant for five years. All
officer and employee options expire ten years from the grant date. Options
granted to non-employee directors vest 20% immediately and 20% on each
anniversary of the grant for four years. Director options expire seven years
from the grant date.
A summary of
activity for stock options for the years ended December 31, 2008, 2007 and 2008
is presented below.
|
Weighted
|
||||||||||||||||||||
|
Average
|
||||||||||||||||||||
|
Aggregate
|
Weighted
|
Remaining
|
||||||||||||||||||
|
Weighted
|
Intrinsic
|
Average
|
Contractual
|
|||||||||||||||||
|
Number
of
|
Average
|
Value
|
Grant-Date
|
Term
|
||||||||||||||||
|
Shares
|
Exercise Price
|
(in thousands)
|
Fair Value
|
(in
years)
|
||||||||||||||||
|
Options
outstanding at December 31, 2005
|
777,556 | $ | 16.99 | $ | 12,025 | $ | --- | 5.41 | ||||||||||||
|
Granted
|
79,351 | 33.30 | --- | 7.93 | --- | |||||||||||||||
|
Cancelled/forfeited
|
(49,335 | ) | 25.18 | --- | --- | --- | ||||||||||||||
|
Exercised
|
(261,307 | ) | 12.65 | 5,340 | --- | --- | ||||||||||||||
|
Options
outstanding at December 31, 2006
|
546,265 | 20.69 | 11,303 | --- | 5.44 | |||||||||||||||
|
Exercisable
(vested) at December 31, 2006
|
383,842 | 16.28 | 6,249 | 6.97 | 4.17 | |||||||||||||||
|
Options
outstanding at December 31, 2006
|
546,265 | 20.69 | --- | --- | --- | |||||||||||||||
|
Granted
|
54,551 | 34.87 | --- | 7.46 | --- | |||||||||||||||
|
Cancelled/forfeited
|
(6,345 | ) | 30.17 | --- | --- | --- | ||||||||||||||
|
Exercised
|
(112,496 | ) | 14.40 | 2,532 | --- | --- | ||||||||||||||
|
Options
outstanding at December 31, 2007
|
481,975 | 23.64 | 3,593 | --- | 5.47 | |||||||||||||||
|
Exercisable
(vested) at December 31, 2007
|
327,948 | 19.12 | 3,560 | 7.61 | 4.23 | |||||||||||||||
|
Options
outstanding at December 31, 2007
|
481,975 | 23.64 | --- | --- | --- | |||||||||||||||
|
Granted
|
31,651 | 28.06 | --- | 6.83 | --- | |||||||||||||||
|
Cancelled/forfeited
|
(16,370 | ) | 24.25 | --- | --- | --- | ||||||||||||||
|
Exercised
|
(95,298 | ) | 14.52 | 1,361 | --- | --- | ||||||||||||||
|
Options
outstanding at December 31, 2008
|
401,958 | 26.12 | 1,278 | --- | 5.53 | |||||||||||||||
|
Exercisable
(vested) at December 31, 2008
|
275,834 | 23.16 | 1,278 | 8.31 | 4.56 | |||||||||||||||
The following table
summarizes nonvested awards at December 31, 2008, and changes during the year
ended December 31, 2008.
|
Options
|
Restricted
Stock
|
|||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Number
of
|
Grant-Date
|
Number
of
|
Grant-Date
|
|||||||||||||
|
Shares
|
Fair
Value
|
Shares
|
Fair
Value
|
|||||||||||||
|
Nonvested
awards at December 31, 2007
|
154,027 | $ | 8.64 | --- | $ | 0.00 | ||||||||||
|
Granted
|
31,651 | 6.83 | 6,700 | 28.75 | ||||||||||||
|
Vested
|
(55,851 | ) | 9.40 | --- | 0.00 | |||||||||||
|
Forfeited
|
(3,703 | ) | 9.38 | --- | 0.00 | |||||||||||
|
Nonvested
awards at December 31, 2008
|
126,124 | $ | 7.83 | 6,700 | $ | 28.75 | ||||||||||
As of December 31,
2008, there was $911 thousand of total unrecognized compensation expense related
to non-vested stock options and restricted stock. This cost is
expected to be recognized over a weighted average period of approximately three
years. The total grant-date fair value of shares vested during the years ended
December 31, 2008, 2007 and 2006 was $522 thousand, $540 thousand and $718
thousand, respectively.
A summary of the
options outstanding and exercisable by price range as of December 31, 2008 is
presented in the following table:
|
Stock Options
Outstanding
|
Stock Options
Exercisable
|
||||||||||||||||||||
|
Range of
Exercise Prices
|
Outstanding as of |
Remaining Contractual Life |
Weighted Average |
Shares
|
Weighted Average |
||||||||||||||||
|
$10.01 -
$15.00
|
90,621 | 2.1 | $ | 12.28 | 90,621 | $ | 12.28 | ||||||||||||||
|
$15.01 -
$20.00
|
28,711 | 3.5 | $ | 17.32 | 28,711 | $ | 17.32 | ||||||||||||||
|
$20.01 -
$25.00
|
6,972 | 3.7 | $ | 20.43 | 6,972 | $ | 20.43 | ||||||||||||||
|
$25.01 -
$30.00
|
79,602 | 6.6 | $ | 27.26 | 49,961 | $ | 26.72 | ||||||||||||||
|
$30.01 -
$35.00
|
149,244 | 6.7 | $ | 33.04 | 88,223 | $ | 32.90 | ||||||||||||||
|
$35.01 -
$40.00
|
46,808 | 8.2 | $ | 35.20 | 11,346 | $ | 35.23 | ||||||||||||||
| 401,958 | 275,834 | ||||||||||||||||||||
Under SFAS No.
123R, 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, we record 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. The
grant-date fair value of the restricted common shares, which was equal to its
intrinsic value on that date, is being recorded as compensation expense over the
requisite service period with a corresponding increase in common stock as the
shares vest. Any excess tax benefit on the vesting of these shares will be also
recorded as an increase in common stock and a corresponding decrease in current
taxes payable.
Stock-based
compensation and tax benefits on exercised options are shown below.
|
Years ended
December 31
|
||||||||||||
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Stock-based
compensation
|
$ | 428 | $ | 502 | $ | 555 | ||||||
|
Excess tax
benefits on exercised options
|
$ | 380 | $ | 729 | $ | 1,394 | ||||||
We determine 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 life of the option, the volatility of the underlying stock, the
expected dividend yield and the risk-free interest rate over the expected life
of the option.
The weighted
average assumptions used in the pricing model are noted in the table
below. The expected term of options granted is derived from
historical data on employee exercise and post-vesting employment termination
behavior. The risk-free rate for periods within the contractual
life of the option is based on the U.S. Treasury yield curve in effect at the
time of the grant. Expected volatility is based on the historical
volatility of the common stock.
|
Year
ended
|
||||||||||||
|
December 31,
2008
|
December 31,
2007
|
December 31,
2006
|
||||||||||
|
Risk-free
interest rate
|
3.50 | % | 4.64 | % | 5.06 | % | ||||||
|
Expected
dividend yield on common stock
|
2.00 | % | 1.38 | % | 1.37 | % | ||||||
|
Expected life
in years
|
6.5 | 7.0 | 7.0 | |||||||||
|
Expected
price volatility
|
23.93 | % | 12.30 | % | 12.53 | % | ||||||
For options granted
prior to January 1, 2006, and valued in accordance with Statement of Financial
Accounting Standard No. 123, Accounting for Stock-Based
Compensation, (“SFAS No. 123”), we recognized option forfeitures as they
occurred.
For options granted
after January 1, 2006, and valued in accordance with No. SFAS 123R, the fair
value of the option is expensed on a straight-line basis over the vesting
period. Forfeitures are estimated and expense is recognized only for
those shares expected to vest. The estimated forfeiture rate, based
on historical forfeiture experience, was unchanged at 7.5% in 2008, 2007 and
2006.
The Black-Scholes
option valuation model requires the input of highly subjective assumptions,
including the expected life of the stock-based award and stock price
volatility. The assumptions listed above represent Management’s best
estimates, but these estimates involve inherent uncertainties and the
application of Management’s judgment. As a result, if other
assumptions had been used, the recorded share-based compensation expense could
have been materially different from that reflected in these financial
statements. If the actual forfeiture rate is materially different
from the estimate, the share-based compensation expense could also be materially
different.
Note
10: Treasury Capital Purchase Program
In response to the
stresses in the credit markets and to protect and recapitalize the U.S.
financial system, on October 3, 2008, the Emergency Economic Stabilization Act
of 2008 (“EESA”) was signed into law. EESA includes the Treasury
Capital Purchase Program (the “TCPP”), which was intended to inject liquidity
into, and stabilize the financial industry. On November 19, 2008, we
received preliminary approval from the United States Department of the Treasury
(the “U.S. Treasury”) to participate in the TCPP. On December 5,
Bancorp issued to the U.S. Treasury 28,000 shares of senior preferred stock with
a zero par value and a $1,000 per share liquidation preference, along with
warrants to purchase 154,242 shares of common stock at a per share exercise
price of $27.23, in exchange for aggregate consideration of $28.0
million. Dividends will be payable quarterly in arrears on February
15, May 15, August 15 and November 15 of each year with a 5% coupon dividend
rate for the first five years and 9% thereafter. If dividends on the senior
preferred shares are not paid in full for six dividend periods, the U.S.
Treasury will have the right to elect two directors to our board until full
dividends have been paid for four consecutive dividend periods. The attached
warrants are immediately exercisable and expire 10 years after the issuance
date. We must comply with restrictions on executive compensation during the
period that the U.S. Treasury holds an equity position in us through the
TCPP. Under the American Recovery and Reinvestment Act of 2009, we
may elect to repurchase the preferred stock at the original purchase price plus
accrued but unpaid dividends. On February 27, 2009, our Board of Directors
approved a resolution to repurchase all 28,000 shares of outstanding preferred
stock from the U.S. Treasury. We have notified the U.S. Treasury of our intent
to repurchase the preferred stock issued under the TCPP.
The proceeds of $28
million were allocated between the preferred stock and the warrants with $27.0
million allocated to preferred stock and $961 thousand allocated to the
warrants, based on their relative fair value at the time of issuance. The fair
value of the preferred stock was estimated using discounted cash flows with a
discount rate of 9%. The fair value of the warrants was estimated using the
Black-Scholes option pricing model with the following assumptions: 1) risk-free
interest rate of 2.67% (the Treasury 10-year yield rate as of warrant issuance
date); 2) estimated life of ten years (contractual term of the warrants); 3)
volatility of 29% (historical volatility based on our stock price over the past
10 years); and 4) dividend yield of 2.59% (expected annual dividend divided by
stock price as of warrant issuance date). The discount on the preferred stock
(i.e., difference between the initial carrying amount and the liquidation
amount) is amortized over the five-year period preceding the 9% perpetual
dividend, using effective yield method.
Note
11: Benefit Plans
In 2003 we
established an Officer Deferred Compensation Plan that allows key executive
officers designated by the Board of Directors of the Bank to defer up to 80% of
their salary and 100% of their annual bonus. Amounts deferred earn
interest at a rate set annually by the Board of Directors. The
interest rate was set at 7.25% for 2008, 8.25% for 2007, and 7.25% for
2006. Our deferred compensation obligation of $2.6 million and $2.2
million at December 31, 2008 and 2007, respectively, is included in interest
payable and other liabilities.
Our 401(k) Defined
Contribution Plan commenced in May 1990 and is available to all
employees. Under this plan employees can defer up to 50% of their
total compensation, up to the maximum amount allowed by the Internal Revenue
Code. The Bank will match 50% of each participant's contribution up
to a maximum match of $4 thousand annually. Employer contributions
totaled $358 thousand, $383 thousand and $409 thousand for the years ended
December 31, 2008, 2007 and 2006, respectively.
In 1999 the 401(k)
Plan was amended to include an employee stock ownership component and was
renamed the Bank of Marin Employee Stock Ownership and Savings Plan (the
“Plan”). Under the terms of the Plan, as amended, the Board of
Director’s determined a specific portion of the Bank's profits to be contributed
to the Plan each year either in common stock or in cash for the purchase of
Bancorp stock. For the years ended December 31, 2008, 2007 and 2006
the Bank contributed $749 thousand, $854 thousand and $900 thousand,
respectively. Contributions to the Plan for both the matching
contribution and for the purchase of Bancorp stock are included in salaries and
benefits expenses. Employer contributions vest at a rate of 20%
per year over a five-year period. Generally, cash dividends on
Bancorp’s stock held by the Plan are used to purchase additional shares in the
open market. All shares of the Bancorp’s stock held by the Plan are
included in the calculations of basic and diluted earnings per
share.
Note
12: Income Taxes
The current and
deferred components of the income tax provision for each of the three years
ended December 31 are as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current tax
provision
|
||||||||||||
|
Federal
|
$ | 6,809 | $ | 5,993 | $ | 5,800 | ||||||
|
State
|
2,258 | 1,847 | 1,514 | |||||||||
|
Total
current
|
9,067 | 7,840 | 7,314 | |||||||||
|
Deferred tax
(benefit) provision
|
||||||||||||
|
Federal
|
(902 | ) | (128 | ) | (494 | ) | ||||||
|
State
|
(287 | ) | 66 | (155 | ) | |||||||
|
Total
deferred
|
(1,189 | ) | (62 | ) | (649 | ) | ||||||
|
Total income
tax provision
|
$ | 7,878 | $ | 7,778 | $ | 6,665 | ||||||
Income taxes
related to changes in the unrealized gains and losses on available for sale
securities are recorded directly to other comprehensive income in stockholders’
equity and are not included above. These income tax effects amounted
to $475 thousand, $234 thousand, and $128 thousand in 2008, 2007 and 2006,
respectively.
The following table
shows the tax effect of our cumulative temporary differences as of December
31:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Deferred tax
assets:
|
||||||||
|
Allowance for
loan losses and off-balance sheet commitments
|
$ | 4,399 | $ | 3,374 | ||||
|
Depreciation
|
205 | 397 | ||||||
|
State
franchise tax
|
683 | 547 | ||||||
|
Deferred
compensation
|
1,076 | 950 | ||||||
|
Stock-based
compensation
|
133 | 88 | ||||||
|
Net
unrealized loss on securities available for sale
|
--- | 194 | ||||||
|
Other
|
249 | 242 | ||||||
|
Deferred tax
liabilities:
|
||||||||
|
Loan
origination costs
|
(239 | ) | (190 | ) | ||||
|
Net
unrealized gain on securities available for sale
|
(281 | ) | --- | |||||
|
Other
|
(55 | ) | (146 | ) | ||||
|
Net deferred
tax assets
|
$ | 6,170 | $ | 5,456 | ||||
Based upon the
level of historical taxable income and projections for further taxable income
over the periods during which the deferred tax assets expect to be deductible,
Management believes it is more likely than not the Bank will realize the benefit
of the deferred tax assets.
The effective tax
rate for 2008, 2007 and 2006 differs from the current Federal statutory income
tax rate as follows:
|
2008
|
2007
|
2006
|
||||||||||
|
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
California
franchise tax, net of federal tax benefit
|
6.2 | 6.2 | 6.1 | |||||||||
|
Stock based
compensation
|
0.7 | 0.8 | 1.1 | |||||||||
|
Tax exempt
interest on municipal securities and loans
|
(2.1 | ) | (1.6 | ) | (1.8 | ) | ||||||
|
Tax exempt
earnings on bank owned life insurance
|
(1.3 | ) | (1.2 | ) | (1.1 | ) | ||||||
|
Prior year
tax adjustments
|
0.9 | (0.3 | ) | (3.3 | ) | |||||||
|
Other
|
(0.1 | ) | (0.2 | ) | (0.1 | ) | ||||||
|
Effective Tax
Rate
|
39.3 | % | 38.7 | % | 35.9 | % | ||||||
Bancorp files a
consolidated return in the U.S. Federal tax jurisdiction and a combined report
in the State of California tax jurisdiction. Prior to the formation
of Bancorp in 2007, the Bank filed in the U.S. Federal and California
jurisdictions on a stand-alone basis. None of the entities are
subject to examination by taxing authorities for years before 2005 for U.S.
Federal or for years before 2004 for California.
We adopted the
provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. No adjustments were identified for
unrecognized tax benefits that required an adjustment to the January 1, 2007
beginning tax reserve. We had no tax reserve for uncertain tax
positions at December 31, 2008. We do not anticipate providing a
reserve for uncertain tax positions in the next twelve months. We
have elected to record interest and penalties related to unrecognized tax
benefits in tax expense. During the years ended December 31, 2008,
2007 and 2006, neither the Bank nor Bancorp had an accrual for interest and
penalties associated with uncertain tax positions.
Note
13: Commitments and Contingencies
We rent certain
premises and equipment under long-term non-cancelable operating leases expiring
at various dates through the year 2023. At December 31, 2008, the
approximate minimum future commitments payable under non-cancelable contracts
for leased premises are as follows:
|
(in
thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Operating
leases
|
$ | 2,160 | $ | 1,963 | $ | 1,534 | $ | 1,439 | $ | 1,397 | $ | 11,565 | $ | 20,058 | ||||||||||||||
Rent expense included in occupancy expense totaled $2.5 million, $2.3 million and $2.0 million in 2008, 2007 and 2006, respectively.
We may be party to
legal actions which arise from time to time as part of the normal course of our
business. We believe, after consultation with legal counsel, that we
have meritorious defenses in these actions, and that litigation contingency
liability, if any, will not have a material adverse effect on our financial
position, results of operations, or cash flows.
We are responsible
for our proportionate share of certain litigation indemnifications provided to
Visa U.S.A. by its member banks in connection with lawsuits related to
anti-trust charges and interchange fees. See Note 20 for further
details.
As permitted or
required under California law and to the maximum extent allowable under that
law, we have certain obligations to indemnify our current and former officers
and directors for certain events or occurrences while the officer or director
is, or was serving, at our request in such capacity. These indemnification
obligations are valid as long as the director or officer acted in good faith and
in a manner the person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The maximum potential amount of future payments we could be required to make
under these indemnification obligations is unlimited; however, we have a
director and officer insurance policy that mitigates our exposure and enables us
to recover a portion of any future amounts paid. We believe the estimated fair
value of these indemnification obligations is minimal.
Note
14: Concentrations of Credit Risk
Concentration of credit risk is the
risk associated with a lack of diversification, such as having substantial
investments in a few individual issuers, thereby exposing us to greater risks
resulting from adverse economic, political, regulatory, geographic, industrial
or credit developments. At December 31, 2008, our most
significant concentration of credit risk was with the U.S. Government, its
agencies and Government Sponsored Enterprises. Our exposure, which primarily
results from positions in securities available for sale issued by the U.S.
Government, and its agencies, and securities guaranteed by Government Sponsored
Enterprises, was $78.6 million at December 31, 2008.
We also manage our
credit exposure related to our loan portfolio to avoid the risk of undue
concentration of credits in a particular industry by reducing significant
exposure to highly leveraged transactions or to any individual customer or
counterparty, and by obtaining collateral as appropriate. No borrower or obligor
accounts for more than 5% of loans held in the portfolio. The largest
loan concentration group by industry is real estate, which account for 76.3% of
our loan portfolio at December 31, 2008.
Note
15: Fair Value of Financial Instruments
The carrying
amounts and fair values of the Bank's financial instruments at December 31, 2008
and 2007 are presented below.
|
2008
|
2007
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(in
thousands)
|
Amounts
|
Value
|
Amounts
|
Value
|
||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash and cash
equivalents
|
$ | 24,926 | $ | 24,926 | $ | 76,265 | $ | 76,265 | ||||||||
|
Investment
securities
|
103,510 | 103,087 | 100,171 | 100,227 | ||||||||||||
|
Loans,
net
|
880,594 | 896,628 | 717,303 | 718,184 | ||||||||||||
|
Accrued
interest receivable
|
4,081 | 4,081 | 4,085 | 4,085 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Deposits
|
852,290 | 853,187 | 834,642 | 835,151 | ||||||||||||
|
Federal funds
purchased
|
21,800 | 21,800 | --- | --- | ||||||||||||
|
Federal Home
Loan Bank borrowings
|
35,000 | 34,137 | --- | --- | ||||||||||||
|
Subordinated
debenture
|
5,000 | 5,000 | 5,000 | 5,000 | ||||||||||||
|
Accrued
interest payable
|
918 | 918 | 796 | 796 | ||||||||||||
|
Interest rate
swaps
|
3,456 | 3,456 | 647 | 647 | ||||||||||||
The following
methods and assumptions were used to estimate the fair value of each class of
financial instruments:
Cash and
Cash Equivalents - Cash and cash equivalents are valued at their carrying
amounts because of the short-term nature of these instruments.
Investment
Securities - Investment securities are valued using the methodology
discussed in Note 16 below.
Loans
- Loans with variable interest rates are valued at the current carrying value,
because these loans are regularly adjusted to market rates. The fair
value of fixed rate loans or variable loans at negotiated floors with remaining
maturities in excess of one year is estimated by discounting the future cash
flows using current market rates at which similar loans would be made to
borrowers with similar credit ratings for the same remaining
maturities.
Accrued
Interest Receivable and Payable - The accrued interest receivable and
payable balance approximates its fair value.
Deposits
- The fair value of non-interest bearing deposits, interest bearing transaction
accounts and savings accounts is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated by discounting the
future cash flows using current rates offered for deposits of similar remaining
maturities.
Federal
Funds Purchased - The balance represents its fair value due to the
short-term nature of these borrowings.
Federal
Home Loan Bank Borrowings - The fair value is estimated by discounting
the future cash flows using current rates offered for similar
borrowings.
Subordinated
Debenture - The balance represent its fair value as it has a variable
interest rate.
Interest
rate swaps – Interest rate swaps are valued using the methodology
discussed in Note 16 below.
Commitments
- The fair value of commitments represents the carrying amount of the related
unamortized loan fees and is not material.
Note
16: Fair Value Measurements
Effective January
1, 2007, we adopted SFAS No. 157, concurrent with the early adoption of SFAS No.
159. SFAS No. 157 clarifies the definition of fair value, describes methods used
to appropriately measure fair value in accordance with generally accepted
accounting principles and expands fair value disclosure requirements. This
statement applies whenever other accounting pronouncements require or permit
fair value measurements.
The following table
summarizes our financial instruments that were required to be measured at fair
value on a recurring basis at December 31, 2008.
|
(Dollars in
thousands)
Description
of Financial Instruments
|
December 31,
2008
|
Quoted Prices
in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||||||||||
|
Securities
available for sale
|
$ | 79,952 | $ | --- | $ | 79,952 | $ | --- | ||||||||
|
Derivative
financial liabilities
|
$ | 3,456 | $ | --- | $ | 3,456 | $ | --- | ||||||||
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, we
obtain 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. There are no assets or liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) during the
year ended December 31, 2008.
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 our 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, observable market prices for LIBOR swap rates, 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. We have used the spread over LIBOR on
the FHLB San Francisco fixed-rate credit advance with the duration
corresponding to the swaps' to calculate this credit-risk related discount
of future cash flows.
Certain financial
assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value
adjustments that result from the application of the lower of cost or fair value
accounting or write-downs of individual assets. 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). Securities held to
maturity may be written down to fair value (determined using the same techniques
discussed above for securities available for sale) as a result of an
other-than-temporary impairment, if any. The following table presents the
carrying value of financial instruments by level within the fair value hierarchy
as of December 31, 2008, for which a nonrecurring change in fair value has been
recorded in 2008.
|
(Dollars in
thousands)
Description
of Financial Instruments
|
December 31,
2008
|
Quoted Prices
in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
Losses for
the year ended December 31, 2008
|
|||||||||||||||
|
Impaired
loans
|
$ | 6,692 | $ | --- | $ | --- | $ | 6,692 | $ | 2,652 | ||||||||||
SFAS No. 157
generally permits the measurement of selected eligible financial instruments at
fair value on specified election dates. In conjunction with the our decision to
sell the indirect auto portfolio on June 5, 2007, we elected the fair value
measurement option for the indirect auto loan portfolio under the early adoption
provisions of SFAS No. 159 effective January 1, 2007. The following table
presents a computation of the net change to retained earnings at the initial
adoption of SFAS No. 159 for our indirect auto loan portfolio.
|
January 1,
2007
|
Net Gain
(Loss)
|
January 1,
2007
|
|||||||||||
|
(Dollars in
thousands)
|
Prior to
Adoption
|
Upon
Adoption
|
After
Adoption
|
||||||||||
|
Assets
|
|||||||||||||
|
Auto loans,
net
|
$ | 83,327 | $ | (2,499 | ) |
(a)
|
$ | 80,828 | |||||
|
Pre-tax
cumulative effect of adoption of the fair value option
|
(2,499 | ) | |||||||||||
|
Increase in
deferred tax asset
|
1,047 | ||||||||||||
|
Cumulative
effect of adoption of the fair value option (charge to retained
earnings)
|
$ | (1,452 | ) | ||||||||||
|
(a)
|
The
$2.5 million loss on loans that was recorded as part of the
cummulative-effect adjustment to retained earnings upon initial
adoption of SFAS No. 159 is net of $1.0 million that was removed from the
allowance for loan losses.
|
Note
17: Regulatory Matters
We 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 our consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital guidelines
that involve quantitative measures of our assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and our 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 requires us 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.
Our capital
adequacy ratios are presented in the following tables. Capital ratios
are reviewed by Management on a regular basis to ensure that capital exceeds the
prescribed regulatory minimums and is adequate to meet our anticipated future
needs. For all periods presented, our ratios exceed the regulatory
definition of well capitalized under the regulatory framework for prompt
corrective action (Bank level) and capital adequacy purposes (Bancorp
level).
|
Capital
Ratios for the Bancorp:
|
Ratio for
Capital
|
|||||||||
|
(Dollars in
thousands)
|
Actual
Ratio
|
Adequacy
Purposes
|
||||||||
|
As of
December 31, 2008
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
Total Capital
(to risk-weighted assets)
|
$ | 140,620 | 14.08 | % |
>$79,933
|
>8.0%
|
||||
|
Tier 1
Capital (to risk-weighted assets)
|
$ | 125,158 | 12.53 | % |
>$39,967
|
>4.0%
|
||||
|
Tier 1
Capital (to average assets)
|
$ | 125,158 | 12.40 | % |
>$40,390
|
>4.0%
|
||||
|
As of
December 31, 2007
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
Total Capital
(to risk-weighted assets)
|
$ | 101,066 | 12.06 | % |
>$67,015
|
>8.0%
|
||||
|
Tier 1
Capital (to risk-weighted assets)
|
$ | 88,041 | 10.51 | % |
>$33,508
|
>4.0%
|
||||
|
Tier 1
Capital (to average assets)
|
$ | 88,041 | 9.63 | % |
>$36,588
|
>4.0%
|
||||
|
Ratio to be
Well
|
||||||||||||
|
Capitalized
Under
|
||||||||||||
|
Capital
Ratios for the Bank:
|
Ratio for
Capital
|
Prompt
Corrective
|
||||||||||
|
(Dollars in
thousands)
|
Actual
Ratio
|
Adequacy
Purposes
|
Action
Provisions
|
|||||||||
|
As of
December 31, 2008
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
Total Capital
(to risk-weighted assets)
|
$ | 139,329 | 13.95 | % |
>$79,922
|
>8.0%
|
>$99,903
|
>10.0%
|
||||
|
Tier 1
Capital (to risk-weighted assets)
|
$ | 123,867 | 12.40 | % |
>$39,961
|
>4.0%
|
>$59,942
|
>6.0%
|
||||
|
Tier 1
Capital (to average assets)
|
$ | 123,867 | 12.27 | % |
>$40,389
|
>4.0%
|
>$50,487
|
>5.0%
|
||||
|
As of
December 31, 2007
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
Total Capital
(to risk-weighted assets)
|
$ | 97,179 | 11.61 | % |
>$66,983
|
>8.0%
|
>$83,729
|
>10.0%
|
||||
|
Tier 1
Capital (to risk-weighted assets)
|
$ | 84,155 | 10.05 | % |
>$33,491
|
>4.0%
|
>$50,237
|
>6.0%
|
||||
|
Tier 1
Capital (to average assets)
|
$ | 84,155 | 9.20 | % |
>$36,587
|
>4.0%
|
>$45,734
|
>5.0%
|
||||
See Note 10 for
discussion regarding our pending repurchase of preferred stock that would reduce
the above ratios.
Note
18: Financial Instruments with Off-Balance Sheet Risk
We make commitments
to extend credit in the normal course of business to meet the financing needs of
our customers. These financial instruments include commitments to
extend credit in the form of loans or through standby letters of
credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements.
We are exposed to
credit loss equal to the contract amount of the commitment in the event of
nonperformance by the borrower. We use the same credit policies in making
commitments as we do for on-balance-sheet instruments and we evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by us, is based on Management's credit
evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and real
property.
The contract amount
of loan commitments and standby letters of credit not reflected on the
consolidated statement of condition was $255.9 million at December 31, 2008 at
rates ranging from 2.25% to 8.00%. This amount included $133.7
million under commercial lines of credit (these commitments are contingent upon
customers maintaining specific credit standards), $76.3 million under revolving
home equity lines, $34.9 million under undisbursed construction loans, $4.0
million under standby letters of credit, and a remaining $7.0 million under
personal and other lines of credit. We have set aside an allowance for losses in
the amount of $512 thousand for these commitments, which is recorded in interest
payable and other liabilities. Approximately 47% of the commitments
expire in 2009 with approximately 53% expiring between 2010 and
2023.
Note
19: Derivative Financial Instruments and Hedging
Activities
We have entered
into interest-rate swap agreements, primarily as an asset/liability management
strategy, in order to mitigate the changes in the fair value of specified
long-term fixed-rate loans and firm commitments to enter into long-term
fixed-rate loans caused by changes in interest rates. These hedges
allow us to offer long-term fixed rate loans to customers without assuming the
interest rate risk of a long-term asset by swapping our fixed-rate interest
stream for a floating-rate interest stream, generally benchmarked to the
one-month U.S. dollar LIBOR index, thus protecting us against changes in the net
interest margin otherwise associated with fluctuating interest
rates.
The fixed-rate
payment features of 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 our interest rate swap agreements qualifies for short-cut hedge
accounting treatment in accordance with SFAS No. 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.
Our 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 an interest rate swap is in a liability position
exceeding a certain threshold, we are required to post collateral to the
counterparty (generally when our derivative liability position is greater than
$100 thousand or $1.25 million, depending upon the counterparty, at which time
posting of collateral in an amount up to the liability position is
required). Collateral levels are monitored and adjusted on a regular
basis for changes in interest rate swap values. The aggregate fair value of all
derivative instruments with collateral requirements that are in a liability
position on December 31, 2008 is $3.5 million, for which we have posted
collateral in the form of securities available for sale totaling $3.9 million
and cash of $610 thousand.
As of December 31,
2008, we had three interest rate swap agreements, which are scheduled to mature
in September 2018, June 2020 and June 2022. All of our derivatives
are accounted for as fair value hedges under SFAS No. 133. As our interest rate
swaps are settled monthly with counterparties, accrued interest on the swaps, if
any, is minimal. Information on our derivatives follows:
|
(in
thousands)
|
Liability
derivatives designated as fair value hedges under SFAS No.
133
|
|||||||
|
As of
December 31,
|
2008
|
2007
|
||||||
|
Interest rate
swap notional amount
|
$ | 17,833 | $ | 15,335 | ||||
|
Credit risk
amount
|
--- | --- | ||||||
|
Interest rate
swap fair value (1)
|
3,456 | 647 | ||||||
|
Balance sheet
location
|
Other
liabilites
|
Other
liabilites
|
||||||
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Unrealized
loss on designated interest rate swaps recognized in interest
income
|
$ | (2,809 | ) | $ | (572 | ) | $ | (198 | ) | |||
|
(Payment)
receipt on interest rate swap recorded in interest income
|
(352 | ) | 37 | 36 | ||||||||
|
Increase in
value of hedged loans recognized in interest income
|
2,841 | 784 | 198 | |||||||||
|
Decrease in
value of yield maintenance agreement recognized against
interest income
|
(21 | ) | (233 | ) | --- | |||||||
|
Net loss
(gain) on derivatives recognized in interest income (2)
|
$ | (341 | ) | $ | 16 | $ | 36 | |||||
(1) See
Note 16 for valuation methodology.
(2) Ineffectiveness
of $11 thousand, ($21) thousand and zero was recorded in interest income during
the years ended December 31, 2008, 2007 and 2006, respectively. The full change
in value of swaps was included in the assessment of hedge
effectiveness.
Note
20: Transactions with Visa Inc.
As a member bank of
Visa Inc., we hold 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, we 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.
In November 2007,
Visa Inc. settled antitrust litigation with American Express Travel Related
Services (“AMEX”) for $2.1 billion. As a member bank of Visa U.S.A.,
we were responsible for our proportionate share of certain litigation
indemnification obligations to Visa Inc. including $142 thousand for the AMEX
litigation and $100 thousand estimated for other antitrust
litigation. We recorded a liability of $242 thousand in the fourth
quarter of 2007 representing our proportionate share. In March of 2008, we
reversed our liability because, subsequent to Visa Inc.’s IPO on March 19, 2008,
it established an escrow account for $3.0 billion from which it paid the initial
amount owed under the AMEX settlement and planned to pay the required quarterly
AMEX payments and additional identified antitrust settlements as they
occurred. The funding of the escrow was accomplished through a
reduction in the conversion factor of Visa Inc. Class B shares held by the
member banks that are available for conversion to Class A shares as allowed by
the Retrospective Responsibility Plan outlined in the Form S-1 filed by Visa
Inc. on November 9, 2007.
On October 27, 2008
Visa Inc. announced a settlement with the other major antitrust litigant,
Discover Financial Services, Inc., for $1.9 billion, of which $1.7 billion is
the responsibility of member banks. As of the settlement date, the
escrow account was under-funded by $1.1 billion. We recorded a liability of $75
thousand for our proportionate share of the shortfall. On December 19, 2008 Visa
Inc. deposited another $1.1 billion directly into the litigation escrow account
to cover the settlement through a further reduction in the conversion factor of
Visa Inc. Class B shares. As a result, we reversed our liability of $75 thousand
in December 2008.
Our proportionate
share of the potential exposure related to the remaining open cases (the
Attridge Litigation and the Interchange Litigation) is not expected to be
material. We do not expect any future cash settlement payments to be required by
us on this portion of the litigation.
Note
21: Condensed Bank of Marin Bancorp Parent Only Financial
Statements
Presented below is
financial information for Bank of Marin Bancorp, parent holding company only,
subsequent to its formation on July 1, 2007.
|
CONDENSED
UNCONSOLIDATED STATEMENT OF CONDITION
at
December 31, 2008 and December 31,
2007
|
|
(in
thousands)
|
December 31,
2008
|
December 31,
2007
|
||||||
|
Assets
|
||||||||
|
Cash and due
from Bank of Marin
|
$ | 1,443 | $ | 3,751 | ||||
|
Investment in
subsidiary
|
124,255 | 83,887 | ||||||
|
Other
assets
|
80 | 179 | ||||||
|
Total
assets
|
$ | 125,778 | $ | 87,817 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Accrued
expenses payable
|
$ | 185 | $ | 43 | ||||
|
Intercompany
payble to Bank of Marin
|
47 | - | ||||||
|
Total
liabilities
|
232 | 43 | ||||||
|
Stockholders'
equity
|
125,546 | 87,774 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 125,778 | $ | 87,817 | ||||
|
CONDENSED
UNCONSOLIDATED STATEMENT OF OPERATIONS
for
the year ended December 31, 2008 and the six months ended December 31,
2007
|
|
(in
thousands)
|
December 31,
2008
|
December 31,
2007
|
||||||
|
Income
|
||||||||
|
Dividends
from Bank of Marin
|
$ | 3,250 | $ | 7,000 | ||||
|
Total
income
|
3,250 | 7,000 | ||||||
|
Expense
|
||||||||
|
Non-interest
expense
|
651 | 371 | ||||||
|
Total
expense
|
651 | 371 | ||||||
|
Income
before income taxes and equity in undistributed net income of
subsidiary
|
2,599 | 6,629 | ||||||
|
Income tax
benefit
|
267 | 156 | ||||||
|
Income before
equity in undistributed net income of subsidiary
|
2,866 | 6,785 | ||||||
|
Equity in
undistributed net income of subsidiary
|
9,284 | (338 | ) | |||||
|
Net
income
|
$ | 12,150 | $ | 6,447 | ||||
|
Preferred
stock dividends and accretion
|
(113 | ) | - | |||||
|
Net income
available to common shareholders
|
$ | 12,037 | $ | 6,447 | ||||
|
CONDENSED
UNCONSOLIDATED STATEMENT OF CASH FLOWS
for
the year ended December 31, 2008 and the six months ended December 31,
2007
|
|
(in
thousands)
|
December 31,
2008
|
December 31,
2007
|
||||||
|
Cash
Flows from Operating Activities:
|
||||||||
|
Net
income
|
$ | 12,150 | $ | 6,447 | ||||
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
|
Equity in
undistributed and distributed net income of subsidiary
|
(12,534 | ) | (6,662 | ) | ||||
|
Net change in
operating assets and liabilities
|
||||||||
|
Other
assets
|
99 | (179 | ) | |||||
|
Other
liabilities
|
88 | 43 | ||||||
|
Intercompany
payable
|
47 | --- | ||||||
|
Net cash used
in operating activities
|
(150 | ) | (351 | ) | ||||
|
Cash
Flows from Investing Activities:
|
||||||||
|
Capital
contribution to subsidiary
|
(29,384 | ) | (61 | ) | ||||
|
Net cash used
in investing activities
|
(29,384 | ) | (61 | ) | ||||
|
Cash
Flows from Financing Activities:
|
||||||||
|
Proceeds from
issuance of preferred stock
|
27,039 | --- | ||||||
|
Proceeds from
issuance of warrants
|
961 | --- | ||||||
|
Stock options
exercised
|
1,384 | 61 | ||||||
|
Dividends
paid on common stock
|
(2,882 | ) | (1,345 | ) | ||||
|
Dividends
received from subsidiary
|
3,250 | 7,000 | ||||||
|
Stock
repurchased
|
(2,526 | ) | (1,553 | ) | ||||
|
Net cash
provided by financing activities
|
27,226 | 4,163 | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(2,308 | ) | 3,751 | |||||
|
Cash and cash
equivalents at beginning of period
|
3,751 | --- | ||||||
|
Cash and cash
equivalents at end of period
|
$ | 1,443 | $ | 3,751 | ||||
Non-Cash
Transactions: The fiscal year ended December 31, 2008 reflects non-cash
financing items of $97 thousand dividend payable to preferred stockholder and
$16 thousand accretion of preferred stock. Non-cash financing items also
included $247 thousand and $134 thousand of common stock issued in payment of
director fees for the fiscal year ended December 31, 2008 and six months ended
December 31, 2007, respectively. Upon formation of the holding company on July
1, 2007, Bank of Marin Bancorp exchanged one share of common stock for each
share of common stock of the Bank of Marin. The investment in subsidiary account
was created to reflect the total capital of the Bank of $84.2 million at that
date, comprised of $53.0 million of common stock, $31.9 million of retained
earnings, and $762 thousand of other comprehensive loss.
End of 2008 Audited
Consolidated Financial Statements
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
|
(A)
|
Evaluation of
Disclosure Controls and
Procedures
|
Our Chief Executive
Officer, Chief Financial Officer, and several other members of our senior
management have evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2008.
Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded, as of December 31, 2008, that the disclosure controls and procedures
were effective in recording, processing, summarizing and reporting the
information we are required to disclose in the reports it files under the
Securities Exchange Act of 1934, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
|
(B)
|
Management's Annual
Report on Internal Control over Financial
Reporting
|
Our Management’s
report on Internal Control over Financial Reporting is set forth in Item 8 and
is incorporated herein by reference.
Our independent
auditors have issued an audit report on our internal control over financial
reporting. See (D) below.
|
(C)
|
Changes in Internal
Controls
|
During the quarter
ended December 31, 2008, we did not make any significant changes in, nor take
any corrective actions regarding, our internal controls or other factors that
have materially affected, or are reasonably likely to materially affect these
controls.
|
(D)
|
Attestation Report of
the Registered Public Accounting
Firm
|
The Attestation
Report of the Registered Public Accounting firm required to be furnished
pursuant to this item is set forth in Item 8 and is incorporated herein by
reference.
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART
III
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The information
required by this Item is incorporated by reference from our Proxy Statement for
the 2009 Annual Meeting of Shareholders. Bancorp and the Bank
have adopted a Code of Ethics that applies to all staff including the Chief
Executive Officer, Chief Financial Officer and Controller. A copy of the Code of
Ethics will be provided to any person, without charge, upon written request to
Corporate Secretary, Bank of Marin Bancorp, 504 Redwood Boulevard, Suite 100,
Novato, CA 94947.
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information
required by this Item is incorporated by reference from our Proxy Statement for
the 2009 Annual Meeting of Shareholders.
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The information
required by this Item is incorporated by reference from Item 5 above, Note 9 to
our audited financial statements and our Proxy Statement for the 2009 Annual
Meeting of Shareholders.
|
ITEM
13.
|
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information
required by this Item is incorporated by reference from our Proxy Statement for
the 2009 Annual Meeting of Shareholders.
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information
required by this Item is incorporated by reference from our Proxy Statement for
the 2009 Annual Meeting of Shareholders.
PART
IV
|
ITEM 15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
|
(A)
|
Documents
Filed as Part of this Report
|
|
|
1.
|
Financial
Statements
|
The financial
statements and supplementary data listed below are filed as part of this report
under Item 8, captioned Financial Statements and
Supplementary Data.
Report of
Independent Registered Public Accounting Firm for the years ended December 31,
2008, 2007 and 2006
Management’s Report
on Internal Control over Financial Reporting
Consolidated
Statement of Condition as of December 31, 2008 and 2007
Consolidated
Statement of Operations for the Years Ended December 31, 2008, 2007 and
2006
Consolidated
Statement of Changes in Stockholders' Equity for the Years Ended December 31,
2008, 2007 and 2006
Consolidated
Statement of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
Notes to
Consolidated Financial Statements
|
|
2.
|
Financial
Statement Schedules
|
All financial
statement schedules have been omitted, as they are inapplicable or the required
information is included in the financial statements or notes
thereto.
|
(B)
|
Exhibits
Filed
|
|
|
Number
|
Description of
Exhibit
|
|
|
3.01
|
Articles of
Incorporation, as amended, is 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.
|
|
|
3.03
|
Certificate
of Determination filed with the California Secretary of State for the
purpose of amending registrant’s Articles of Incorporation with respect to
preferred stock is incorporated by reference to Exhibit 3.1 to Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 9, 2008.
|
|
|
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.
|
|
|
4.02
|
Form of
Certificate of Preferred Stock is incorporated by reference to Exhibit 4.1
to Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 9, 2008.
|
|
|
4.03
|
Form of
Warrant for Purchase of Shares of Common Stock is incorporated by
reference to Exhibit 4.2 to Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 9,
2008.
|
|
|
10.01
|
2007 Employee
Stock Purchase Plan is incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8 filed with the Securities and Exchange
Commission on July 24, 2007.
|
|
|
10.02
|
1989 Stock
Option Plan is incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
July 24, 2007.
|
|
|
10.03
|
1999 Stock
Option Plan is incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
July 24, 2007.
|
|
|
10.04
|
2007 Equity
Plan is incorporated by reference to Exhibit 4.1 to Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on July 24,
2007.
|
|
|
10.05
|
Form of
Change in Control Agreement is incorporated by reference to Exhibit 10.01
to Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 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 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
March 14, 2008.
|
|
|
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 Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 14,
2008.
|
|
|
10.09
|
Form of
Letter Agreement dated December 5, 2008 between registrant and the United
States Department of Treasury, with respect to issuance of preferred stock
and warrants is incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 9, 2008.
|
|
|
10.10
|
Form of
Employment Agreement dated January 23, 2009 is incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 26,
2009.
|
|
|
12.01
|
Schedule of
Earnings to Fixed Charges and Schedule of Earnings to Fixed Charges and
Preferred Dividends.
|
|
|
14.01
|
Code of
Ethics is incorporated by reference to Exhibit 14.01 to Current Report on
Form 8-K filed with the Securities and Exchange Commission on June 26,
2008.
|
|
|
23.01
|
Consent of
Moss Adams LLP.
|
|
|
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.
|
SIGNATURES
Pursuant to the
requirements of Section 13 of the Securities Exchange Act of 1934, Bancorp has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Bank of Marin
Bancorp
|
|
|
Dated: March 10,
2009
|
/s/ Russell A. Colombo
|
|
Russell A.
Colombo
|
|
|
President
&
|
|
|
Chief
Executive Officer
|
|
|
Dated: March 10,
2009
|
/s/ Christina J. Cook
|
|
Christina J.
Cook
|
|
|
Executive
Vice President &
|
|
|
Chief
Financial Officer
|
|
|
Dated: March 10,
2009
|
/s/ Larry R. Olafson
|
|
Larry R.
Olafson
|
|
|
Controller
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
Members of
Bank of Marin Bancorp's
|
|
|
Board of
Directors
|
|
|
Dated: March 10,
2009
|
/s/ Joel
Sklar
|
|
Joel Sklar,
M.D.
|
|
|
Chairman of
the Board
|
|
|
Dated: March 10,
2009
|
/s/
Russell A. Colombo
|
|
Russell A.
Colombo
|
|
|
President
&
|
|
|
Chief
Executive Officer
|
|
|
Dated: March 10,
2009
|
/s/ Judith O’Connell
Allen
|
|
Judith
O’Connell Allen
|
|
|
Dated: March 10,
2008
|
/s/
James E. Deitz
|
|
James E.
Deitz
|
|
|
Dated: March 10,
2009
|
/s/ Thomas J.
Foster
|
|
Thomas J.
Foster
|
|
Dated: March 10,
2009
|
/s/ H. Robert
Heller
|
|
H. Robert
Heller
|
|
|
Dated: March 10,
2009
|
/s/ Norma J.
Howard
|
|
Norma J.
Howard
|
|
|
Dated: March 10,
2009
|
/s/ J. Patrick
Hunt
|
|
J. Patrick
Hunt
|
|
|
Dated: March 10,
2009
|
/s/ Stuart D.
Lum
|
|
Stuart D.
Lum
|
|
|
Dated: March 10,
2009
|
/s/ Joseph D.
Martino
|
|
Joseph D.
Martino
|
|
|
Dated: March 10,
2009
|
/s/ William McDevitt,
Jr.
|
|
William
McDevitt, Jr.
|
|
|
Dated: March 10,
2009
|
/s/ Brian M.
Sobel
|
|
Brian M.
Sobel
|
|
|
Dated: March 10,
2009
|
/s/ J. Dietrich
Stroeh
|
|
J. Dietrich
Stroeh
|
|
|
Dated: March 10,
2009
|
/s/ Jan I.
Yanehiro
|
|
Jan I.
Yanehiro
|
EXHIBIT INDEX
|
Exhibit
Number
|
Description
|
Location
|
||
|
Schedule of
Earnings to Fixed Charges
|
Filed
herewith
|
|||
|
Consent of
Moss Adams LLP.
|
Filed
herewith.
|
|||
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
Filed
herewith.
|
|||
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as
adopted pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
Filed
herewith.
|
|||
|
Certification
pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
|
Furnished
herewith.
|
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