Notice of Securities of a Successor Issuer Deemed to be Registered — Form 8-K Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 8-K12G3 Bank of Marin Bancorp 8-K12G3 6-29-2007 HTML 612K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 40K
Liquidation or Succession
Date
of
Report (Date of earliest event reported) June 29, 2007
Bank
of Marin Bancorp
(Exact
name of Registrant as specified in its charter)
California
20-8859754
(State
or other jurisdiction of incorporation)
(File
number)
(I.R.S.
Employer Identification No.)
504
Redwood Blvd., Suite 100, Novato, CA
94947
(Address
of principal executive office)
(Zip
Code)
Registrant’s
telephone number, including area code: (415)
884-7781
Not
Applicable
(Former
name or former address, if changes since last report)
Check
the
appropriate box below if the Form 8-K filing is to simultaneously satisfy the
filing obligation of the registrant under any of the following
provisions:
£
Written
communications pursuant to Rule 425 under the Securities Act (17CFR
230.425)
£
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
£
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR
240.14d-2(b))
£
Pre-commencement
communications pursuant to Rule 13e-4(c)) under the Exchange Act
(17 CFR
240.13e-4(c))
Section
2 - Financial Information
Item
2.01.
COMPLETION
OF ACQUISITION OR DISPOSITION OF
ASSETS.
On
Sunday, July 1, 2007, Bank of Marin, a state banking corporation organized
under
the laws of the State of California (“Bank”), will complete its holding company
reorganization, whereby the Bank will become the wholly owned subsidiary of
Bank
of Marin Bancorp, a California corporation (“Bancorp”). The Plan of
Reorganization and Agreement of Merger, dated March 8, 2007 (the “Plan”), which
governs the reorganization was submitted to the California Secretary of State
on
Friday, June 29, 2007 for filing as of Sunday, July 1, 2007.
Pursuant
to the Plan, upon the closing of the reorganization each outstanding share
of
Bank common stock will be exchanged for one share of common stock of
Bancorp.
Registrar
and Transfer Company of Cranford, New Jersey, is Bancorp’s transfer
agent.
The
filing of this 8-K Report by Bancorp begins Bancorp’s filings with the
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”). The Bank
previously filed such Exchange Act reports with the Federal Deposit Insurance
Corporation (FDIC) pursuant to Section 12(i) of the Exchange Act.
Bancorp’s
common stock will begin trading on the Nasdaq Capital Market under the symbol
“BMRC” on July 2, 2007.
Section
9 - Financial Statements and Exhibits
Item
9.01
FINANCIAL
STATEMENTS AND EXHIBITS
(a)
Financial
statements of business
acquired.
The
audited financial statements for Bank of Marin as of December 31, 2006 and
2005,
and for the three year period ended December 31, 2006 are attached hereto
beginning at page F-1.
(b)
Pro
forma financial information.
Because
Bank of Marin Bancorp had no operations as of December 31, 2006, pro forma
financial information for Bank of Marin Bancorp and Bank of Marin on a
consolidated basis would be substantially identical to the financial statements
of Bank of Marin attached hereto.
(d)
Exhibits.
2.1
Plan
of Reorganization and Agreement of Merger, dated as of March 8,2007.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Bank of Marin
We
have
audited the accompanying statements of condition of Bank of Marin (the Bank)
as
of December 31, 2006 and 2005 and the related statements of operations, changes
in stockholders’ equity and cash flows for the three years ended December 31,2006. We have also audited management’s assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting, that the Bank
maintained effective internal control over financial reporting as of December31, 2006, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Bank of Marin’s management is responsible for these financial
statements, 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, an opinion on management’s assessment, and an opinion on the
effectiveness of the Bank’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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, evaluating management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, 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 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.
F-1
Because
of the 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 policies or procedures may deteriorate.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Bank of Marin as of December 31,2006 and 2005 and the results of its operations and cash flows for the three
years then ended in conformity with accounting principles generally accepted
in
the United States of America. Also, in our opinion management’s
assessment that Bank of Marin maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal Control – Integrated
Framework issued by the COSO. Furthermore, in our opinion, Bank of Marin
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control – Integrated Framework issued by the COSO.
As
discussed in note one to the financial statements, effective January 1, 2006,
the Bank changed its method of accounting for share-based payment arrangements
to conform to Statement of Financial Accounting Standard No. 123(R),
“Share-Based Payment.”
Adjustments
to reconcile net income to net cash provided by operating
activities:
Provision
for loan losses
1,266
1,541
934
Compensation
payable in common stock
465
410
344
Stock-based
compensation expense
555
---
---
Excess
tax benefits from exercised stock options
(1,394
)
---
---
Amortization
and accretion of investment security premiums, net
487
821
1,570
Depreciation
and amortization
998
846
949
Net
loss on disposition and sale of furniture and equipment
50
---
---
Net
change in operating assets and liabilities:
Interest
receivable
(257
)
(621
)
(362
)
Interest
payable
292
89
(25
)
Deferred
rent and other rent-related expenses
164
---
---
Other
assets
(1,870
)
(2,762
)
(3,468
)
Other
liabilities
1,060
1,709
1,046
Total
adjustments
1,816
2,033
988
Net
cash provided by operating activities
13,699
13,770
10,506
Cash
Flows from Investing Activities:
Purchase
of securities held-to-maturity
(1,087
)
(1,205
)
(5,363
)
Purchase
of securities available-for-sale
(10,471
)
(33,630
)
(38,545
)
Proceeds
from paydowns/maturity of:
Securities
held-to-maturity
8,663
15,915
9,350
Securities
available-for-sale
22,011
19,511
42,878
Proceeds
from sales of securities
---
992
---
Purchase
of bank owned life insurance policies
(1,159
)
(698
)
---
Loans
originated and principal collected, net
(33,475
)
(110,240
)
(126,358
)
Proceeds
from sale of equipment
12
---
---
Additions
to premises and equipment
(3,855
)
(1,969
)
(352
)
Net
cash used in investing activities
(19,361
)
(111,324
)
(118,390
)
Cash
Flows from Financing Activities:
Net
increase in deposits
15,525
76,093
60,963
Proceeds
from stock options exercised
3,307
2,031
2,527
Net
increase in Federal Funds purchased and Federal Home Loan Bank
borrowings
8,400
13,200
17,800
Common
stock repurchased
(3,968
)
---
---
Dividends
paid in cash
(2,448
)
(990
)
(1,824
)
Cash
paid for fractional shares
(27
)
(17
)
(9
)
Subordinated
debt issued
---
---
5,000
Excess
tax benefits from exercised stock options
1,394
---
---
Net
cash provided by financing activities
22,183
90,317
84,457
Net
increase (decrease) in cash and cash equivalents
16,521
(7,237
)
(23,427
)
Cash
and cash equivalents at beginning of year
22,262
29,499
52,926
Cash
and cash equivalents at end of year
$
38,783
$
22,262
$
29,499
Supplemental
disclosure of cash flow information:
Cash
paid for interest
$
16,285
$
9,911
$
5,319
Cash
paid for income taxes
$
6,075
$
7,400
$
5,599
The
accompanying notes are an integral part of these financial
statements.
F-6
NOTES
TO FINANCIAL STATEMENTS
Note
1: Summary of Significant Accounting Policies
Nature
of Operations: The Bank of Marin (the Bank) is a California
state chartered bank. The Bank operates eight branches in Marin
County and three in southern Sonoma County, California. The Bank's
primary source of revenue is interest from providing loans to customers, who
are
predominantly professionals, small and middle-market businesses, and middle
and
high-income individuals who work and/or reside in Marin and southern Sonoma
counties. The accounting and reporting policies of the Bank conform
with generally accepted accounting principles and general practice within the
banking industry. A summary of the more 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 the Bank has the ability and intent to hold until maturity and are
reported at cost, adjusted for the amortization or accretion of premiums or
discounts. Investments classified as trading securities are reported
at fair value, with unrealized gains and losses included in
earnings. Investments classified as available for sale 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 the majority of the Bank's
securities, fair values are determined based upon quoted prices for similar
securities.
At
each
financial statement date, management assesses each investment to determine
if
impaired investments are temporarily impaired or if the impairment is other
than
temporary based upon the positive and negative evidence
available. Evidence evaluated includes, but is not limited to,
industry analyst reports, credit market conditions and interest rate
trends. A decline in the market value of any security below cost that
is deemed other than temporary 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 nonaccrual status when
management believes that there is serious doubt as to the collection of
principal or interest, or when they become contractually past due by 90 days
or
more with respect to principal or interest, except for loans that are both
well
secured and in the process of collection. When loans are placed on
nonaccrual 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 has been collected. Loan
origination 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, the Bank considers the Bank's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, current economic conditions and other factors.
The
allowance for loan losses is based on estimates and ultimate losses may vary
from current estimates.
F-7
The
Bank's method for assessing the appropriateness of the allowance includes
specific allowances for identified problem loans, an allowance factor for pools
of credits and allowances for changing environmental factors (e.g., portfolio
trends, concentration of credit, growth, economic factors,
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 applicable to each loan
pool. Due to the Bank's minimal historic losses, loss estimation
factors are based only in part on the previous historical loss experience for
each pool. Allowances for changing environmental factors are
management's best estimate of the probable impact these changes have had on
the
loan portfolio as a whole.
The
Bank
considers a loan to be impaired when it is probable the Bank 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. The Bank's
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 The Bank has entered into certain participation
agreements with other organizations. The Bank accounts 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 the Bank on the sale of these participation
interests.
Bank
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 The Bank accounts
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." The
Bank recognizes compensation cost equal to the fair value of the ESOP shares
during the periods in which they become committed to be released. To
the extent that the fair value of the Bank'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.
F-8
Income
Taxes reported in the financial statements are computed based on an asset
and liability approach. The Bank recognizes 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.
Cash
and Cash Equivalents include cash and due from banks and federal funds
sold, which have an original maturity of 90 days or less.
Earnings
per share are based upon the weighted average number of common shares
outstanding during each year. The following table shows weighted
average basic shares, potential common shares related to stock options, and
weighted average diluted shares. Basic earnings per share are based
upon the weighted average number of common shares outstanding during each
period. Diluted earnings per share are based upon the weighted
average number of common shares and potential common shares outstanding during
each period. Earnings per share and share amounts for all periods
have been retroactively adjusted for the 5% stock dividends in 2005 and
2006.
2006
2005
2004
Weighted
average basic shares outstanding
5,385,483
5,163,962
5,012,885
Add:
Potential common shares related to stock options
253,936
352,536
387,172
Weighted
average diluted shares outstanding
5,639,419
5,516,498
5,400,057
The
number of anti-dilutive shares not included in the calculation of diluted
earnings per share was 87,865, 64,418 and 14,963 at December 31, 2006, 2005
and
2004, respectively.
Share-Based
Compensation On January 1, 2006 the Bank adopted the provisions of
Statement of Financial Accounting Standard No.123R (SFAS No.123R)”Share-Based
Payment,” which requires that all share-based payments to employees, including
stock options, be recognized as an expense in the income statement based on
the
grant date fair value of the award with a corresponding increase in common
stock. The fair value, as defined in SFAS No.123R, is amortized over
the implied service period, which is generally the vesting period. Prior to
January 1, 2006, the Bank accounted for its share-based payments in accordance
with APB Opinion No. 25, “Accounting for Stock Issued to Employees” under which
no stock-based compensation was required to be recognized in net income for
options granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant.
Under
FAS
123R, the Bank determines fair value at grant date using the Black-Scholes
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected 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 judgment. As a result, if other assumptions had been
used, the Bank’s recorded stock-based compensation expense could have been
materially different from that recorded in its financial
statements. In addition, the Bank is required to estimate the
expected vesting period. If the Bank’s actual forfeiture rate is
materially different from the estimate, the share-based compensation expense
could be materially different.
F-9
Upon
adoption of SFAS No. 123R on January 1, 2006, the Bank elected the disclosure
provisions 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.
The
results for prior periods have not been restated. However, had compensation
cost
for the stock option plans been determined in accordance with SFAS No. 123R
in
prior periods, the Bank’s net income and earnings per share would have been
reduced to the pro forma amounts in the following table.
Weighted
average fair value of options granted during the year*
$
11.06
$
11.18
*
These
numbers have been adjusted for
the 5% stock dividends declared in April 2006 and 2005.
Derivative
financial Instruments and Hedging Activities
Fair
Value Hedges: The Bank's interest rate swap contracts that
are designated as fair value hedges are aligned to perfectly offset hedged
debt
and therefore qualify for fair value short-cut hedge accounting in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. The interest rate swaps are carried on the
balance sheet at their fair value in other assets (when the fair value is
positive) or in other liabilities (when the fair value is negative) and offset
in other non-interest income. As a result of interest rate
fluctuations, the hedged fixed-rate loan will gain or lose market
value. In a 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.
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 other non-interest income. The Bank’s forward swap is
considered to be a non-designated hedge.
Comprehensive
Income for the Bank includes net income reported on the statement of
operations and changes in the fair value of its available for sale investments,
net of related taxes, reported as a component of stockholders'
equity.
F-10
Segment
Information The Bank's two operating segments include the traditional
community banking activities provided through its eleven branches and its Wealth
Management Services. The activities of these two segments are
monitored and reported by Bank management as separate operating
segments. The accounting policies of the segments are the same as
those described in this note. The Bank evaluates segment performance
based on total segment revenue and does not allocate expenses between the
segments. Wealth Management Services revenues were $1,067 thousand in
2006, $958 thousand in 2005 and $922 thousand in 2004, 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.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified
to
conform with the current presentation. These reclassifications have
no effect on previously reported net income.
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
February 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting
for Certain Hybrid Financial Instruments”which amends FASB Statements Nos.
133 and 140 and specifies the treatment of financial instruments with embedded
derivatives. The statement allows financial instruments that have embedded
derivatives to be accounted for as a whole (eliminating the need to bifurcate
the derivative from its host), if the holder elects to irrevocably account
for
the whole instrument on a fair value basis. SFAS No. 155 is effective for
all financial instruments acquired, issued or subject to a remeasurement event
occurring after the beginning of an entity’s first fiscal year that begins after
September 15, 2006.
In
January of 2007, the FASB approved the exemption of certain securities from
SFAS
No. 155 if the embedded derivative is tied only to the prepayment risk of the
underlying financial asset and the investor does not control the right to
accelerate the settlement. The adoption of SFAS No. 155 is not expected to
have
a material impact on the financial condition or results of operations of the
Bank.
In
July
2006, the FASB issued Interpretation (FIN) No. 48, “Accounting for Uncertainty
in Income Taxes – An Interpretation of FASB Statement No. 109,” which clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes.” FIN 48 establishes a “more-likely-than-not” recognition threshold
that must be met before a tax benefit can be recognized in the financial
statements. For tax positions that meet the more-likely-than-not threshold,
an
enterprise may recognize only the largest amount of tax benefit that is greater
than fifty percent likely of being realized upon ultimate settlement with the
taxing authority. FIN 48 is effective January 1, 2007. The cumulative effect
of
applying the provisions of FIN 48 would be recognized as an adjustment to the
beginning balance of retained earnings. The adoption of FIN 48 is not expected
to have a material impact on the financial condition or results of operations
of
the Bank.
F-11
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” 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 and is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 157 is not
expected to have a material impact on the Bank’s financial position or results
of operations.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.”SAB 108 was issued to
provide interpretive guidance on how the effects of the carryover or reversal
of
prior year misstatements should be considered in quantifying a current year
misstatement. The provisions of SAB 108 are effective for fiscal
years ending on or after November 15, 2006. The adoption of SAB 108
has not had a material impact on the Bank’s financial position or results of
operations.
On
February 15, 2007, the FASB released SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities.” SFAS No. 159
permits entities to choose to measure eligible financial instruments at fair
value at specified election dates. Under SFAS No. 159 an entity will record
unrealized gains and losses in earnings on items for which the fair value option
has been elected at each subsequent reporting date. The objective is
to mitigate volatility in reported earnings without having to apply complex
hedge accounting provisions. The provisions of SFAS No. 159 are effective for
fiscal years ending on or after November 15, 2007. Management is currently
evaluating the impact of this interpretation on the Bank’s financial position
and results of operations.
F-12
Note
2: Investment Securities
The
amortized cost and fair market value of investment securities at December 31,2006 and 2005 consisted of the following:
Amortized
Gross
Unrealized
Fair
Market
(In
thousands)
Cost
Gains
Losses
Value
2006
Held to Maturity
Oblig.
Of state & political subdivisions
$
13,163
$
67
$
(114
)
$
13,116
Corporate
debt securities and other
996
12
---
1,008
Total
held to maturity
14,159
79
(114
)
14,124
2006
Available for Sale
U.
S. Treasury Securities
2,511
---
(7
)
2,504
Securities
of U. S. Government Agencies
69,742
11
(975
)
68,778
Corporate
CMOs
3,978
---
(46
)
3,932
Total
available for sale
76,231
11
(1,028
)
75,214
Total
$
90,390
$
90
$
(1,142
)
$
89,338
2005
Held to Maturity
Oblig.
Of state & political subdivisions
$
18,360
$
115
$
(190
)
$
18,285
Corporate
debt securities and other
3,535
43
(29
)
3,549
Total
held to maturity
21,895
158
(219
)
21,834
2005
Available for Sale
U.
S. Treasury Securities
4,126
---
(64
)
4,062
Securities
of U. S. Government Agencies
81,695
17
(1,267
)
80,445
Corporate
CMOs
2,277
---
(7
)
2,270
Total
available for sale
88,098
17
(1,338
)
86,777
Total
$
109,993
$
175
$
(1,557
)
$
108,611
The
amortized cost and estimated market value of investment securities at December31, 2006 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.
In
the
year ended December 31, 2006, no investment securities were sold and accordingly
no gains or losses were recognized. During 2005, the Bank sold one
security due to deterioration of the issuer’s creditworthiness. The
proceeds from the sale totaled $992 thousand and resulted in a gain of $1
thousand. In the year ended December 31, 2004, the Bank did not sell any of
its
investment securities.
F-13
At
At
December 31, 2006, investment securities carried at $6.1 million were pledged
with the Federal Reserve Bank of San Francisco: $1.3 million to secure the
Bank’s Treasury, Tax and Loan account, and $4.8 million to provide collateral
for potential future borrowings to meet unusual short-term liquidity needs.
At
December 31, 2006 investment securities carried at $10.8 million were pledged
with the State of California: $9.5 million to secure public deposits
in compliance with the Local Agency Security Program and $1.3 million to provide
collateral for trust deposits. In addition, at December 31, 2006, investment
securities carried at $2.3 million were pledged to collateralize an internal
Wealth Management Services checking account and $851 thousand was pledged to
provide collateral for the Bank’s interest-rate swaps.
Investment
securities with unrealized losses are summarized and classified according to
the
duration of the loss period as follows:
Management
periodically evaluates each investment security in an unrealized loss position
to determine if the impairment is temporary or other than
temporary. Included are forty-one securities at December 31, 2006 and
forty-one securities at December 31, 2005 with fair values of $79.3 million
and
$91.4 million, respectively, and unrealized losses of $1.1 million and $1.6
million, respectively.
F-14
Management
has determined that no investment security is impaired due to credit quality
and
no investment security is other-than-temporarily impaired. This temporary
impairment is attributable to general changes in short-term interest rates
as
measured by the U.S. Treasury yield curve.
Note
3: Loans
The
majority of the Bank's loan activity is with customers located in California,
primarily in the counties of Marin and southern Sonoma. Although the
Bank has a diversified loan portfolio, a large portion of the loans are for
commercial property, and many of the Bank's loans are secured by real estate
in
Marin and Sonoma Counties. Approximately 75% and 74% of the loans are
secured by real estate at December 31, 2006 and 2005, respectively.
Outstanding
loans by type, net of deferred loan fees of $2.8 million and $2.8 million at
December 31, 2006 and 2005, respectively, are as follows:
(In
thousands)
2006
2005
Commercial
loans
$
117,391
$
144,510
Real
estate
Commercial
311,692
282,564
Construction
116,790
112,116
Residential
58,912
36,304
Installment
Auto
loans
84,141
77,612
Other
installment
30,852
33,555
Total
loans
719,778
686,661
Less
Allowance for loan losses
(8,023
)
(7,115
)
Net
Loans
$
711,755
$
679,546
At
December 31, 2006, the Bank had one loan past due greater than 90 days totaling
$49 thousand. At December 31, 2005, the Bank had no loans that were past due
greater than 90 days.
At
December 31, 2006, the Bank's FHLB line of credit and advances were secured
under terms of a blanket collateral agreement by a pledge of certain qualifying
collateral, including loans.
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 collectibility or present other unfavorable
features.
An
analysis of net loans to related parties for the years ended December 31, 2006
and 2005 is as follows:
(In
thousands)
2006
2005
Balance
at beginning of year
$
4,627
$
2,497
New
loans to related parties
2,821
2,384
Repayments
(4,054
)
(254
)
Balance
at end of year
$
3,394
$
4,627
The
undisbursed commitment to related parties as of December 31, 2006, was $500
thousand.
F-15
Note
4: Allowance for Loan Losses
Activity
in the allowance for loan losses for each of the three years ended December
31
follows:
(In
thousands)
2006
2005
2004
Beginning
balance
$
7,115
$
6,110
$
5,458
Provision
for loan loss charged to expense
1,266
1,541
934
Loans
charged off
(596
)
(764
)
(427
)
Loan
loss recoveries
238
228
145
Ending
balance
$
8,023
$
7,115
$
6,110
Total
loans outstanding at end of year, before deducting allowance for
loan
losses
$
719,778
$
686,661
$
576,957
Average
total loans outstanding during the year
$
701,438
$
640,726
$
514,299
Ratio
of allowance for loan losses to total loans at end of year
At
December 31, 2006, the bank had one impaired loan totaling $49 thousand. At
December 31, 2005 and 2004 the Bank had no impaired loans. The
average recorded investment in impaired loans was $1.8 million for the year
ended December 31, 2006 (primarily related to two loans, one of which paid
off
and one that was sold), $214 thousand for the year ended December 31, 2005
and
zero for the year ended December 31, 2004.
The
gross
interest income that would have been recorded had non-accrual loans been current
totaled $223 thousand in the year ended December 31, 2006. For the years ended
December 31, 2005 and 2004, the amount of foregone interest due to non-accrual
loans was not significant.
Note
5: Bank Premises and Equipment
A
summary
of Bank premises and equipment at December 31 follows:
(In
thousands)
2006
2005
Leasehold
improvements
$
9,260
$
6,438
Furniture
and equipment
8,245
6,845
Subtotal
17,505
13,283
Accumulated
depreciation and amortization
(9,059
)
(8,249
)
Bank
premises and equipment, net
$
8,446
$
5,034
The
amount of depreciation and amortization was $998 thousand, $846 thousand and
$949 thousand for the years ended December 31, 2006, 2005 and 2004,
respectively.
Note
6: Bank Owned Life Insurance
The
Bank
has purchased life insurance policies on the lives of certain officers of the
Bank ($13.5 million cash surrender value at December 31, 2006 and $11.9 million
cash surrender value at December 31, 2005) to finance employee benefit
programs. The investment in the Bank owned life insurance (BOLI)
policies are reported in "interest receivable and other assets" at the cash
surrender value of the policies. The cash surrender value includes
both the Bank's original premiums invested in the life insurance policies and
the accumulated accretion of policy income since inception of the
policies. Income of $504 thousand in 2006 and $442 thousand in 2005
was recognized on the life insurance policies and is reported in "other
non-interest income."
F-16
Note
7: Deposits
Total
time deposits were $88.7 million and $127.5 million at December 31, 2006 and
2005, respectively. Interest on these deposits was $3.8 million, $3.4
million and $2.0 million in 2006, 2005 and 2004,
respectively. Scheduled maturities of these deposits at December 31,2006 follows:
(In
thousands)
2007
2008
2009
2010
2011
Thereafter
Total
Scheduled
maturities of time deposits
$
73,667
$
5,784
$
5,234
$
2,951
$
1,017
---
$
88,653
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.
Note
8: Borrowings
Purchased
Funds Short-term debt at December 31, 2006 and 2005 included overnight
borrowings from the Federal Home Loan Bank ("FHLB") in the amount of $29.4
million and $21.0 million, respectively. Short-term borrowing
available to the Bank of $174.6 million consists of a line of credit for
advances with FHLB secured under terms of a blanket collateral agreement by
a
pledge of loans. At December 31, 2006 the Bank had an unused capacity
with FHLB of $135.2 million. The Bank also has unsecured lines of
credit totaling $65.0 million with correspondent banks for overnight
borrowings. As of December 31, 2006, interest rates on these lines of
credit ranged from 5.28% to 6.20%.
Federal
Home Loan Bank Advance- During the third quarter of 2005, the Bank obtained
a three-year fixed-rate advance with Federal Home Loan Bank for $10.0
million. Each month, the Bank pays an annualized fixed rate of
interest of 4.23% on the three-year advance. The principal of
$10.0 million is due in its entirety upon maturity in the third quarter of
2008.
Federal
Reserve Line of Credit - The Bank also has available a line of credit with
the Federal Reserve Bank of San Francisco totaling $4.7 million at 6.25% as
of
December 31, 2006. This line of credit is secured by an agency
security.
Subordinated
Debt - On June 17, 2004 the Bank issued a 15-year, $5.0 million
subordinated debenture through a pooled trust preferred program, which matures
on June 17, 2019. The Bank has 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 31,2006 was 7.84%. The debenture is subordinated to the claims of depositors and
other creditors of the Bank.
The
maximum amount outstanding at any month end for overnight borrowings was $39.0
million and $39.4 million, during 2006 and 2005, respectively.
F-17
Note
9: Stockholders' Equity
On
April13, 2006 and April 14, 2005, the Board of Directors declared 5% stock dividends.
Cash was paid in lieu of issuing fractional shares. Earnings per share amounts
and information with respect to stock options have been restated for all years
presented to reflect the stock dividends.
During
the third quarter of 2005, the Bank implemented a quarterly dividend program.
In
2006, the Bank paid cash dividends of forty-six cents per common share, totaling
$2.4 million. In 2005, the bank paid cash dividends of twenty cents per common
share, totaling $990 thousand. In 2004, the Bank paid one cash dividend of
forty
cents per share, totaling $1.8 million. The cash dividends were recorded as
a
reduction to retained earnings.
Under
California State banking laws, 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 $27.9
million of the retained earnings balance was available for payment of dividends
as of December 31, 2006.
Under
SFAS No. 123R which was implemented in January 2006, the fair value of stock
options on the grant date is recorded as an expense on the income statement
with
a corresponding increase in common stock. On December 31, 2006, the
amount recorded in common stock was $555 thousand. See Notes 10 and 11 for
further information on accounting for stock options and share-based payments.
In
addition, the Bank recorded tax benefits on exercised stock options of $1.4
million. The amount is accounted for as an addition to common stock with a
corresponding decrease in accrued tax liability.
In
October 2006, the Bank received approval from the California Department of
Financial Institutions (DFI) and the Federal Deposit Insurance Corporation
(FDIC) to buy back up to 10%, or approximately 545,884 of the Bank’s 5,458,838
then-outstanding shares, not to exceed $15 million. The repurchase
program allows 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 executes these transactions pursuant to the
Securities and Exchange Commission’s Rule 10b-18. Repurchase
transactions are subject to market conditions as well as applicable legal and
other considerations. All shares repurchased were made in open market
transactions and were part of the publicly announced repurchase program. In
2006, the Bank purchased 115,625 shares at prices ranging from $32.43 to $36.25
for a total cost of $4.0 million.
Note
10: Stock Options
The
Bank
has stock option plans for full-time, salaried officers and employees who have
substantial responsibility for the successful operation of the
Bank. Terms of the plans provide for the issuance of up to 1,115,629
shares of common stock for these officers and employees. Options are
issued at the fair market value of the stock at the date of grant. Options
granted prior to January 1, 2006 vest 20% immediately and 20% on each
anniversary of the grant for four years. Options granted subsequent to January1, 2006 vest 20% on each anniversary of the grant for five years. All
officer and employee options expire ten years from the grant date.
Terms
of
the plans also provide for the issuance of up to 190,965 shares for non-employee
directors which vest 20% immediately and 20% on each anniversary of the grant
for four years. Director options expire seven years from the grant
date.
Upon
exercise of stock options, new common shares of the Bank are
issued.
As
of
December 31, 2006 there was $1.1 million of total unrecognized compensation
expense related to non-vested stock options. This cost is expected to
be recognized over a weighted average period of approximately 14.6
months.
A
summary
of the options outstanding and exercisable by price range as of December 31,2006 is presented in the following table.
Options
Outstanding
Options
Exercisable
Range
of
Exercise
Prices
Outstanding
as of
12/31/06
Remaining
Contractual Life
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
$5.01
- $10.00
6,906
0.2
$
6.08
6,906
$
6.08
$10.01
- $15.00
235,848
3.1
$
11.88
235,848
$
11.88
$15.01
- $20.00
54,447
4.8
$
16.99
48,150
$
16.93
$20.01
- $25.00
19,147
4.9
$
20.32
15,316
$
20.32
$25.01
- $30.00
72,576
7.2
$
26.84
44,089
$
26.82
$30.01
- $35.00
154,033
8.7
$
32.98
32,210
$
32.59
$35.01
- $40.00
3,308
8.0
$
35.37
1,323
$
35.37
546,265
5.4
$
20.69
383,842
$
16.28
F-19
Note
11: Share-Based Compensation
On
January 1, 2006 the Bank adopted the provisions of Statement of Financial
Accounting Standard No.123R (SFAS No.123R)”Share-Based Payment,” which requires
that all share-based payments, including stock options, be recognized as an
expense in the income statement based on the grant date fair value of the award
with a corresponding increase in common stock.
The
following table summarizes share-based compensation expense under SFAS No.
123R
for the year ended December 31, 2006.
Stock
based compensation included in salaries and related
benefits
555
Tax
benefit of share-based compensation included in provision for income
taxes
(80
)
Share-based
compensation net of tax
$
475
Weighted-average
fair value of options granted
$
7.93
Weighted-average
fair value of options vested
$
9.30
The
Bank
determines fair value at grant date using the Black-Scholes pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected 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 Bank’s stock.
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),the Bank recognized option forfeitures as they
occurred.
For
options granted after January 1, 2006, and valued in accordance with SFAS 123R,
the Bank expenses the fair value of the option on a straight-line basis over
the
vesting period. The Bank estimates forfeitures and only recognizes
expense for those shares expected to vest. The Bank’s estimated
forfeiture rate, based on historical forfeiture experience, was 7.5% in
2006.
Assumptions
used in the Bank’s pricing model are shown below.
*In
2006 the stock was traded more
actively, reducing price volatility
F-20
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 judgment. As a result, if other assumptions
had been used, the Bank’s recorded stock-based compensation expense could have
been materially different from that reflected in these financial
statements. In addition, the Bank is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected
to
vest. If the Bank’s actual forfeiture rate is materially different
from the estimate, the share-based compensation expense could be materially
different.
Note
12: Benefit Plans
In
2003
the Bank 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 2006, 7.25% for
2005 and 7.00% for 2004. The Bank's deferred compensation
obligation of $1.8 million and $1.4 million at December 31, 2006 and 2005,
respectively, is included in "interest payable and other
liabilities."
The
Bank
also established a Split Dollar Plan and a Survivor Income Plan in 2003 for
officers designated by the Board of Directors. Death benefits are
provided under the specific terms of these plans. The Bank has
purchased life insurance policies on the designated officers in connection
with
these plans. The expense recognized under this plan totaled $67
thousand and $56 thousand for the years ended December 31, 2006 and 2005,
respectively.
The
Bank's 401(k) Plan commenced in May 1990 and is available to all
employees. Under the Plan employees can defer up to 50% of their base
pay, 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 $409 thousand, $338 thousand and $306 thousand for the years ended
December 31, 2006, 2005 and 2004, respectively.
In
1999
the Plan was amended to include an employee stock ownership component and was
renamed the Bank of Marin Employee Stock Ownership and Savings
Plan. Under the terms of the Plan, as amended, a portion of the
Bank's profits, as determined by the Board of Directors, is contributed to
the
Plan each year either in common stock or in cash for the purchase of Bank of
Marin stock. For the years ended December 31, 2006, 2005 and 2004 the
Bank contributed $900 thousand, $889 thousand and $754 thousand,
respectively. Generally, cash dividends on the Bank's stock held by
the Plan are used to purchase additional shares in the open
market. All shares of the Bank's stock held by the Plan are included
in the calculations of basic and diluted earnings per share.
Contributions
to the Plan for both the matching contribution and for the purchase of Bank
of
Marin stock are included in "salaries and benefits." Employer
contributions vest at a rate of 20% per year over a five-year
period.
F-21
Note
13: 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)
2006
2005
2004
Current
tax provision
Federal
$
5,800
$
6,113
$
4,791
State
1,514
2,220
1,828
Total
current
7,314
8,333
6,619
Deferred
tax (benefit)/liability
Federal
(494
)
(769
)
(619
)
State
(155
)
(190
)
(192
)
Total
deferred
(649
)
(959
)
(811
)
Total
income tax provision
$
6,665
$
7,374
$
5,808
Income
taxes recorded directly to comprehensive income are not included
above. These income tax benefits /(liabilities) relating to changes
in the unrealized gains and losses on available for sale securities amounted
to
$128 thousand, $381 thousand and $358 thousand in 2006, 2005 and 2004,
respectively.
The
following table shows the tax effect of the Bank's cumulative temporary
differences as of December 31:
(In
thousands)
2006
2005
Deferred
tax assets:
Allowance
for loan losses
$
3,557
$
3,139
Depreciation
366
344
State
franchise tax
541
579
Deferred
compensation
797
640
Lease
transactions
78
---
Stock
based compensation
67
---
Net
unrealized loss on securities available for sale
428
556
Deferred
tax liabilities
Loan
origination costs
(180
)
(151
)
Securities
Accretion
(26
)
---
Net
deferred tax asset
$
5,628
$
5,107
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 of the Bank for 2006, 2005 and 2004 differs from the current
Federal statutory income tax rate as follows:
2006
2005
2004
Federal
statutory income tax rate
35.0
%
35.0
%
35.0
%
Increase
(decrease) due to:
California
franchise tax, net of federal tax benefit
6.1
6.9
6.9
Stock
based compensation
1.1
--
--
Tax
exempt interest on municipal securities and loans
(1.8
)
(1.6
)
(2.3
)
Prior
year tax adjustments
(3.3
)
--
--
Tax
exempt earnings on bank owned life insurance
(1.1
)
(1.0
)
(1.4
)
Other
permanent differences
(0.1
)
(0.7
)
(0.3
)
35.9
%
38.6
%
37.9
%
F-22
Note
14: Commitments and Contingencies
The
Bank
rents certain premises and equipment under long-term non-cancellable operating
leases expiring at various dates through the year 2021. At December31, 2006 the approximate minimum future commitments payable under
non-cancell-able contracts for leased premises are as follows:
(In
thousands)
2007
2008
2009
2010
2011
Thereafter
Total
Operating
leases
$
1,956
$
2,010
$
1,923
$
1,699
$
1,262
$
10,759
$
19,609
Rent
expense included in "occupancy" totaled $2.0 million, $1.5 million and $1.3
million in 2006, 2005 and 2004, respectively.
The
Bank
leases one branch facility from a former member of the Bank's Board of Directors
at current market prices. This director retired as of November 30,2006. Rental payments to the director totaled $114 thousand through November
2006. Rental payments to the director totaled $122 thousand and $120 thousand
for the years ended December 31, 2005 and 2004, respectively.
The
Bank
is party to legal actions which arise from time to time as part of the normal
course of its business. The Bank believes, after consultation with
legal counsel, that it has meritorious defenses in these actions, and that
the
liability, if any, will not have a material adverse effect on the financial
position, results of operations, or cash flows of the Bank.
Note
15: Fair Value of Financial Instruments
The
carrying amounts and fair values of the Bank's financial instruments at December31, 2006 and 2005 follows:
2006
2005
(In
thousands)
Carrying
Amounts
Fair
Value
Carrying
Amounts
Fair
Value
Financial
assets
Cash
and cash equivalents
$
38,783
$
38,783
$
22,262
$
22,262
Investment
securities
89,373
89,338
108,672
108,611
Loans,
net
711,755
704,341
679,546
675,189
Accrued
interest receivable
4,191
4,191
3,934
3,934
Financial
liabilities
Deposits
736,697
735,969
721,172
720,810
Federal
funds purchased
29,400
29,400
21,000
21,000
Federal
Home Loan Bank borrowings
10,000
9,805
10,000
9,832
Subordinated
debenture
5,000
5,000
5,000
5,000
Accrued
interest payable
797
797
396
396
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 amountsbecause of the short-term nature of these
instruments.
Investment
Securities - Investment securities are valued at the quoted market
prices. See Note 2 for further analysis.
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 with remaining maturities in excess of one year is
estimated by discounting the future cash flows using current 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.
F-23
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.
Commitments
- The fair value of commitments represents the carrying amount of the related
unamortized loan fees and is not material.
Note
16: Regulatory Matters
The
Bank
is subject to various regulatory capital requirements administered by the
federal and California banking agencies. The Federal Deposit
Insurance Corporation (FDIC) has adopted risk-based capital regulations, which
assign risk weightings to bank assets and "off-balance sheet" items (such as
loan commitments). Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
the
FDIC that, if undertaken, could have a material effect on the Bank's financial
statements. The regulations require the Bank to maintain minimum
amounts and ratios (set forth in the following table) of Total and Tier 1
Capital (as defined in the regulations) to risk-weighted assets (as defined)
and
of Tier 1 Capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2006 and 2005, that
the Bank met all capital adequacy requirements to which it is
subject.
As
of
December 31, 2006, the most recent notification from the FDIC categorized the
Bank as "well capitalized" under the regulatory framework for prompt corrective
action. There are no conditions or events since the notification that
management believes have changed the Bank's category. The Bank's
actual capital amounts and ratios as of December 31, 2006 and 2005, are
presented in the following table.
Note
17: Financial Instruments with Off-Balance Sheet
Risk
The
Bank
makes commitments to extend credit in the normal course of business to meet
the
financing needs of its customers. These financial instruments include
commitments to extend credit in the form of loans or through standby letters
of
credit. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash
requirements.
F-24
The
Bank
is exposed to credit loss, in the event of nonperformance by the borrower,
in
the contract amount of the commitment. The Bank uses the same credit
policies in making commitments as it does for on-balance-sheet instruments
and
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the
Bank is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and real property. The
contract amount of loan commitments not reflected on the statement of condition
was $218.8 million at December 31, 2006. This amount included $106.4
million under commercial lines of credit (these commitments are contingent
upon
customers maintaining specific credit standards), $58.9 million under revolving
home equity lines and $38.0 million under undisbursed construction loans, at
rates ranging from 5.82% to 18.00%. The Bank has set aside an
allowance for losses in the amount of $438 thousand for these commitments,
which
is recorded in "interest payable and other
liabilities." Approximately 55% of the commitments expire in 2007
with approximately 45% expiring between 2008 and 2016.
Note
18: Derivative Financial Instruments and Hedging
Activities
The
Bank
of Marin has entered into interest-rate swaps, primarily as an asset/liability
management strategy, in order to hedge the change in the fair value of both
long-term fixed-rate loans and firm commitments to enter into long-term
fixed-rate loans due to changes in interest rates. Such hedges allow
the Bank to offer long-term fixed rate loans to customers without assuming
the
interest rate risk of a long-term asset by swapping the Bank's fixed-rate
interest stream for a floating-rate interest stream tied to one-month
LIBOR. Such modification of the interest characteristics of the loan
protects the Bank against an adverse effect on earnings and the net interest
margin due to fluctuating interest rates.
The
two
interest rate swaps held by the Bank are scheduled to mature in June of 2020
and
June 2022. Information on the Bank’s hedges follows:
Gain(loss)
on designated and undesignated interest rate contracts
$
(198
)
$
123
Increase
(decrease) in value of designated loans and yield maintenance agreement
qualifying as derivatives
198
(123
)
Net
gain (loss) on derivatives used to hedge loans recorded in
income
$
0
$
0
(1)
Credit
risk represents the amount of unrealized gain included in derivative
assets which is subject to counterparty credit risk. It
reflects the effect of master netting agreements and includes credit
risk
on virtual derivatives.
(2)
Tax-equivalent
yield equals 8.26%.
No
ineffectiveness was recorded in any of the periods presented. The full change
in
value of swaps was included in the assessment of hedge
effectiveness.
F-26
Placeholder
for Selected Financial Data
F-27
The
following graph, provided by Keefe, Bruyette, & Woods, Inc., shows a
comparison of cumulative total shareholder return on the Bank’s common stock
during the five fiscal years ended December 31, 2006 compared to Standard &
Poors (S&P) 500 stock index and a peer group index. The
comparison assumes $100 was invested on December 31, 2001 in the Bank’s stock
and all of the dividends were reinvested. The chart indicates that the Bank’s
stock outperformed both the S&P index and its peers.
