BANK OF MARIN
2004 ANNUAL REPORT
TABLE OF CONTENTS
Directors and Executive Officers .................................................. 1
Bank Staff and Corporate Officers ............................................... 2
Message to Shareholders ............................................................. 3
Business of the Bank ................................................................... 4
Management's Discussion and Analysis ....................................... 5
Report of Independent Auditors ................................................. 20
Financial Statements ................................................................. 22
Notes to Financial Statements ................................................... 26
Selected Financial Data ............................................................. 37
Stock Price and Dividend Information ........................................ 37
DIRECTORS AND EXECUTIVE OFFICERS
Judith O’Connell Allen, Community volunteer, Chairman, Bank of Marin
* Nancy R. Boatright, Vice President & Corp. Sec., Bank of Marin
* Russell A. Colombo, Exec. Vice President & Branch Administrator, Bank of Marin
* Christina J. Cook, Exec. Vice President & CFO, Bank of Marin
James E. Deitz, President, Marin Business Services
W. Robert Griswold, Jr., President and CEO, Bank of Marin
Ray Hoffman, III, Proprietor, Hoffman Development Co.
Norma J. Howard, Business consultant
J. Patrick Hunt, Partner, Hunt Investments
H. C. Jackson, Retired merchant
James D. Kirsner, Business consultant
* Larry Klaustermeier, Sr. Exec. Vice President & CCO, Bank of Marin
* Patrick J. London, Exec. Vice President & Director of Wealth
Management Services, Bank of Marin
Stuart D. Lum, Partner, Veracast Communications
Joseph D. Martino, Retired banker
James L. Placak, Employee Benefits Consultant
Joel Sklar, MD, Partner, Cardiology Assoc. of Marin & San Francisco
Brian M. Sobel, Partner, Sobel Communications
* Alexandra E. Souza, Exec.Vice President & CAO, Bank of Marin
J. Dietrich Stroeh, Partner, CSW/Stuber-Stroeh Engineering Group
Jan Yanehiro, Owner, Media and Marketing Strategic Planning
* These executive officers are not also directors.
This annual report serves as the annual disclosure statement for the purposes of part 350 of the Federal Deposit
Insurance Corporation rules. It has not been reviewed or confirmed for accuracy or relevance by the FDIC.
Annual Report - 1
BANK STAFF
Mary Adams
Diane Akers
Dino Alessio
Nova Alexander
Terry Aman
Joanne Amaral
Michele Anderson
Natalie Andryushina
Tamara Austin
Boualay Bala
Caroline Barossi
Ken Beagle
Susan Beaver
Robin Bentivegna
John Berens
Josiane Bougard
Arlene Brians
Vanessa Camacho
Scott Canaan
Brian Carlson
David Cerejo
Gaik Chan
Nancy Chapin
Angela Colglazier
Kay Commins
Anooshik Cronin
Sarah Dempsey
Amra Dizdarevic
Barbara Dougherty
Sean Dwyer
Mary Jayne Elmore
Donna Ernst
Florette Eugene
Brandee Everett
Susan Farac
Coy Ferini
Giuliana Ferrer
Gary Ford
Craig Fox
Vince Franceschi
Leslie Fuette
Hung Fung
Karen Garbarino
Judy Grider
Helga Gruber
Vicki Gruber
Sarah Guenther
Jessica Gutgsell
Sal Gutierrez
Victoria Gutierrez
Dina Hadzikadunic
Jessica Ham
Bryan Heagy
Viviana Henao
Dean Higgins
Debbie Higgins
Kyle Hixon
Helen Hoffmann
Josh Iversen
Tracy Jerves
Kevin Johnson
Claudia Just Olsen
Merlee Katzman
Mindy King
Lisa Kleinecke
David Kough
Van Luu
Molly Manisay
Connie Marelich
Joan Marino
Stephanie McLeod
Kenny Meligan
Mary Melville
Victor Mencarelli
Edgar Mendoza
Pia Mize
Marisol Negrete
Eric Nelson
Linda Nolt
Michael Nord
Jon O'Halloran
Anotinette Oroz
Jaime Ortiz
Teri Pearson
CORPORATE OFFICERS
Connie Pedersen
John Pedone
Irene Pelmear
Shirley Pettit
Sabrina Randall
Nancy Reich
Linda Reid
Isaias Reyes
Penny Reynolds
Marie Rieck
Mike Roney
Stephen Ross
Saroj Sachdev
Ellie Shattuck
Nikki Singh
Mari Soria
Jamie Thigpen
Allison Thornton
Kim To
Barbara Tolin
Cindy Toscanini
Ray Vallerga
Patty Varela
Joe Villaluna
Jim Whaley
Renee Weaver
Danielle Wu
Vita Yumanova
Kate Albaugh, Asst. Vice President
Sue Anderson, Vice President
Marshall Appleton, Asst. Vice President
Angela Bergamini, Asst. Vice President
Gisela Bigden-Fisher, Vice President
Boo Boero, Asst. Vice President
Karry Bryan, Asst. Vice President
Michael Burke, Vice President
Fabia Butler, Asst. Vice President
Michael Callan, Vice President
Joan Capurro, Vice President
Megan Carter, Asst. Vice President
Sal Catinella, Vice President
Douglas Caulfield. Vice President
Judi Cole, Vice President
Chris Colliver, Asst. Vice President
Phyllis Cope, Vice President
Richard DeRamon, Vice President
Emily Di Laura, Vice President
Pat Feingold, Vice President
Holly Ford, Vice President
Sharon Fox, Vice President
Faith Giosso, Asst. Vice President
Kevin Gish, Asst. Vice President
Robert Gotelli, Asst. Vice President
Jeff Graham, Asst. Vice President
Janet Hayward, Vice President
Karen Hegarty, Vice President
Sherri Hendrickson, Vice President
Wayne Hoffer, Vice President
Fran Hoke, Vice President
Deborah Hoke Smith, Vice President
Martha Hollenbeck, Vice President
Joseph Iacocca, Vice President
Annual Report - 2
Donald Jarvis, Vice President
Nancy Jones, Vice President
Steve Kambur, Vice President
James King, Vice President
Carol Kneis, Vice President
Mae Lacourse, Vice President
Carrie Lee, Asst. Vice President
Thomas Leong, Asst. Vice President
Lynn McHale, Asst. Vice President
Jerry Miller, Vice President
Bill Montgomery, Vice President
Frank Murray, Sr. Vice President
Patti O'Brien, Asst. Vice President
Elizabeth O'Farrell, Sr. Vice President
Peter Pelham, Vice President
Frank Perachiotti, Jr., Vice President
Carole Reif, Vice President
Elizabeth Reizman, Sr. Vice President
Lucy Rezendes, Vice President
Dan Rheiner, Vice President
Robert Rowen, Asst. Vice President
Renee Rymer, Vice President
David Schmidt, Vice President
Mary Ann Shoemaker, Vice President
Liza Silva, Vice President
Linda Steidle, Vice President
Renee Story, Asst. Vice President
Rich Ugarte, Vice President
Sherry Wallace, Vice President
Jackie Williams, Vice President
Bonnie Wilson, Asst. Vice President
Nicole Young, Asst. Vice President
Keith Zimmerman, Sr. Vice President
MESSAGE TO OUR SHAREHOLDERS:
Bank of Marin reported record earnings in 2004, so it’s tempting, in one sense, to let the numbers
speak for themselves. Consider, if you will, these year over year changes:
• Net income of $9,518,000, an increase of 27.4% over 2003.
•
Loan totals of more than $575 million, 28% more than the previous year.
•
Total deposits of $645 million, an increase of more than 10%.
•
Total assets of over $737 million, a 15% increase.
• Non-interest expense growth limited to just over 10%.
• An efficiency ratio of 54.7%.
• Non-performing loans in the portfolio: none.
While we’re extremely pleased with these outstanding results, we’re even more proud of how we
achieved them.
We did it without compromising any of the principles our founder, Bill Murray, envisioned when
we began 15 years ago: hard work, attention to detail, legendary and personalized service for
each of our customers, a dedicated and loyal professional team, a real and meaningful
commitment to the many communities we serve, and an on-going pledge to our shareholders to
work in your best interests.
We’re very proud of what we’ve accomplished during these first 15 years. We’ve grown in size and
scope, expanded our customer base, grown capital, and greatly increased and improved our
product offerings. At the same time, we have intensified our community support and
involvement, and provided our shareholders with solid and impressive results.
As a group, our employees are the largest single shareholder of the Bank, with our Employee
Stock Ownership Plan (ESOP), holding more than six percent of the outstanding stock. They
think and act like shareholders, because they are. They are constantly working with the
shareholders’ best interests in mind. And, they’re extremely loyal. Our employee turnover is
among the lowest in California for banks our size.
In the past year, we’ve made two significant additions to our senior management team. Russ
Colombo joined the Bank as Branch Administrator to oversee our branch network and business
development activities; and Chris Cook, a CPA, joined the Bank to assume the responsibilities of
Chief Financial Officer. Both bring a wealth of experience, and the same dedication we all
embrace: putting our customers at the very top of everything we do.
In the coming year, we’ll be adding a second branch in Petaluma; and we’re targeting yet another
branch at a location we’re now exploring.
Our first 15 years have been very rewarding in many ways. And, in view of all we’ve
accomplished, we’re very excited about the future. Our message to you, our shareholders, is a
simple, but sincere one: thank you. Thanks for your ongoing support. Thanks for your belief in
us. We look forward to continuing to partner with you to build an even better, stronger and more
productive Bank of Marin.
/s/ Judith O'Connell Allen
Judith O’Connell Allen
Chairman of the Board
/s/ W. Robert Griswold, Jr.
W. Robert Griswold, Jr.
President & Chief Executive Officer
Annual Report - 3
BUSINESS OF THE BANK
General
Bank of Marin (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 and, like most state
chartered banks of its size in California, is not a member of the Federal Reserve System.
Market Area and Customer Base
The Bank’s market area stretches from southern Sonoma county south to the Golden Gate Bridge and lies
between the Pacific Ocean on the west and San Pablo Bay to the east. Of this larger market area the Bank has
designated the communities of San Rafael, Corte Madera, Greenbrae, Larkspur, Kentfield, Ross, San Anselmo,
Tiburon, Belvedere, Mill Valley, Sausalito, Terra Linda, Bel Marin Keys, Novato and Petaluma as its primary
market areas. The Bank’s customer base is made up of business and personal banking relationships from the
communities near the nine branch office locations.
Loans
The Bank offers a broad range of commercial and retail lending programs including commercial loans,
construction financing, consumer loans including indirect auto, and home equity loans and lines of credit. The
Bank also offers a proprietary Visa credit card to its customers, including a Business Visa program for business
and professional customers. For reporting purposes these programs are consolidated into the general
categories of commercial loans, real estate loans and personal loans. At December 31, 2004, these broad
categories totaled $576,957 thousand, and accounted for approximately 21%, 63% and 16%, respectively, of
the loan portfolio.
The interest rates on most commercial loans are tied to the Wall Street Journal prevailing prime rate and change
as rate changes are reported. A majority of these loans have a term of one year or less.
Real estate loans include commercial real estate loans, consumer loans and lines of credit secured by real
property, and construction financing. Commercial real estate loans are generally written for ten years with
fixed rates for the first 5 years and then adjusting to an indexed spread for the remaining 5 years. Consumer
real estate secured loans include equity lines of credit and installment loans for various consumer purposes.
Generally, equity lines are for a term of ten years or less and are secured by first or second deeds of trust on
residential properties and bear interest at a floating rate tied to the Wall Street Journal prevailing prime rate.
Usually, home equity installment loans are for a term of 15 years or less and have a fixed rate of interest.
The Bank offers construction financing to developers of single-family residences and commercial real estate
properties. Construction loans are typically repaid through permanent financing by the Bank or from other
financial institutions. Usually these loans have terms of twelve to eighteen months, have fixed rates of interest
or floating rates tied to the Wall Street Journal prevailing prime rate, and are secured by first deeds of trust.
Deposits
The Bank offers 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. The Bank also offers direct deposit of payroll, social security and pension checks. Bank
of Marin's ATM system is tied into both the STAR and PLUS networks, and the Bank offers a proprietary Visa
check card.
Bank of Marin attracts deposits from individuals, merchants, small to medium sized businesses and
professionals who live and/or work in our market areas. More than 90% of our deposits come from Marin and
southern Sonoma counties. Approximately 54% of the Bank’s deposits are from businesses and 46% are from
individuals. The Bank as a matter of policy does not accept brokered deposits.
Wealth Management Services
In 1998, the Bank began to offer investment advisory and personal trust services. The services include
customized portfolio management of individual stocks, bonds and cash and retirement assets; professional
management of all trust assets including real estate and other specialty assets; tax reporting, safekeeping and
accounting of assets; estate settlement and administration of all areas of living, testamentary and charitable
trusts.
Annual Report - 4
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion of the Bank’s financial condition and results of operations for each of the years in
the three-year period ended December 31, 2004 should be read in conjunction with the Bank’s financial
statements and related notes thereto, located on pages 22 to 36 of this Annual Report. Average balances,
including balances used in calculating certain financial ratios, are generally comprised of average daily
balances.
On April 15, 2004 the Board of Directors declared a 3-for-2 stock split payable May 24, 2004. In April, 2003
and April, 2002 the Board of Directors declared 5% stock dividends. Earnings per share and book value per
share amounts have been restated for prior periods to reflect the stock split and stock dividends. Additionally,
the Board of Directors declared a one-time special cash dividend of $.40 per post-split share payable on
June 1, 2004.
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.
The Bank’s forward-looking statements include descriptions of plans or objectives of management for future
operations, products or services, and forecasts of its revenues, earnings or other measures of economic
performance. Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts. They often include the words “believe,” “expect,” “intend,” “estimate” or words of
similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”
Forward-looking statements are based on management’s current expectations regarding economic, legislative,
and regulatory issues that may impact the Bank’s earnings in future periods. A number of factors - many of
which are beyond the Bank’s control - could cause future results to vary materially from current management
expectations. Such factors include, but are not limited to, general economic conditions, changes in interest
rates, deposit flows, real estate values and competition; changes in accounting principles, policies or
guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory and
technological factors affecting the Bank’s operations, pricing, products and services. These and other
important factors are detailed in various Federal Deposit Insurance Corporation filings made periodically by
the Bank, copies of which are available from the Bank at no charge. Forward-looking statements speak only
as of the date they are made. The Bank does not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements are made or to reflect the
occurrence of unanticipated events.
Critical Accounting Policy
Allowance for Loan Losses
Management has considered the accounting principles upon which the Bank’s financial reporting depends and
has determined the allowance for loan losses to be the Bank’s most critical accounting policy. The allowance
for loan losses is discussed in further detail beginning on page 13 of this Annual Report. The Bank formally
assesses the adequacy of the allowance for loan losses on a quarterly basis. Determination of the adequacy is
based on ongoing assessments of the probable risk in the outstanding loan portfolio. These assessments
include the periodic re-grading of loans based on changes in their individual credit characteristics including
delinquency, seasoning, recent financial performance of the borrower, economic factors, changes in the
interest rate environment, and other factors as warranted. Loans are initially graded when originated. They
are re-graded as they are renewed, when there is a new loan to the same borrower, when identified facts
Annual Report - 5
demonstrate heightened risk of nonpayment, or if they become delinquent. Re-grading of larger problem loans
occurs at least quarterly. Confirmation of the quality of the grading process is obtained by independent credit
reviews conducted by consultants specifically hired for this purpose and by various bank regulatory agencies.
The Bank’s method for assessing the appropriateness of the allowance includes specific allowances for
identified problem loans, an allowance factor for pools of credits, and allowances for changing environmental
factors (e.g., portfolio trends, concentration of credit, growth, economic factors, 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 our 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.
Future Adoption of Accounting Standard
For a discussion of the impact of the adoption of Financial Accounting Standards Board Statement No. 123
(revised 2004), Share-Based Payment, see Note 1 of the Notes to Financial Statements.
RESULTS OF OPERATIONS
Overview
The 2004 financial performance for the Bank produced record levels of deposits, loans, and net income. Total
deposits reached $645,079 thousand in 2004, an increase of $60,963 thousand or 10.4% from the prior year.
Total gross loans finished the year at $576,957 thousand compared to $450,881 thousand in 2003,
representing an increase of $126,076 thousand or 28.0%. Net income for 2004 was $9,518 thousand or $1.94
per share (diluted) compared with $7,473 thousand or $1.59 per share (diluted) in 2003. The year over year
change in net income represents an improvement of 27.4%.
The Bank’s return on average assets (ROA) and return on average equity (ROE) improved over the prior year.
In 2004 the Bank’s ROA and ROE were, respectively, 1.38% and 15.64% compared to 1.28% and 14.46% in
2003. Management continues to balance the desire to increase the return ratios to those of its peers with the
desire to increase the Bank’s deposit penetration in Marin and Sonoma Counties. For the twelve-month period
from June 2003 to June 2004 (the latest date for which the information is available), the Bank’s market share
of total Marin County deposits increased from 8.11% to 8.47%.
Net interest income was a principal source of the earnings improvement for the year, as it reached $32,237
thousand, an increase of $4,581 thousand or 16.6% over 2003. The interest income component of net interest
income was up 14.5% to $37,589 thousand, and is primarily the result of the increase in the size of the Bank’s
loan portfolio and, to a lesser extent, an increase in the average balance of U. S. government agency
securities, partially offset by lower average yields on interest-earning assets. Total interest expense of $5,352
thousand was up from 2003 by $183 thousand or 3.5% due to interest expense on a new subordinated
debenture, as well as growth in the Bank’s deposit portfolio, partially offset by a lower overall rate on interest-
bearing liabilities.
The Bank provided $934 thousand to the allowance for loan losses in 2004, and net charge-offs were $282
thousand. This compares to a provision of $686 thousand and net charge-offs of $262 thousand in 2003. At
year-end 2004 and 2003, the allowance for loan losses as a percentage of total loans was 1.06% and 1.21%,
respectively.
Non-interest income is comprised of service charges on deposit accounts, Wealth Management Services (WMS)
revenue, and other income. In 2004, total non-interest income was $3,643 thousand, which is an improvement
of $683 thousand or 23.1% over 2003. Service charges on deposit accounts increased to $1,137 thousand
versus $1,020 thousand one year ago. WMS revenue grew to $922 thousand, an increase of $107 thousand,
and other income finished the year at $1,584 thousand compared to $1,125 thousand in the prior year.
Annual Report - 6
Non-interest expenses increased from $17,817 thousand in 2003 to $19,620 thousand in 2004, a $1,803
thousand or 10.1% increase and was largely due to the growth in the operations of the Bank.
Assets of the Bank totaled $737,094 thousand at December 31, 2004, an increase of $94,487 thousand or
14.7% from 2003 ending balances. Contributing to the growth of assets in 2004 was an increase of $125,424
thousand, or 28.2%, in outstanding loans. The increase in loans was funded in part by a shift of the funds from
other earning assets, including Federal funds sold and investment securities, as well as increases in
deposits, Federal funds purchased and the issuance of a subordinated debenture.
Summary of Quarterly Results of Operations
Table 1 sets forth the results of operations for the four quarters of 2004 and 2003.
Table 1 Summarized Statement of Operations
(Dollars in thousands)
2004 Quarters Ended
Dec. 31 Sept. 30 June 30 Mar. 31
2003 Quarters Ended
Dec. 31 Sept. 30 June 30 Mar. 31
Interest income ............................................ $10,488 $9,821 $8,855 $8,425
1,243
Interest expense ..........................................
7,182
Net interest income .................................
100
Provision for loan losses .....................
1,535
8,953
425
1,200
7,655
105
1,374
8,447
304
$8,157 $8,213 $8,340 $8,115
1,405
6,710
167
1,240
6,917
139
1,285
7,055
205
1,239
6,974
174
Net interest income after provision
for loan losses ....................................
Non-interest income ......................................
Non-interest expense ....................................
Income before provision for income taxes ..
Provision for income taxes ......................
Net income ................................................
Net income per common share
8,528
951
5,152
4,327
1,662
$2,665
8,143
906
4,991
4,058
1,551
$2,507
7,550
916
4,745
3,721
1,404
$2,317
7,082
870
4,732
3,220
1,191
$2,029
6,778
816
4,263
3,331
1,247
$2,084
6,800
796
4,482
3,114
1,194
$1,920
6,850
679
4,492
3,037
1,179
6,543
668
4,580
2,631
1,020
$1,858 $1,611
Basic ......................................................
Diluted ..................................................
$0.58
$0.53
$0.55
$0.51
$0.51
$0.47
$0.45
$0.42
$ 0.47
$ 0.43
$ 0.43
$ 0.41
$ 0.43
$ 0.39
$ 0.37
$ 0.35
Net Interest Income
Net interest income is the Bank’s largest source of income (89.85%). Net interest income is the difference
between the interest earned on loans, investments and other interest earning assets, and its 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. Comparisons of net interest income
are frequently made using net interest margin and net interest rate spread. Net interest margin is expressed
as net interest income divided by average earning assets. Net interest rate spread is the difference between the
average rate earned on total interest earning assets and the average rate incurred on total interest bearing
liabilities. Both of these measures are reported on a taxable equivalent basis. Net interest margin is the higher
of the two because it reflects interest income earned on assets funded with non-interest bearing sources of
funds, which include demand deposits and stockholders’ equity.
Table 2, Distribution of Average Statements of Condition and Analysis of Net Interest Income, compares
interest income and interest earning assets with interest expense and interest bearing liabilities for the
three years 2004, 2003 and 2002. The table also indicates net interest income, net interest margin and net
interest rate spread for each year.
Annual Report - 7
Table 2 Distribution of Average Statements of Condition and Analysis of Net Interest Income
(Dollars in thousands)
Assets
2004
Interest
Average
Income/ Yield/
Balance Expense(1) Rate(1)
2003
Interest
Average
Income/ Yield/
Balance Expense(1) Rate(1)
2002
Interest
Average
Income/ Yield/
Balance Expense(1)Rate(1)
Federal funds sold ............................ $ 5,410 $ 61
--
Interest-earning deposits ...........
--
Investment securities
1.13% $ 23,312 $ 243
--
--
--
U. S. Treasury securities ..............
U. S. government agencies ...........
Other ...........................................
Municipal bonds .........................
Loans and bankers’ acceptances.(2) .
Total interest-earning assets .....
Cash and due from banks .................
Bank premises and equipment, net .
Interest receivable and other assets .
35,009
4,198
12,702
Total Assets ................................ $691,258
12,265
67,888
11,644
27,843
324
2,257
795
1,012
514,299 33,140
639,349 37,589
2.64
3.32
6.83
5.27
6.44
5.95
11,459
32,672
12,303
23,991
518
1,018
791
954
434,908 29,301
538,645 32,825
33,056
4,361
5,513
$581,575
29,877
4,196
2,090
$494,581
1.04% $13,237 $ 204 1.54%
--
4.52
3.11
6.43
5.72
6.74
6.17
--
--
--
17,522
21,769
15,201
24,281
1,101
1,009
848
1,027
366,408 27,561
458,418 31,750
6.28
4.64
5.58
6.02
7.52
7.02
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
Savings accounts ...............................
Time accounts ...................................
Federal funds purchased ..................
Borrowed funds ..................................
Total interest-bearing liabilities ....
Demand accounts ...............................
Interest payable and other liabilities
Stockholders’ equity ..........................
66,084
298,091
93,189
2,805
2,705
462,874
164,881
2,639
60,864
Total Liabilities and
Stockholders' Equity .............. $691,258
Net Interest Income ..................................
Net Interest Margin ..................................
Net Interest Spread ..................................
257
2,961
1,968
49
117
5,352
207
2,426
2,534
2
--
5,169
0.39 $ 51,664
226,288
0.99
110,740
2.11
91
1.74
4.32
--
388,783
1.16
138,214
2,890
51,688
0.40 $ 43,188
182,532
1.07
105,409
2.29
333
1.71
--
--
331,462
1.33
115,983
2,922
44,214
309
2,953
2,960
6
--
6,228
0.72
1.62
2.81
1.86
--
1.88
$32,237
$27,656
$25,522
$581,575
$494,581
5.11%
4.79%
5.21%
4.84%
5.66%
5.14%
(1) Yields and interest income are presented on a taxable equivalent basis using the Federal statutory rate of 34 percent.
(2) Average balances on loans outstanding include non-performing loans, if any. The amortized portion of net loan
origination fees (costs) is included in interest income on loans, representing an adjustment to the yield.
In 2004, the Bank’s net interest income increased by $4,581 thousand or 16.6% over 2003, and by $2,134
thousand or 8.4% in 2003 over 2002. These increases are attributable to growth in average earning assets of
$100,704 thousand in 2004 and $80,227 thousand in 2003. In 2004, net interest income was positively
affected by a shift in the mix of asset balances from lower-yielding Federal funds sold to higher-yielding loans
and securities. The Bank’s 2004 year-end loan-to-deposit ratio was 89.4% up from 77.2% at December 31,
2003. The Bank’s yield on interest earning assets declined in 2004 by twenty-two basis points to 5.95%, and
the yield on its loan portfolio declined from 6.74% in 2003 to 6.44% in 2004. The yield on the Bank’s Federal
funds sold increased to 1.13% in 2004 from 1.04% in 2003. The increase in the Federal funds sold yield is the
result of interest rate increases implemented by the Federal Reserve Board by increasing the Federal funds
interest rate (the interest rate banks charge each other for short-term borrowings). The yield on loans
declined in 2004 and did not increase despite rate increases due to the lagged effect of interest rate changes
on the loan portfolio. In 2003 there was a twenty-five basis point reduction in the Federal funds rate, and a
125 basis point increase in 2004.
The yield on the Bank’s portfolio of Agency Securities increased from 3.11% in 2003 to 3.32% in 2004. The
increase in the volume and yield on Agency Securities primarily relates to purchases of securities at higher
market rates in a rising rate environment. The Bank’s Agency Securities generally have an average life of less
than three years and will mature or be called more quickly than other securities in the Bank’s portfolio.
Therefore, their yield is significantly impacted by market rates of interest. Other Securities is largely comprised
of corporate bonds and the yield on these instruments improved from 6.43% to 6.83% due to shorter duration
rates rising during 2004. The yield on the Bank’s portfolio of Treasury Securities declined from 4.52% in
2003 to 2.64% in 2004 and the yield on Municipal Securities declined from 5.72% in 2003 to 5.27% in 2004
due to maturities of higher yielding securities.
Annual Report - 8
The rate paid on interest bearing liabilities declined from 1.33% in 2003 to 1.16% in 2004. This is primarily
the result of the lagged effect of the aforementioned changes in market interest rates originating from actions
taken by the Federal Reserve in 2003 and 2004. In 2004, the Bank achieved a net interest margin (NIM) of
5.11%, down from the NIM of 5.21% experienced in 2003. The decline in the margin is also affected by the
lagged effect of changes to market rates, partially offset by the impact of a higher loan-to-deposit ratio.
In 2003 the Bank’s net interest margin decreased by forty-five basis points when compared to 2002. The
combination of a lower loan-to-deposit ratio in 2003 and the decline in market rates of interest contributed to
this change.
Table 3, Analysis of Changes in Net Interest Income, separates the change in the Bank’s 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 2004 and 2003. The increase in net interest income during
both years is primarily the result of growth in average earning assets and the decline in the rate paid on interest
bearing liabilities.
Table 3 Analysis of Changes in Net Interest Income
(Dollars in thousands)
Assets
Year ended December 31,
2004 compared to 2003
Yield/
Rate*
Total
Volume
Year ended December 31,
2003 compared to 2002
Yield/
Rate*
Volume
Total
Federal funds sold ............................ $ (187) $ 5 $ (182) $ 156
Interest-earning deposits .................
--
Investment securities
--
--
--
$ (117) $ 39
--
--
U. S. Treasury securities .................
36
U. S. government agencies ........... 1,096
(42)
Other ..............................................
222
Municipal bonds ............................
(230)
143
46
(164)
Loans and bankers’ acceptances ...... 5,348 (1,509)
Total interest-earning assets ........ 6,473 (1,709)
(194)
1,239
4
58
(381)
506
(162)
(17)
3,839 5,153
4,764 5,255
(202)
(497)
105
(56)
(583)
9
(57)
(73)
(3,413) 1,740
(4,180) 1,075
Liabilities
Interest-bearing transaction accounts
Savings accounts ..............................
Time accounts ...................................
Federal funds purchased ..................
Borrowed funds ................................
Total interest-bearing liabilities ...
58
770
(402)
46
117
589
(8)
(235)
(164)
1
--
(406)
50
535
(566)
47
117
183
61
708
150
(4)
--
915
(163)
(1,235)
(576)
--
--
(1,974)
(102)
(527)
(426)
(4)
--
(1,059)
Net Interest Income .............................. $5,884 $(1,303) $4,581 $4,340
$(2,206) $2,134
*
Variances due to changes in both yield/rate and volume (mix) are allocated to yield/rate.
Provision for Loan Losses
The Bank formally assesses the adequacy of the allowance on a quarterly basis. The Bank provides as an
expense an amount to bring the allowance for loan losses to a level to provide adequate coverage for probable
loan losses. The adequacy of the allowance for loan losses is evaluated based on several factors, including
growth of the loan portfolio, analysis of probable losses in the portfolio and recent loss experience. Actual losses
on loans are charged against the allowance and the allowance is increased through the provision charged to
expense. The Bank’s provision for loan losses in 2004 was $934 thousand versus $686 thousand for 2003 and
$577 thousand in 2002. Net charge-offs for 2004 totaled $282 thousand compared with $262 thousand in 2003
and $122 thousand in 2002. Table 4, Non-performing Loans at December 31, shows that there were no non-
performing assets at December 31 for the last five years.
Annual Report - 9
Table 4 Non-performing Loans at December 31
Non accrual loans .................................................
Accruing loans past due 90 days or more ............
Other real estate owned ..........................................
Total non-performing assets ..........................
2004
$ --
--
--
$ 0
2003
$ --
--
--
$ 0
2002
$ --
--
--
$ 0
2001
$ --
--
--
$ 0
2000
$ --
--
--
$ 0
The Bank’s policy is to place loans on non-accrual 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 income, and additional income is recorded only as payments are received.
Non-interest Income
Non-interest income includes service charges on deposit accounts, WMS income and other income. Non-
interest income grew to $3,643 thousand in 2004, up from $2,960 thousand in 2003 and $2,318 thousand in
2002.
Service charges on deposits in 2004 and in 2003 increased by $117 thousand and $180 thousand, respectively.
These increases are generally due to growth in the number of accounts in the Bank. The Bank’s WMS has shown
similar results. WMS revenue in 2004 was $922 thousand, an increase of $107 thousand over the prior year.
This increase is primarily the result of growth in assets under management. WMS revenue in 2003 showed
a $145 thousand increase over 2002. The increases in “other” income in 2004 and 2003 are attributed to
growth in other services associated with an expanding customer base, the Bank’s $10 million investment in
Bank Owned Life Insurance (BOLI), which occurred in 2003, as well as higher commissions and fees due to
increased debit and credit card usage.
Non-interest Expense
Table 5, Significant Components of Non-interest Expense, summarizes the amounts and changes in dollars
and percentages. In 2004 non-interest expense increased 10.1% while average loans and deposits increased
18.3% and 18.1%, respectively. In 2003 non-interest expense increased 4.0%, while average loans and
deposits increased 18.7% and 17.8%, respectively.
Table 5 Significant Components of Non-Interest Expense
(Dollars in Thousands)
2004
Year ended
December 31,
2003
2004 compared to 2003
Percent
Amount
Increase
Increase
2 0 0 2(Decrease)(Decrease)
2003 compared to 2002
Percent
Amount
Increase
Increase
(Decrease) (Decrease)
Salaries and related benefits ...... $11,954 $10,767 $10,446
1,601
Occupancy and equipment ..........
882
Depreciation and amortization ....
953
Data processing fees ...................
3,243
Other expense .............................
1,676
992
1,039
3,343
1,864
949
1,210
3,643
$1,187
188
(43)
171
300
Total ...................................... $19,620 $17,817 $17,125
$1,803
11.0%
11.2
(4.3)
16.5
9.0
10.1%
$321
75
110
86
100
$692
3.1%
4.7
12.5
9.0
3.1
4.0%
In 2004 salaries and benefits costs increased by $1,187 thousand or 11.0%, primarily due to regular salary
adjustments, increased accruals for bonuses and ESOP contributions, as well as higher medical benefit and
workers’ compensation costs. The number of full-time equivalent (FTE) employees increased to 167, up from
161 at year-end 2003. In 2004 there were expenses of $1,056 thousand for the Bank’s Employee Stock
Annual Report - 10
Ownership and Savings Plan (ESOP), and $1,233 thousand for staff and officer incentive bonus plans. The
increase in ESOP expense for 2004 was $139 thousand or 15.2%. The incentive bonus plans increased by
$348 thousand or 28.2% from 2003.
In comparing 2003 with 2002, salaries and benefits costs increased by $321 thousand or 3.1%, primarily due
to annual merit pay increases. The number of full-time equivalent (FTE) employees increased by two from
December 31, 2002 to 161 at December 31, 2003. In 2003 there were expenses of $917 thousand for the Bank’s
ESOP and $885 thousand for staff and officer incentive bonus plans. The increase in ESOP expense for 2003
was $38,000 or 4.3%. The increase in salary and ESOP costs were offset by a decrease in incentive bonus plan
expense, which decreased by $293 thousand or 24.9% from 2002.
The 2004 increase of $188 thousand in occupancy and equipment costs is largely due to annual rent increases
in the branch and administration facilities. The 2004 expenses also reflect the effect of the addition of the
Bank’s Sausalito branch in November 2003. In 2003, the Bank incurred an increase of $75 thousand, which
was largely due to annual increases in branch operating leases.
The 2004 decrease of $43 thousand in depreciation and amortization expense is primarily attributable to
certain fixed assets becoming fully depreciated during the year. In 2003 the Bank had an increase of $110
thousand in depreciation and amortization expenses , which was primarily related to purchases and leasehold
improvements.
In 2004 data processing costs were $1,210 thousand, an increase over 2003 of $171 thousand or 16.5%. This
increase is largely attributable to the greater number of accounts resulting from the growth of the Bank, the
contractually stipulated price increases that are part of the Bank’s long-term agreement with its data
processing provider, and the increased use of internet banking and bill pay by the Bank’s customers. In 2003,
data processing expense increased by $86 thousand, and is attributable to the increase in the growth in the
operations of the Bank.
Other non-interest expenses of $3,643 thousand represent a $300 thousand or 9.0% increase over 2003.
Generally, this increase is due to the growth in activity of the Bank. In 2003, other non-interest expenses
increased by $100 thousand or 3.1%. These increases were due to the growth in activity of the Bank.
The Bank’s efficiency ratio (the ratio of non-interest expense divided by the sum of non-interest income and
net interest income) improved over the prior year and was at 54.7% for 2004. In 2003, the Bank’s efficiency
ratio was 58.1%.
Provision for Income Taxes
The Bank reported a provision for income taxes of $5,808 thousand, $4,640 thousand and $3,897 thousand
for the years 2004, 2003 and 2002, respectively. These provisions reflect accruals for taxes at the applicable
rates for Federal and California State income taxes based upon reported pre-tax income, and adjusted for
the beneficial effect of the Bank’s investment in qualified municipal securities and life insurance products.
The Bank has not been subject to an alternative minimum tax (AMT). See Note 10 of the Notes to Financial
Statements for additional discussion of Provision for Income Taxes.
FINANCIAL CONDITION
Investment Securities
The Bank maintains an investment securities portfolio to provide liquidity and 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 6 shows the
makeup of the securities portfolio at December 31, 2004 and 2003.
Annual Report - 11
Table 6 Securities Investments
Type and Maturity Grouping
(Dollars in thousands)
Held to maturity
U.S. Treasury
Principal
Amount
December 31, 2004
Book
Value*
Value
Market Average
Yield
Principal
Amount
December 31, 2003
Market
Value
Book
Value*
Average
Yield
Total ........................................
$ --
$ --
$ --
--%
$ --
$ --
$ --
--%
U.S. government agencies
Total ........................................
--
--
--
--
--
--
--
--
State and municipal
Due within 1 year .........................
Due after 1 but within 5 years .....
Due after 5 but within 10 years ...
Due after 10 years .........................
Total ........................................
Corporate Bonds
Due within 1 year .........................
Due after 1 but within 5 years .....
Due after 5 but within 10 years ...
Due after 10 years .........................
Total ........................................
Total held to maturity ...........................
Available for sale
U.S. Treasury
Due within 1 year .........................
Due after 1 but within 5 years .....
Due after 5 but within 10 years ...
Due after 10 years ..........................
Total ........................................
U. S. government agencies
Due within 1 year .........................
Due after 1 but within 5 years .....
Due after 5 but within 10 years ....
Due after 10 years .........................
Total ........................................
Total available for sale .........................
6,645
8,790
6,485
3,595
25,515
7,000
4,500
--
--
11,500
37,015
6,000
4,000
--
--
10,000
17,360
44,968
1,274
--
63,602
73,602
6,688
8,869
6,912
3,780
26,249
7,022
4,572
--
--
11,594
37,843
6,068
4,283
--
--
10,351
17,433
45,491
1,279
--
64,203
74,554
6,662
9,193
7,003
3,602
26,460
7,096
4,700
--
--
11,796
38,256
6,050
4,230
--
--
10,280
17,512
45,090
1,258
--
63,860
74,140
3.30
4.32
3.41
3.41
3.69
6.63
5.26
--
--
6.09
3.71
2.54
2.28
--
--
2.44
4.22
3.75
4.93
--
3.90
4.44
7,320
13,795
6,705
1,890
29,710
--
11,500
--
--
11,500
41,210
5,500
7,500
--
--
13,000
26,794
28,407
10,000
716
65,917
78,917
7,367
14,028
7,205
1,899
30,499
--
11,691
--
--
11,691
42,190
5,514
7,802
--
--
13,316
27,258
28,798
10,012
713
66,781
80,097
7,359
14,797
7,244
1,960
31,360
--
12,380
--
--
12,380
43,740
5,572
7,879
--
--
13,451
27,572
28,919
9,852
742
67,085
80,536
2.94
4.13
3.39
4.69
3.71
--
6.05
--
--
6.05
4.36
3.09
2.43
--
--
2.71
4.69
3.04
4.15
6.13
3.92
3.72
Total ...................................................... $110,617 $112,397 $112,396
3.95% $120,127 $122,287 $124,276
3.94%
Interest income and yields on tax-exempt securities are not presented on a tax-equivalent basis.
*
Book value reflects cost, adjusted for accumulated amortization and accretion. No securities are less than investment
grade.
The Bank’s investment securities portfolio, consisting primarily of U.S. Treasuries, other U.S. government
agencies, state and municipal securities, and corporate bonds, decreased $10,743 thousand or 8.75% in 2004.
U.S. Treasuries, representing 9% of the portfolio decreased by $3,171 thousand. U.S. government agency
securities made up 58% of the portfolio and decreased by $3,225 thousand. State and municipal securities
decreased by $4,250 thousand and represent 23% of the portfolio, and corporate bonds totaling $11,594
thousand or 10% of the portfolio, decreased by $97 thousand in 2004. The weighted average maturity of the
portfolio at December 31, 2004 was approximately thirty-eight months.
At December 31, 2002, the book value of investments in obligations of U. S. Treasury and other U. S.
government agencies and corporations was $27,976 thousand, the book value of investments in obligations
of state and municipal subdivisions was $22,598 thousand and the book value of investments in corporate
bonds was $12,614.
Loans
Loans, net, increased by $125,424 thousand, which reflects increases in all loan categories. The Bank seeks
to maintain a loan portfolio that is well balanced in terms of borrowers, collateral and maturities. Of the Bank’s
outstanding loans at December 31, 2004, 71% are secured by real estate. The Bank’s commercial real estate
loan portfolio is composed primarily of term loans for which the primary source of repayment is cash flow from
net operating income. Table 7 shows an analysis of loans by type.
Annual Report - 12
Table 7 Loans Outstanding by Type at December 31
(Dollars in thousands)
2004
2003
2002
2001
2000
Commercial loans ...................................................
Real estate
Commercial .........................................................
Construction .......................................................
Residential .........................................................
Installment ............................................................
Total loans ...........................................................
Allowance for loan losses .....................................
$120,006
$ 105,847
$ 85,192
$ 68,517
$ 54,030
250,326
81,549
30,692
94,384
576,957
6,110
196,703
44,471
28,052
75,808
450,881
5,458
187,384
41,736
29,824
66,019
410,155
5,035
161,136
27,305
28,363
40,928
326,249
4,580
146,695
17,284
24,114
22,825
264,948
4,213
Net loans .............................................................
$570,847
$445,423
$405,120
$321,669
$260,735
Table 8 shows that both the fixed and variable rate portion of the portfolio in 2004 remained relatively
unchanged when compared to 2003. In 2004, the Bank’s fixed rate loans were 40.5% of the portfolio, and the
variable portion was 59.5%. 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) and the remainder adjusts with
changes in the Bank’s reference rate. Many of the fixed rate 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 five years.
Table 8 Loan Portfolio Maturity Distribution and Interest Rate Sensitivity
(Dollars in thousands)
December 31, 2004
December 31, 2003
Fixed
Rate
Variable
Rate
Total
Percent
Fixed
Rate
Variable
Rate
Total Percent
Due within 1 year ................................ $ 27,284 $139,083 $166,367
166,726
Due after 1 but within 5 years ............
243,864
Due after 5 years ..................................
62,992
141,110
103,734
102,754
28.8% $28,498
89,142
28.9
67,620
42.3
$96,309 $124,807
134,814
191,260
45,672
123,640
27.7%
29.9
42.4
Total ............................................... $233,772 $343,185 $576,957 100.0% $185,260 $265,621 $450,881 100.0%
Percentage ......................................
40.5%
59.5%
100.0%
41.1%
58.9%
100.0%
Note: The "Due within 1 year" data includes demand loans, overdrafts and past due loans.
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, the Bank maintains an allowance for loan losses
to absorb losses inherent in the Bank’s loan portfolio. This is maintained through periodic charges to earnings.
These charges are shown in the Statement of Operations as provision for loan losses. All specifically
identifiable and quantifiable losses are immediately charged off against the allowance. The balance of the
Bank’s allowance for loan losses is an estimate of the remaining losses inherent in the portfolio.
The allowance for loan losses to total loans at December 31, 2004 was 1.06% versus 1.21% at the end of 2003.
At December 31, 2002, the allowance for loan losses to total loans was 1.23%. Based on the current conditions
of the loan portfolio, management believes that the $6,110 thousand allowance for loan losses at December
31, 2004 is adequate to absorb losses inherent in the Bank’s 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 9 shows the activity in the allowance for loan losses for each of the years in the five-year period
ended December 31, 2004. At December 31, 2004 and 2003 the Bank had no loans that were past due 90 days
or otherwise nonperforming.
Annual Report - 13
Table 9 Allowance for Loan Losses at December 31
(Dollars in thousands)
2004
2003
2002
2001
2000
Beginning balance ..............................................
Provision charged to expense ............................
Loans charged off
Commercial .....................................................
Construction ...................................................
Real estate .......................................................
Installment ......................................................
Total .............................................................
Loan loss recoveries
Commercial .....................................................
Construction ...................................................
Real estate .......................................................
Installment ......................................................
Total .............................................................
Net loans charged off ...............................
$5,458
934
$5,035
685
$4,580
577
$4,003
619
$3,179
986
(6)
--
--
(421)
(427)
1
--
--
144
145
(282)
(146)
--
--
(230)
(376)
14
--
--
100
114
(262)
(33)
--
--
(161)
(194)
2
--
--
70
72
(122)
(37)
--
--
(15)
(52)
1
--
--
9
10
(42)
(182)
--
--
(33)
(215)
36
--
--
17
53
(162)
Ending balance ...................................................
$6,110
$5,458
$5,035
$4,580
$4,003
Total loans outstanding at end of year, before
deducting allowance for loan losses ..............
$576,957
$450,881
$410,155
$326,249
$264,948
Average total loans outstanding during year .....
$514,299
$434,908
$366,408
$291,717
$232,761
Ratio of allowance for loan losses to total loans
at end of year ....................................................
1.06%
1.21%
1.23%
1.40%
1.51%
The Components of the Allowance for Loan Losses
As stated previously in “Critical Accounting Policies,” the overall allowance consists of a specific allowance, an
allowance factor, 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 and specified allowances for loan
losses established where applicable.
The second component, the allowance factor, is an estimate of the probable inherent losses across the major
loan categories in the Bank’s loan portfolio. This analysis is based on loan grades by pool and current general
economic and business conditions. This analysis covers the Bank’s 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.
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, economic trends, etc.
There are limitations to any credit risk grading process. The volume of loans makes it impractical to re-grade
every loan every quarter. Therefore, it is possible that 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.
At December 31, 2004 the allowance for loan losses was $6,110 thousand consisting of a specific allowance
of $971 thousand, an allowance factor of $4,539 thousand, and an economic allowance of $600 thousand. At
December 31, 2003 the allowance for loan losses was $5,458 thousand consisting of a specific allowance of
$1,110 thousand, an allowance factor of $3,643 thousand, and an economic allowance of $705 thousand.
Annual Report - 14
Table 10 shows the allocation of the allowance by loan type as well as showing the percentage of total loans
in each of the same loan types.
Table 10 Allocation of Allowance for Loan Losses
(Dollars in thousands)
December 31, 2004
Allowance Loans as
balance percent of
allocation total loans
December 31, 2003
Allowance Loans as
balance percent of
allocation total loans
December 31, 2002
Loan as
Allowance
balance percent of
allocation total loans
December 31, 2001
December 31, 2000
Allowance
Loans as
percent of
allocation total loans allocation total loans
Loans as Allowance
balance
balance percent of
Commercial .................. $2,320
1,315
Construction ................
1,260
Real estate ...................
1,215
Installment ..................
Total allowance
for loan losses ... $6,110
Total percent ........
Deposits
20.8% $2,288
14.1
734
1,319
48.7
1,117
16.4
23.4% $1,584
872
1,577
1,002
9.8
44.2
22.6
20.9% $1,322
662
10.2
1,860
45.9
736
23.0
21.0% $1,405
643
1,263
692
8.4
51.2
19.4
20.4%
6.5
64.5
8.6
$5,458
$5,035
$4,580
$4,003
100.0%
100.0%
100.0%
100.0%
100.0%
Deposits increased by $60,963 thousand from December 31, 2004 as compared to 2003. Deposits are used to
fund the Bank’s interest earning assets. The Bank does not accept brokered deposits and has only a nominal
amount of public funds. Tables 11 and 12 show the relative composition of the Bank’s average deposits for the
years 2004, 2003 and 2002, and the maturity groupings for the Bank’s time deposits of $100,000 or more.
Table 11 Distribution of Average Deposits
(Dollars in thousands)
2004
Amount Percent
Year ended December 31,
2003
Amount
Percent
2002
Amount Percent
Demand ......................................... $164,881
Interest checking ............................ 66,084
Savings ......................................... 98,778
Money market ................................. 199,313
Time deposits
26.5%
10.6
15.9
32.0
$138,214
51,664
84,161
142,128
26.2%
9.8
16.0
27.0
$115,983
43,188
70,502
112,030
25.9%
9.7
15.7
25.1
Less than $100,000 ................. 37,392
$100,000 or more .................... 55,797
Total time deposits ............... 93,189
6.0
9.0
15.0
39,756
70,984
110,740
7.5
13.5
21.0
40,762
64,647
105,409
9.1
14.5
23.6
Total Deposits ............................... $622,245
100.0%
$526,907
100.0%
$447,112
100.0%
Note:
Refer to Table 2 for the average amount of and the average rate paid on each deposit category.
Table 12 Maturities of Time Deposits of $100,000 or more at December 31
(Dollars in thousands)
December 31,
2004
2003
2002
Three months or less ................................................ $30,538
6,193
Over three months through six months ..................
10,849
Over six months through twelve months ................
21,140
Over twelve months ..................................................
$39,276
6,470
8,535
17,239
$31,542
8,840
11,330
27,371
Total ................................................................ $68,720
$71,520
$79,083
Commitments
The following is a summary of the Bank’s contractual commitments as of December 31, 2004.
Table 13 Contractual Obligations at December 31
(Dollars in thousands)
Operating leases ....................................................
Subordinated debt ..................................................
< 1 year
$1,303
--
Payments due by period
4-5 years
1-3 years
>5 years
$1,854
--
$1,631
--
$2,291
5,000
Total
$7,079
5,000
The contract amount of loan commitments not reflected on the statement of condition was $184,598 thousand
at December 31, 2004 and $153,695 thousand at December 31, 2003.
Annual Report - 15
Capital Adequacy
As discussed in Note 14 of the Notes to Financial Statements, the Bank’s capital ratios are above regulatory
guidelines to be considered “well capitalized.” In 2004, the Bank’s risk based capital ratio improved from
10.92% to 11.37%. This is primarily due to capital growth from earnings and the addition of $5,000 thousand
in subordinated debt.
Liquidity
The goal of liquidity management is to provide adequate funds to meet both loan demand and unexpected
deposit withdrawals. This goal is accomplished by maintaining an appropriate level of liquid assets,
consistent with core deposit growth, and informal lines of credit to purchase funds from correspondent banks.
At year-end 2004, the Bank had approximately $64,539 thousand in cash and securities maturing within
one year. The remainder of the securities portfolio of $77,357 provides additional liquidity. At year-end
2003, the Bank had approximately $105,100 thousand in cash, Federal funds sold and securities maturing
within one year. The remainder of the securities portfolio of $70,552 thousand provided additional liquidity.
During 2004, loan demand was strong resulting in a modest decline in the Bank’s liquidity. Management
expects to be able to meet the liquidity needs of the Bank during 2005 primarily through balancing loan
growth with corresponding increases in deposits. See discussion below for additional sources of liquidity for
the Bank.
The Bank did occasionally utilize borrowings from FHLB and Federal fund lines during 2004. The Bank
purchased $17,800 thousand in Federal funds at December 31, 2004, as compared to $0 purchased at
December 31, 2003.
During the year the combination of 10.4% deposit growth and 28.0% gross loan growth resulted in a year-end
loan-to-deposit ratio of 89.4% compared to 77.2% at December 31, 2003.
Management monitors the Bank’s liquidity position daily, balancing loan fundings/payments with changes in
deposit activity and overnight investments. The Bank’s emphasis on local deposits at competitive rates,
combined with its 8.9% average equity capital base, provides a very stable funding base. The Bank also has
unsecured lines of credit totaling $35,000 thousand with correspondent banks to purchase Federal funds.
The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB), and has a line of credit for
advances of $24,448 thousand ($6,648 thousand of which was available at December 31, 2004) at an interest
rate that is determined daily. Borrowings under the line are limited to eligible collateral.
The Bank had undisbursed loan commitments of $184,598 thousand, including $91,237 thousand under lines
of credit (these commitments are contingent upon customers maintaining specific credit standards), $48,428
thousand under revolving home equity lines, and $31,174 thousand under undisbursed construction loans.
These commitments, to the extent used, are expected to be funded through repayment of existing loans and
normal deposit growth.
Market Risk Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Bank’s market risk arises
primarily from interest rate risk inherent in its loan and deposit functions. The objective for managing the
assets and liabilities of the Bank is to maximize earnings while maintaining a high-quality portfolio of loans
and investments and assuming only limited interest rate risk. The Loan and Investment Committee of the
Board of Directors has overall responsibility for interest rate risk management policies. The Committee
establishes and monitors guidelines to control the sensitivity of net interest income (NII) and regulatory
Tier 1 capital (Capital) to changes in interest rates.
Activities in asset and liability management include, but are not limited to, lending, accepting deposits and
investing in securities. Interest rate risk is the primary market risk associated with asset and liability
management. Sensitivity of NII and Capital to interest rate changes arises when yields on loans and
Annual Report - 16
investments change in a different time frame or amount from that of rates on deposits and other interest-
bearing liabilities. To mitigate interest rate risk, the structure of the statement of condition is managed with
the objective of correlating the movements of interest rates on loans and investments with those of deposits.
The asset and liability policy sets limits on the acceptable amount of change to NII and Capital in changing
interest rate environments. The Bank uses simulation models to forecast NII and Capital.
Simulation of NII and Capital under various scenarios of increasing or decreasing interest rates is the primary
tool used to measure interest rate risk. Using licensed software developed for this purpose, management is able
to estimate the potential impact of changing rates. A simplified statement of condition is prepared on a quarterly
basis as a starting point, using as inputs, actual loans, investments and deposits.
In the simulation of NII and Capital under various interest rate scenarios, the simplified statement of condition
is processed against at least six interest rate change scenarios. In addition to a flat rate scenario, which
assumes interest rates are unchanged, the six scenarios include three 100 basis point increases and three 100
basis point decreases. Each of these scenarios assumes that the change in interest rates is immediate and
remains at the new levels.
Table 14 summarizes the effect on NII and Capital due to changing interest rates as measured against the flat
rate scenario.
Table 14 Effect of Interest Rate Change on Net Interest Income and Capital
Changes in Interest
Rates (in basis points)
up 300 ..............................
up 200 ..............................
up 100 ..............................
unchanged .......................
down 100 .........................
down 200 .........................
down 300 .........................
Estimated change in NII
(as percent of flat NII)
at December 31,
Estimated change in capital
(as percent of flat capital)
at December 31,
2004
4.6%
3.1%
1.5%
--
(2.3%)
(4.5%)
N / A
2003
5.4%
3.6%
1.8%
--
(2.5%)
N / A
N / A
2004
2.6%
1.7%
0.9%
--
(1.3%)
(2.5%)
N / A
2003
3.3%
2.2%
1.1%
--
(1.4%)
N / A
N / A
N/A - Not applicable as Federal funds rates cannot drop below zero.
The results in the table indicate that the Bank was modestly asset sensitive since NII increased under the
increasing interest rate scenarios. The results are also well within the policy guidelines established by the
Committee. Further, the results do not assume nor incorporate any action(s) which management might take
to minimize any negative consequences of interest rate changes. Therefore, they are not intended to portray
likely results but rather estimates of the impact of interest rate risk.
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 the Bank’s 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 the Bank’s 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 US 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 the Bank’s 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
Annual Report - 17
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 15 shows the Bank’s repricing gaps as of December 31, 2004. Due to the limitations of gap analysis,
as described above, the Bank does not generally use it in managing interest rate risk. Instead the Bank relies
on the more sophisticated simulation model described above as its primary tool in measuring and managing
interest rate risk.
Table 15 Interest Rate Sensitivity
(Dollars in thousands)
At December 31, 2004
Interest Earning Assets
1-30
Days
31-90
Days
Maturing or Repricing
181-365
91-180
Days
Days
Over
one year
Total
Funds sold ................................... $ --
Investment securities ..................
3,001
201,069
Loans ............................................
204,070
Total ...........................................
$ --
4,662
4,372
9,034
$ --
14,978
3,824
18,802
$ --
14,630
14,541
29,171
$ --
74,712
347,041
421,753
$ --
111,983
570,847
682,830
Interest Bearing Liabilities
--
Transaction and savings deposits
--
Federal funds purchased .............
6,762
Time deposits less than $100,000
18,407
Time deposits $100,000 or more
25,169
Total .......................................
--
Demand Deposits .............................
Sensitivity for period ........................
(16,135)
Sensitivity - cumulative .................... $(204,031) $(220,166)
374,326
17,800
3,845
12,130
408,101
--
(204,031)
--
--
6,469
6,194
12,663
--
6,139
--
--
5,298
10,850
16,148
--
13,023
$(214,027) $(201,004)
--
--
9,275
21,139
30,414
170,385
220,954
$ 19,950
374,326
17,800
31,649
68,720
492,495
170,385
$ 19,950
Deferred Compensation Obligations
The Bank maintains 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 fifteen
years commencing upon retirement and reduced benefits upon early retirement, disability, or termination
of employment. At December 31, 2004, the Bank’s aggregate payment obligations under this plan totaled
$722 thousand.
Off Balance Sheet Arrangements
The Bank makes commitments to extend credit in the normal course of business to meet the financing
needs of its customers. For additional information, see Note 15 of the Notes to Financial Statements.
Borrowings
Federal funds Purchased
As of December 31, 2004, short-term borrowings totaled $17,800 thousand as compared to $0 as of December
31, 2003. Short-term borrowings consist primarily of Federal funds purchased and borrowings from Federal
Home Loan Bank of San Francisco (FHLB). Based on the FHLB stock requirements at December 31, 2004,
the lines provided for maximum borrowings of approximately $24,448 thousand. At December 31, 2004 the
Bank had an unused capacity with the FHLB of $6,648 thousand. The Bank also has available unused
unsecured formal lines of credit totaling $35,000 thousand for Federal funds transactions at December 31,
2004 with correspondent banks.
Annual Report - 18
Subordinated Debt
On June 17, 2004, the Bank issued a 15-year, $5 million subordinated debenture through a pooled trust
preferred program. The interest rate on the debentures is paid quarterly at the three-month LIBOR plus
2.48%. The debenture is subordinated to the claims of depositors and other creditors of the Bank. The
principal is due on June 17, 2019.
Related Party Transactions
See Notes 3, 7, and 11 of the Notes to Financial Statements for discussion of the Bank’s related party
transactions.
Code of Ethics
Bank of Marin has adopted a Code of Ethics that applies to all employees, directors and officers, including
the Bank’s principal executive officer, principal financial officer and principal accounting officer. A copy of
the Code of Ethics is available, without charge, upon written request to Corporate Secretary, Bank of Marin,
P.O. Box 2039, Novato, CA 94948.
Annual Report - 19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bank of Marin
We have audited the accompanying statement of condition of Bank of Marin (the Bank) as of
December 31, 2004 and the related statements of operations, stockholders’ equity and cash flows
for the year then ended. These financial statements are the responsibility of the Bank’s management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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. We believe that our audit provides a reasonable basis for our
opinion.
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, 2004 and the results of its operations
and its cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
We have also audited the adjustments described in Note 1, Earnings Per Share and Note 13,
Stockholders’ Equity that were applied to restate the 2003 and 2002 financial statements resulting
from the stock split in 2004. In our opinion, such adjustments are appropriate and have been
properly applied.
Santa Rosa, California
February 18, 2005
/s/ Moss Adams LLP
Annual Report - 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bank of Marin
Corte Madera, California
We have audited the accompanying statement of condition of Bank of Marin (the Bank) as of
December 31, 2003, and the related statements of operations, stockholders’ equity and cash
flows for each of the two years in the period ended December 31, 2003 (prior to the restatement
for a stock split, not presented herein). These financial statements are the responsibility of the
Bank’s management. Our responsibility is to express an opinion on these financial statements
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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of the Bank as of December 31, 2003, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
San Francisco, California
January 21, 2004
/s/ Deloitte & Touche LLP
Annual Report - 21
STATEMENT OF CONDITION
(Dollar amounts in thousands)
Assets
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Investment securities
Held to maturity, at amortized cost
Available for sale (at fair market value, cost
$74,554 in 2004 and $80,097 in 2003)
Total investment securities
Loans, net of allowance for loan losses of
$6,110 in 2004 and $5,458 in 2003
Bank premises and equipment, net
Interest receivable and other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Non-interest bearing
Interest bearing
Transaction accounts
Savings
Time
Total deposits
Federal funds purchased
Subordinated debenture
Interest payable and other liabilities
Total liabilities
December 31,
2004
2003
$ 29,499
---
29,499
37,843
74,140
111,983
570,847
3,911
20,854
$ 737,094
$ 36,026
16,900
52,926
42,190
80,536
122,726
445,423
4,508
17,024
$ 642,607
$ 170,385
$ 160,121
68,259
306,067
100,368
645,079
17,800
5,000
3,607
671,486
63,801
255,814
104,380
584,116
---
---
2,914
587,030
Stockholders' Equity
Common stock, no par value
Authorized - 15,000,000 shares
Issued and outstanding - 4,609,685 shares in 2004
and 2,954,054 shares in 2003
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
40,208
25,640
(240)
65,608
37,367
17,955
255
55,577
Total liabilities and stockholders’ equity
$ 737,094
$ 642,607
The accompanying notes are an integral part of these financial statements.
Annual Report - 22
STATEMENT OF OPERATIONS
(In thousands, except per share data)
Interest income
Interest and fees on loans
Interest on investment securities
U. S. Treasury securities
Securities of U. S. Government agencies
Obligations of state and political
subdivisions - tax exempt
Corporate debt securities and other
Interest on Federal funds sold
Years ended December 31,
2004
2003
2002
$33,140
$29,301
$27,562
324
2,257
1,012
795
61
518
1,018
954
791
243
1,101
1,009
1,027
848
204
Total interest income
37,589
32,825
31,751
Interest expense
Interest on interest bearing transaction deposits
Interest on savings deposits
Interest on time deposits
Interest on borrowed funds
257
2,961
1,968
166
207
2,426
2,534
2
309
2,953
2,960
6
Total interest expense
5,352
5,169
6,228
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Non-interest income
Service charges on deposit accounts
Wealth Management Services
Other income
32,237
934
27,656
686
25,523
577
31,303
26,970
24,946
1,137
922
1,584
1,020
815
1,125
840
670
808
Total non-interest income
3,643
2,960
2,318
Non-interest expense
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
Data processing
Other expense
11,954
1,864
949
1,210
3,643
10,767
1,676
992
1,039
3,343
10,446
1,601
882
953
3,243
Total non-interest expense
19,620
17,817
17,125
Income before provision
for income taxes
Provision for income taxes
Net income
Net income per common share*
Basic
Diluted
15,326
12,113
10,139
5,808
$ 9,518
4,640
$ 7,473
3,897
$ 6,242
$2.09
$1.94
$1.70
$1.59
$1.44
$1.37
* Restated for the 3-for-2 stock split declared in April 2004 and for the 5% stock dividend declared in April 2003.
The accompanying notes are an integral part of these financial statements.
Annual Report - 23
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
Common Stock
Shares
Amount
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss),
Net of taxes
Unearned
ESOP
Shares
Total
Balance at Dec. 31, 2001
2,590,749
$28,003
$11,838
$810
$(50)
$40,601
---
---
6,242
---
---
6,242
Balance at Dec. 31, 2002
2,757,393
$31,969
$14,662
$551
$(65)
$47,117
---
---
7,473
---
---
7,473
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss)
on available for sale securities
(net of tax benefit of $188)
Comprehensive income
Stock options exercised
Stock issued on 5% stock
dividend declared Apr. 11
Stock issued in payment of
director fees
Change in unearned ESOP
shares
---
---
27,160
129,956
9,528
---
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss)
on available for sale securities
(net of tax benefit of $215)
Comprehensive income
Stock options exercised
Stock issued on 5% stock
dividend declared Apr. 10
Stock issued in payment of
director fees
Change in unearned ESOP
shares
---
---
48,958
138,461
9,242
---
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss)
on available for sale securities
(net of tax benefit of $358)
Comprehensive income
Stock options exercised
3-for-2 stock split declared
April 15
Cash dividend paid
June 1
Stock issued in payment of
director fees
---
---
126,901
1,519,714
---
9,016
---
---
317
---
6,242
---
3,405
(3,418)
244
---
---
---
(259)
(259)
---
---
---
---
---
---
---
---
---
(15)
(259)
5,983
317
(13)
244
(15)
---
---
955
---
7,473
---
4,162
(4,180)
281
---
---
---
(296)
(296)
---
---
---
---
---
---
---
---
---
65
(296)
7,177
955
(18)
281
65
---
---
2,527
---
---
314
---
9,518
---
(9)
(1,824)
---
(495)
(495)
---
---
---
---
---
---
---
---
---
---
(495)
9,023
2,527
(9)
(1,824)
314
Balance at Dec. 31, 2003
2,954,054
$37,367
$17,955
$255
$---
$55,577
---
---
9,518
---
---
9,518
Balance at Dec. 31, 2004
4,609,685
$40,208
$25,640
$(240)
$---
$65,608
The accompanying notes are an integral part of these financial statements.
Annual Report - 24
STATEMENT OF CASH FLOWS
(In thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Compensation payable in common stock
Amortization and accretion of investment
security premiums, net
Depreciation and amortization
Net change in operating assets and liabilities:
Interest receivable
Interest payable
Other assets
Other liabilities
Total adjustments
Years ended December 31,
2004
2003
2002
$ 9,518
$ 7,473
$ 6,242
934
344
1,570
949
686
281
1,107
992
577
243
750
882
(362)
(25)
(3,468)
1,046
988
19
(81)
(495)
(2,605)
(96)
(131)
(19)
(337)
2,610
4,575
Net cash provided by operating activities
10,506
7,377
10,817
Cash Flows from Investing Activities:
Purchase of securities held-to-maturity
Purchase of securities available-for-sale
Proceeds from paydowns/maturity of:
Securities held-to-maturity
Securities available-for-sale
Purchase of bank owned life insurance policies
Loans originated and principal collected, net
Additions to premises and equipment
(5,363)
(38,545)
(14,277)
(87,479)
---
(17,128)
9,350
42,878
---
(126,358)
(352)
6,972
34,578
(10,000)
(40,989)
(949)
2,694
31,672
---
(83,906)
(1,320)
Net cash used in investing activities
(118,390)
(112,144)
(67,988)
Cash Flows from Financing Activities:
Net increase in deposits
Issuance of common stock
Federal funds purchased
Cash dividend paid
Subordinated debt issued
Other
60,963
2,527
17,800
(1,824)
5,000
(9)
98,087
955
---
---
---
(18)
74,212
317
---
---
---
(13)
Net cash provided by financing activities
84,457
99,024
74,516
Net (decrease) increase in cash and cash equivalents
(23,427)
(5,743)
17,345
Cash and cash equivalents at beginning of year
52,926
58,669
41,324
Cash and cash equivalents at end of year
$29,499
$52,926
$58,669
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
$5,319
$5,599
$5,250
$4,822
$6,248
$3,762
The accompanying notes are an integral part of these financial statements.
Annual Report - 25
NOTES TO FINANCIAL STATEMENTS
December 31, 2004
(In thousands, except share and per-share data)
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 one in southern Sonoma County, California. The
Bank's primary source of revenue is interest from providing loans to customers, who are
predominately 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; and 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 as payments are received.
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. 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 in periodic evaluations of the adequacy of the
allowance balance. The allowance for loan losses is based on estimates, and ultimate losses may
vary from current estimates.
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.)
Annual Report - 26
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 as 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 Directors’ Loan Committee
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 judgement of the Loan Committee and management, changes are
warranted.
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 5 to 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.
ESOP and Related Debt Employee Stock Ownership Plan (ESOP) - 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 is 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. 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 are classified assuming that cash and cash equivalents includes cash
and due from banks and federal funds sold, which have an original maturity of 90 days or less at
the time of purchase.
The Bank is required to maintain reserves with the Federal Reserve Bank of San Francisco equal
to a percentage of its reservable deposits. Reserve balances that were required by the Federal
Reserve Bank were $10,466 thousand and $7,819 thousand for December 31, 2004 and 2003,
respectively, and are reported in cash and due from banks on the balance sheet.
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
Annual Report - 27
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 3-for-2 stock split in 2004 and the 5% stock
dividend in 2003.
2004
2003
2002
Weighted average basic shares outstanding
Add: Potential common shares related to
stock options
4,546,834
4,392,962
4,324,202
351,176
315,591
227,439
Weighted average diluted shares outstanding
4,898,010
4,708,553
4,551,641
The number of antidilutive shares not included in the calculation of diluted earnings per shares
were 14,250, 17,366 and 36,114 at December 31, 2004, 2003 and 2002, respectively.
Stock-Based Compensation In December 2002 the Bank adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends SFAS No. 123 - Accounting for Stock-
Based Compensation. This Statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation. It
also amends the disclosure requirements to require prominent disclosure about the method of
accounting for stock-based employee compensation and the effect of the method used on reported
results.
The Bank accounts for stock-based awards for its plans under APB Opinion No. 25 - Accounting
for Stock Issued to Employees - under which no stock-based compensation cost has been recognized
in net income, as all options granted under these plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. Had compensation cost for these plans
been determined in accordance with SFAS No. 123, the Bank’s net income and earnings per share
would have been reduced to the pro forma amounts shown in the following table. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
(Dollars in thousands, except per share amounts)
Net income as reported
Stock-based compensation expense, net of taxes
Pro forma net income
Earnings per share
As reported (basic)
As reported (diluted)
Pro forma (basic)
Pro forma (diluted)
Weighted-average fair value of options granted
during the year
Assumptions used in weighted-average fair value
Risk-free interest rate
Expected dividend yield
Expected life in years
Expected price volatility
2004
$9,518
(905)
$8,613
2003
$7,473
(959)
$6,514
2002
$6,242
(910)
$5,332
$2.09
1.94
1.89
1.76
$1.70
1.59
1.48
1.38
$1.44
1.37
1.23
1.17
$12.43
$12.85
$11.87
4.05%
0.12%
8
29.96%
4.00%
0.00%
8
28.83%
4.00%
0.00%
8
30.88%
In December 2004, the Financial Accounting Standards Board adopted SFAS No. 123-R, which
requires recognition for stock-based compensation expense in the Bank’s financial statements
beginning in the third quarter of 2005. The Bank expects to adopt the requirements prospectively
in July 2005 and estimates the impact to be a reduction to net income of approximately $105
thousand to $140 thousand per quarter.
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 reported as a component of
stockholders’ equity.
Annual Report - 28
Segment Information The Bank’s two operating segments include the traditional community
banking activities provided through its nine 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 $922
thousand in 2004, $815 thousand in 2003, and $670 thousand in 2002, 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.
Note 2: Investment Securities
The amortized cost and fair market value of investment securities at December 31, 2004 and 2003
consisted of the following:
(In thousands)
2004 Held to maturity
Oblig. of state & political subdivisions
Corporate debt securities and other
2004 Available for sale
U. S. Treasury Securities
Securities of U.S. Government Agencies
Total
2003 Held to maturity
Oblig. of state & political subdivisions
Corporate debt securities and other
2003 Available for sale
U. S. Treasury Securities
Securities of U.S. Government Agencies
Amortized Cost
Gains
Losses Market Value
Gross Unrealized
Fair
$26,249
11,594
37,843
10,351
64,203
74,554
$112,397
$30,499
11,691
42,190
13,316
66,781
80,097
$472
213
685
6
130
136
$821
$ 983
689
1,672
135
510
645
$(261)
(11)
(272)
(77)
(473)
(550)
$26,460
11,796
38,256
10,280
63,860
74,140
$(822)
$112,396
$ (122)
---
(122)
( 1)
(205)
(206)
$31,360
12,380
43,740
13,450
67,086
80,536
Total
$122,287
$2,317
$(328)
$124,276
The amortized cost and estimated market value of investment securities at December 31, 2004 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 thousands)
Within one year
After one but within five years
After five years through ten years
After ten years
December 31, 2004
Held to maturity
Fair
Market Value
Amortized
Cost
Available for sale
Fair
Market Value
Amortized
Cost
$13,710
13,441
6,912
3,780
$13,759
13,893
7,003
3,601
$ 21,330
44,556
6,496
2,172
$21,356
44,169
6,410
2,205
Total
$37,843
$38,256
$74,554
$74,140
Annual Report - 29
For the years ended December 31, 2004, 2003, and 2002 the Bank did not sell any of its investment
securities, and accordingly, did not recognize any gains or losses. At December 31, 2004,
investment securities carried at $17,253 thousand were pledged with the Federal Reserve Bank:
$3,994 thousand to secure the Bank's Treasury, Tax and Loan account and trust deposits, $4,048
thousand to provide collateral for potential future borrowings to meet unusual short-term liquidity
needs, and $9,211 thousand to secure the Bank's public fund deposits.
Investment securities with unrealized losses are summarized and classified according to the
duration of the loss period as follows:
December 31, 2004
(In thousands)
Held-to-maturity
< 12 continuous months
Fair value Unrealized loss
> 12 continuous months
Unrealized loss
Fair value
Obligations of state & political subdivisions
Corporate debt securities and other
Available for sale
U. S. Treasury Securities
Securities of U. S. Government Agencies
$5,634
2,081
7,715
9,272
42,222
51,494
Total temporarily impaired securities
$59,209
$(261)
(11)
(272)
(77)
(473)
(550)
$(822)
$---
---
---
---
---
---
$---
$ ---
---
---
---
---
---
$---
December 31, 2003
(In thousands)
Held-to-maturity
< 12 continuous months
Fair value Unrealized loss
> 12 continuous months
Unrealized loss
Fair value
Obligations of state & political subdivisions $ 3,857
$ (122)
Available for sale
U. S. Treasury Securities
Securities of U. S. Government Agencies
1,999
20,053
22,052
(1)
(205)
(206))
Total temporarily impaired securities
$25,909
$(328)
---
---
---
---
---
--
---
---
---
---
Management periodically evaluates each investment security in an unrealized loss position to
determine if the impairment is temporary or other than temporary. Included are twenty-seven
securities at December 31, 2004 and nine securities at December 31, 2003 with fair values of
$59,209 thousand and $25,909 thousand, respectively, and unrealized losses of $822 thousand
and $328 thousand, respectively. Management has determined that 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. The duration of this impairment
was for a period of less than twelve months.
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 County. Approximately 71% of the loans are secured by real
estate.
Outstanding loans by type, net of deferred loan fees of $2,040 thousand and $1,395 thousand at
December 31, 2004 and 2003, respectively, are as follows:
(In thousands)
Commercial loans
Real estate
Commercial
Construction
Residential
Installment
Total loans
Less - Allowance for loan losses
Net Loans
Annual Report - 30
2004
$120,006
2003
$105,847
250,326
81,549
30,692
94,384
576,957
( 6,110)
$570,847
196,703
44,471
28,052
75,808
450,881
(5,458)
$445,423
At December 31, 2004 and 2003 the Bank had no loans that were past due greater than 90 days.
At December 31, 2004, commercial real estate loans of $56,655 thousand were pledged as collateral
for an FHLB line of credit.
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 and 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 year ended December 31, 2004, is as follows:
(In thousands)
Balance at beginning of year
New loans to related parties
Repayments
Balance at end of year
2004
$1,730
1,044
277
$2,497
The undisbursed commitment to related parties as of December 31, 2004 was $1,992 thousand.
Note 4: Allowance for Loan Losses
Activity in the allowance for loan losses for the three years in the period ended December 31 follows:
(In thousands)
Beginning balance
Provision for loan loss charged to expense
Loans charged off
Loan loss recoveries
Ending balance
Total loans outstanding at end of year,
2004
$5,458
934
(427)
145
$ 6,110
2003
$ 5,035
685
(376)
114
$ 5,458
2002
$ 4,580
577
(194)
72
$ 5,035
before deducting allowance for loan losses
$ 576,957
$ 450,881
$ 410,155
Average total loans outstanding during the year
Ratio of allowance for loan losses
to total loans at end of year
$ 514,299
$ 434,908
$ 366,408
1.06%
1.21%
1.23%
Loans classified as nonaccrual amounted to $0 at December 31, 2004 and 2003.
At December 31, 2004, 2003 and 2002 the Bank had no impaired loans. The average recorded
investment in impaired loans was $0 for the years ended December 31, 2004, 2003 and 2002.
Note 5: Bank Premises and Equipment
A summary of Bank premises and equipment at December 31 follows:
(In thousands)
Leasehold improvements
Furniture and equipment
Accumulated depreciation and amortization
Bank premises and equipment, net
2004
$5,276
6,038
11,314
(7,403)
$3,911
2003
$ 5,214
5,748
10,962
(6,454)
$4,508
The amount of depreciation and amortization was $949 thousand, $992 thousand and $882
thousand for the three years in the period ended December 31, 2004, 2003 and 2002, respectively.
Note 6: Bank Owned Life Insurance
The Bank has purchased life insurance policies on the lives of certain officers in the Bank and
intends to use the policies ($10,715 thousand cash surrender value at December 31, 2004 and
$10,203 thousand cash surrender value at December 31, 2003) 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 carrying 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 $512 thousand in 2004 and
Annual Report - 31
$203 thousand in 2003 was recognized on the life insurance policies and is reported in “other non-
interest income.”
Note 7: Deposits
Time deposits in denominations of $100,000 or greater were $68,720 thousand and $71,520
thousand at December 31, 2004 and 2003, respectively. Interest on these deposits was $1,968
thousand, $2,534 thousand and $2,960 thousand in 2004, 2003 and 2002, respectively.
Scheduled maturities of these deposits at December 31, 2004 follows:
(In thousands)
Scheduled maturities
of time deposits
2005
2006
2007
2008
2009
Thereafter
Total
$47,579
$7,937
$3,616
$2,370
$7,218
$---
$68,720
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
Federal funds Purchased Short-term debt at December 31, 2004 and 2003 consisted of overnight
Federal funds purchased in the amount of $17,800 thousand and $0 thousand, respectively. Short-
term borrowing available to the Bank of $24,448 thousand consists of a line of credit and advances
with the Federal Home Loan Bank (“FHLB”) secured under terms of a blanket collateral agreement
by a pledge of FHLB stock and certain other qualifying collateral such as investments and loans.
At December 31, 2004 the Bank had an unused capacity with the FHLB of $6,648 thousand. The
Bank also has unused unsecured formal lines of credit totaling $35,000 thousand with
correspondent banks. At December 31, 2004, interest rates on lines of credit with correspondent
banks ranged from 2.00% to 3.18%.
Subordinated Debt On June 17, 2004 the Bank issued a 15-year, $5 million subordinated debenture
through the pooled trust preferred program of FTN Financial Capital market and Keefe, Bruyette
and Woods, which matures on June 17, 2017. The Bank has the right to redeem the debenture,
in whole or in part, at the redemption price at principal amounts in multiples of $1,000 thousand
on any interest payment date on or after June 17, 2009. The interest rate on the debentures changes
quarterly and is paid quarterly at the three-month LIBOR plus 2.48%. The rate at December 31,
2004 was 4.98%. The debenture is subordinated to the claims of depositors and other creditors of
the Bank.
Borrowings at December 31, 2004 and 2003 are summarized as follows:
(In thousands)
Federal funds purchased
Subordinated debenture
Carrying
Value
$17,800
5,000
2004
Average
Balance
$2,805
2,705
Average
Rate
1.74%
4.32
Carrying
Value
$ ---
---
2003
Average
Balance
$91
---
Average
Rate
1.71%
---
The maximum amount outstanding at any month end for Federal funds purchased was $18,800
thousand and $5,300 thousand, during 2004 and 2003, respectively.
Note 9: Benefit Plans
In 2003 the Bank established an Officer Deferred Compensation Plan, which 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% for 2004 and 6% for the period from September 1, 2003
to December 31, 2003. The Bank’s deferred compensation obligation of $722 thousand and $113
thousand at December 31, 2004 and 2003, 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
Annual Report - 32
plans. The Bank has purchased life insurance policies on the designated officers in connection
with these plans. The expense recognized under this plan totaled $2 thousand and $23 thousand
for the years ended December 31, 2004 and 2003, 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 $4,000 annually. Employer contributions totaled $306 thousand, $267
thousand and $227 thousand for the years ended December 31, 2004, 2003 and 2002, respectively.
In 1995 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, 2004, 2003 and 2002 the Bank contributed $754
thousand, $653 thousand and $652 thousand, respectively. In December 2003 the Plan's trustees
arranged for a $1,000 thousand 26-month revolving line of credit at prime plus 1/4% from an
unaffiliated community bank. At December 31, 2004 the balance on the line was $0.
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.
Note 10: Income Taxes
The current and deferred components of the income tax provision for each of the three years
ended December 31, 2004 are as follows:
In thousands
Current tax provision
Federal
State
Total current
Deferred tax( benefit)/liability
Federal
State
Total deferred
Total income tax provision
2004
2003
2002
$3,553
1,444
4,997
619
192
811
$5,808
$3,175
1,235
4,410
145
85
230
$4,640
$ 2,866
1,137
4,003
(96)
(10)
(106)
$3,897
Income taxes recorded directly to comprehensive income are not included above. These income tax
benefits relating to changes in the unrealized gains and losses on available for sale investment
securities amounted to $358 thousand, $215 thousand and $188 thousand in 2004, 2003 and
2002, respectively.
The following table shows the tax effect of the Bank's cumulative temporary differences as of
December 31:
(In thousands)
Deferred tax assets:
Allowance for loan losses
Depreciation
State franchise tax
Deferred compensation
Net unrealized loss on securities available for sale
Deferred tax liabilities:
Net unrealized gain on securities available for sale
Depreciation
Loan origination costs
Net deferred tax asset
2004
2003
$2,895
304
123
423
174
3,919
---
---
(179)
(179)
$3,740
$2,310
---
481
148
---
2,939
(180)
(184)
---
(364)
$2,575
Annual Report - 33
Based upon the level of historical taxable income and projections for further taxable income over
the periods during which the deferred tax assets are 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 2004, 2003 and 2002 differs from the current Federal statutory
income tax rate as follows:
Federal statutory income tax rate
Increase (decrease) due to:
California franchise tax, net of federal tax benefit
Tax exempt interest on municipal securities
Other
2004
35.0%
6.9
(2.3)
(1.7)
37.9%
2003
34.0%
7.2
(2.8)
(0.1)
38.3%
2002
34.0%
7.3
(3.3)
0.4
38.4%
Note 11: Commitments and Contingencies
The Bank rents certain premises and equipment under long-term non-cancellable operating leases
expiring at various dates through the year 2019. At December 31, 2004 the approximate minimum
future commitments payable under non-cancellable contracts for leased premises are as follows:
(In thousands)
Operating leases
2005
$1,303
2006
$980
2007
$874
2008
$874
2009
$757
Thereafter
$2,291
Total
$7,079
Rent expense included in “occupancy” totaled $1,344 thousand, $1,178 thousand and $1,134
thousand in 2004, 2003 and 2002, respectively.
The Bank leases one branch facility from a current member of the Bank’s Board of Directors at
current market prices. Rental payment to the Director totaled $120 thousand, $116 thousand and
$113 thousand for the years ended December 31, 2004, 2003 and 2002, 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 12: Fair Value of Financial Instruments
The carrying amounts and fair values of the Bank's financial instruments at December 31,
2004 and 2003 follows:
(In thousands)
Financial assets
Cash and cash equivalents
Investment securities
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Federal funds purchased
Subordinated debenture
Accrued interest payable
2004
2003
Carrying
Amounts
$29,499
111,983
570,847
3,312
645,079
17,800
5,000
307
Fair Value
$ 29,499
112,396
574,016
3,312
645,109
17,800
5,000
307
Carrying
Amounts
$ 52,926
122,726
445,423
2,960
584,116
---
---
322
Fair Value
$ 52,926
124,276
452,490
2,960
584,970
---
---
322
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 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.
Annual Report - 34
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.
Borrowings - The balance represents its fair value due to the short-term nature of these
borrowings and the long-term borrowing has a variable interest rate.
Commitments - The fair value of commitments is not material.
Note 13: Stockholders’ Equity
On April 15, 2004, the Board of Directors declared a 3-for-2 stock split contingent upon approval
of an increase in the number of authorized common shares by the shareholders and the California
Department of Financial Institutions (“CDFI”). Shareholders approved the increase to 15 million
common shares at their May 4, 2004 Annual Meeting and subsequently the CDFI approved that
amendment to the Articles of Incorporation. The stock split was payable on May 24, 2004 to
shareholders of record on May 19, 2004. Additionally, the Board declared a one-time special cash
dividend of $.40 per post-split share payable on June 1, 2004 to shareholders of record on May 27,
2004, which was also subject to the approvals just noted.
On April 10, 2003 and April 11, 2002, 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 and
stock split.
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 674,606 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 expire ten years from the grant date,
and vest over a four year period. Terms of the plans also provide for the issuance of up to 115,473
shares for non-employee directors. These options expire seven years from the grant date, and vest
over a four year period. A summary of the status of the Bank's stock option plans at December 31,
2004, 2003 and 2002 and changes for the years then ended is presented in the following table. The
2003 and 2002 information has been restated to reflect the 3-for-2 stock split that occurred in 2004.
Outstanding at beg. of year
Granted
Exercised
Cancelled/forfeited
Outstanding at end of year
Shares
835,880
100,279
(168,015)
(15,955)
752,189
2004
Weighted Avg.
Exercise Price
$13.24
$29.85
$11.16
$19.98
$15.78
2003 2002
Weighted Avg.
Shares Exercise Price
849,941
78,395
(74,844)
(17,612)
835,880
Shares
777,152
124,596
(43,857)
(7,950)
849,941
$12.37
$20.06
$10.11
$14.57
$13.24
Weighted Avg.
Exercise Price
$11.38
$16.53
$6.48
$14.14
$12.37
Exercisable at end of year
562,883
$13.63
593,538
$12.28
521,220
$11.51
A summary of the options outstanding and exercisable by price range as of December 31, 2004 is
presented in the following table.
Range of
Exercise Prices
$0.00 - $5.00
$5.01 - $10.00
$10.01 - $15.00
$15.01 - $20.00
$20.01 - $25.00
$25.01 - $30.00
$30.01 - $35.00
$35.01 - $40.00
Options Outstanding
Options Exercisable
Outstanding
Weighted Avg.
Remaining
Contractual Life
8,355
24,520
454,071
143,099
27,266
57,678
31,200
6,000
752,189
0.9
1.8
4.4
7.1
7.2
9.2
9.4
9.9
5.5
Weighted Avg.
Exercise Price
$4.61
$6.24
$12.70
$17.28
$22.06
$28.29
$31.51
$36.84
$15.78
Weighted Avg.
Exercisable Exercise Price
$4.61
$6.24
$12.66
$17.11
$22.03
$28.29
$31.51
$36.84
$13.63
8,355
24,520
425,033
74,194
11,446
11,535
6,600
1,200
562,883
Annual Report - 35
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, the balance of retained earnings equalling approximately $21,409 thousand was
available for payment of dividends as of December 31, 2004.
Note 14: 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, 2004 and 2003, that the
Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2004, 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, 2004 and 2003 are presented in the
table.
(In thousands)
As of December 31, 2004
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
As of December 31, 2003
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Actual
Amount Ratio
For Capital
Adequacy Purposes
Amount Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$77,328 11.37%
$65,849 9.69%
$65,849 8.98%
>$54,388 >8.0%
>$27,194 >4.0%
>$29,332 >4.0%
>$67,986 >10.0%
>$40,791 > 6.0%
>$36,665 > 5.0%
$61,164 10.92%
$55,322 9.88%
$55,322 8.80%
>$44,795 >8.0%
>$22,398 >4.0%
>$23,263 >4.0%
>$55,994 >10.0%
>$33,596 > 6.0%
>$29,079 > 5.0%
Note 15: Financial Instruments with Off-Balance Sheet Risk
The Bank makes commitments to extend credit in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend
credit in the form of loans or through standby letters of credit. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amount does not necessarily represent future cash requirements.
The Bank is exposed to credit loss, in the 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 $184,598 thousand at
December 31, 2004 at rates ranging from 3.04% to 18%. The Bank has set aside an allowance in
the amount of $369 thousand for these commitments, which is recorded in “interest payable and
other liabilities.” Approximately 62% of the commitments expire in 2005 with approximately 38%
expiring between 2006 and 2015.
Annual Report - 36
SELECTED FINANCIAL DATA (in thousands except per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
At December 31
Total assets
Total loans
Total deposits
Total stockholders’ equity
Equity-to-assets ratio
For year ended December 31
Net interest income
Provision for possible loan losses
Non-interest income
Non-interest expense
Net income
Net income per share (diluted)*
Dividend payout ratio
2000
$ 379,096
264,948
341,711
34,352
9.1%
2000
$ 19,271
986
1,638
12,675
4,523
1.05
0%
2001
$ 455,417
326,249
411,818
40,601
8.9%
2001
$ 21,456
619
1,873
14,428
5,148
1.17
0%
2002
$ 539,025
410,155
486,029
47,117
8.7%
2002
$ 25,522
577
2,318
17,125
6,242
1.37
0%
2003
$ 642,607
450,881
584,116
55,577
8.6%
2003
$ 27,656
686
2,960
17,817
7,473
1.59
0%
2004
$ 737,094
576,957
645,079
65,608
8.9%
2004
$ 32,237
934
3,643
19,620
9,518
1.94
19.1%
03/04
% change
14.7%
28.0%
10.4%
18.0%
03/04
% change
16.6%
36.2%
23.1%
10.1%
27.4%
22.0%
.
1
7
3
7
$
.
6
2
4
6
$
.
0
9
3
5
$
.
4
5
5
4
$
.
1
9
7
3
$
%
2
2
1
.
%
4
2
1
.
%
6
2
1
.
%
8
2
1
.
%
8
3
1
.
%
4
2
4
1
.
%
9
5
3
1
.
%
2
1
4
1
.
%
6
4
4
1
.
%
4
6
5
1
.
00
01
02
03
04
00
01
02
03
04
00
01
02
03
04
Total Assets (in millions)
Return on Assets
Return on Equity
4
9
1
$
.
.
9
5
1
$
7
3
1
$
.
.
7
1
1
$
5
0
1
$
.
.
3
2
4
1
$
.
4
5
2
1
$
.
5
8
0
1
$
.
8
4
9
$
.
3
1
8
$
00
01
02
03
04
00
01
02
03
04
Total Assets (in millions)
Net Income Per Share (diluted)*
Book Value Per Share*
*Restated for stock dividends declared April 2000, 2001, 2002, 2003 and a 3-for-2 stock split declared April 2004.
DIVIDEND INFORMATION, STOCK PRICE
AND MARKETPLACE DESIGNATION
On April 15, 2004 the Board of Directors
declared a 3-for-2 stock split payable May 24,
2004 to shareholders of record on May 19,
2004. Additionally, the Board declared a
one-time special cash dividend of $0.40 per
post-split share payable on June 1, 2004 to
shareholders of record on May 27, 2004.
During 2004 there were 1,999 trades at prices
ranging from a high of $40.70 to a low of
$26.57. In 2003 there were 919 trades at
prices ranging from a high of $33.49 to a
low of $17.79.
Bank of Marin common stock trades on the
NASDAQ SmallCap Market under the symbol
BMRC. There were 792 holders of record of the
Bank’s common stock as of February 1, 2005.
Annual Report - 37