BANK OF MARIN
2005 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 ................................................. 21
Financial Statements ................................................................. 23
Notes to Financial Statements ................................................... 27
Selected Financial Data ............................................................. 40
Stock Price and Dividend Information ........................................ 40
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 & COO, 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
Robert Heller, Former Governer, Federal Reserve Board &
former President and CEO, Visa U.S.A.
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, President, Pacific Mortgage Investors
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
J. Dietrich Stroeh, Partner, CSW/Stuber-Stroeh Engineering Group
Jan I. 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
Pamela Angliss
Tamara Austin
Boualay Bala
Ken Beagle
Susan Beaver
Melodie Behm
Robin Bentivegna
Joyce Bjerke
Boo Boero
Josiane Bougard
Arlene Brians
Celine Cabrera-Menique
Vanessa Camacho
Scott Canaan
Brian Carlson
Sunshine Castle
Nick Castro
Gaik Chan
Nancy Chapin
Angela Colglazier
Alana Comaduran
Kay Commins
Anooshik Cronin
Sarah Dempsey
Shelby DiGrazia
Amra Dizdarevic
Barbara Dougherty
Mary Jane Elmore
Florette Eugene
Lisa Evans-Colvin
Susan Farac
Coy Ferini
Giuliana Ferrer
Gary Ford
Vince Franceschi
Hung Fung
Karen Garbarino
Rebecca Gardner
Joyce Giannini
Jonathan Girard
David Gonzalez
Elizabeth Greene
Judy Grider
Julie Griffin
Vicki Gruber
Sarah Guenther
Suzanne Guenza
Sal Gutierrez
Jessica Ham
Genny Harris-Boyd
Debora Hartlieb
Viviana Henao
Kyle Hixon
James Hoffman
Helen Hoffmann
Josh Iversen
Lisa Jaffurs
Nawal Jarjoura
Tracy Jerves
Kevin Johnson
Veronika Johnson
Claudia Just Olsen
Merlee Katzman
Mindy King
Lisa Kleinecke
David Kough
Daniel MacDonneil
Nicolette MacDonneil
Katherine Madsen
Lisa Mallen
Connie Marelich
Joan Marino
Stephanie McCleod
Mary McDermott
Melina Mehiel
Mary Melville
Victor Mencarelli
Edgar Mendoza
Krissy Meyer
Judy Morey
Catherine Moriarty
Mohammed Nadeem
Marisol Negrete
Eric Nelson
Tim O'Connor
Jon O'Halloran
Anotinette Oroz
Jaime Ortiz
Teri Pearson
John Pedone
Irene Pelmear
Shirley Pettit
Patricia Plytas
Diane Pollock
Benjamin Pulido
Nancy Reich
Linda Reid
Melanie Renn
Isaias Reyes
Penny Reynolds
Marie Rieck
Fabiola Rodriguez
Emilie Rogier
Mike Roney
Stephen Ross
Saroj Sachdev
Sean Scullion
Ellie Shattuck
Jaime Sheets
Nikki Singh
Mari Soria
Lloyd Stasiowski
David Strickland
Lee Tang-Chi
Melanie Taylor
Jamie Thigpen
David Thomas
Kim To
Cindy Toscanini
Silia Townsend
Ray Vallerga
Patty Varela
Nicole Wallace
Renee Weaver
Duncan Young
Executive Vice President
Alexandra Souza
Senior Vice Presidents
Douglas Caulfield
Kevin Coonan
Holly Ford
Deborah Hoke Smith
Frank Murray
Elizabeth O'Farrell
Peter Pelham
Elizabeth Reizman
David Schmidt
Keith Zimmerman
Vice Presidents
Sue Anderson
Angela Bergamini
Michael Callan
Joan Capurro
Sal Catinella
Judi Cole
Phyllis Cope
Barbara Dalmau
Richard DeRamon
Pat Feingold
CORPORATE OFFICERS
Sharon Fox
Bob Gotelli
Janet Hayward
Karen Hegarty
Sherri Hendrickson
Wayne Hoffer
Fran Hoke
Martha Hollenbeck
Joseph Iacocca
Donald Jarvis
Nancy Jones
Steve Kambur
Carol Kneis
Mae Lacourse
Thomas Leong
Bill Montgomery
Sandra Murray
Frank Perachiotti, Jr.
Carole Reif
Lucy Rezendes
Dan Rheiner
Richard Ronsheimer
Renee Rymer
Mary Ann Shoemaker
Liza Silva
Linda Steidle
William Sullivan
Rich Ugarte
Sherrie Wallace
Jackie Williams
Carol York
Assistant Vice Presidents
Marshall Appleton
Fabia Butler
Megan Carter
Jenny Church
Chris Colliver
Faith Giosso
Kevin Gish
April Gobershock
Jeff Graham
Eileen Katz
Carrie Lee
Lynn McHale
Bambi Riebesell
Suzanne Ross
Renee Story
Allison Thornton
Carol Trueblood
Bonnie Wilson
Nicole Young
Annual Report - 2
MESSAGE TO OUR SHAREHOLDERS:
Bank of Marin grew in many ways last year, especially in the number of products we offer our
existing and expanding list of customers. An even fuller array of products is on the horizon. We
also grew in size, expanding further into Sonoma County with an August opening of a second
Petaluma branch and a third in the first quarter of 2006. In the late summer all of our non-
branch staff will be relocating to a single facility, Pell Plaza, in Novato. We expect to achieve
significant efficiencies from having our lending, operations and administrative staffs working
together under one roof.
We’re also pleased to report continued growth in earnings, up 23% from last year to $11.7 million.
Of course, central to our growth is our unwavering commitment to providing legendary service to
our customers, creating a satisfying work environment for our employees and making a real
difference in the communities we serve, all the while being mindful of our obligation to work in
the best interest of our shareholders.
Some of the exciting new products and services we added in 2005 are as follows:
• Reverse Mortgages – A unique home loan based on the home’s equity, working in reverse,
so that payments are made directly to the homeowner (62 and older). The funds can be
used for any purpose, and there’s no change in ownership of the home.
• Tenancy in Common Loans – You may have read about this, because we received lots of
positive press as the first bank to offer fractional interest TIC loans in a pilot program
establishing an affordable housing ownership option in San Francisco.
Pentegra Retirement Services – We’ve partnered with this nationally known retirement
plan company to provide local businesses with affordable employee 401(k) plan services.
• Rewards Credit Card – By using our new Visa Points2U Rewards Card, customers earn
•
•
points that can be redeemed for travel, gifts and gift cards.
Long Term Care Insurance – We've partnered with a licensed insurance specialist to offer
this combination of long term care and life insurance. To the extent it is not needed for
long-term care coverage, the insurance provides an income tax-free death benefit to heirs.
• Bank of Marin Foundation – This non-profit charity, affiliated with the Marin Community
Foundation and coordinated by the Bank's Wealth Management Services professionals,
enables clients to organize and simplify their charitable giving.
We also have plans to broaden our array of products in 2006 by adding Residential Mortgages,
Equipment Lease Financing and Asset-based Lending.
We are especially proud that in 2005 we were named "One of the Top 100 Best Places to Work in
the Bay Area” by San Francisco Business Times. This is a direct tribute to our wonderful,
dedicated staff, who feel a sense of ownership in Bank of Marin and whose primary focus is
serving the individual needs of each of our customers. Through the Bank of Marin Employee
Stock Ownership Plan (ESOP), our employees, as a group, are the largest single shareholder and
own almost 6% of the Bank's stock.
We deeply appreciate your ongoing support. We want you to know that measured, strategic
growth is all a part of our total commitment to improving the lives of the people, businesses, and
communities of Marin and southern Sonoma counties, and to growing shareholder value.
/s/ Judith O'Connell Allen
/s/ W. Robert Griswold, Jr.
Judith O’Connell Allen
Chairman of the Board
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 branch office locations.
Loans
The Bank offers a broad range of commercial and retail lending programs including commercial loans,
construction financing, consumer loans including auto loans (direct and indirect) and home equity loans and
lines of credit. The Bank also offers a proprietary Visa credit card combined with a rewards program 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 installment loans. At December 31, 2005, these broad categories totaled $686.7 million, 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 and multi-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 57% of the Bank’s deposits are from businesses and 43% 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 in partnership with subadvisors, using individual stocks, bonds, exchange-
traded funds and cash; professional management of all trust assets including real estate and other specialty
assets; tax reporting, safekeeping and accounting of assets; and estate settlement and administration of all
areas of living, testamentary and charitable trusts. The Bank also offers 401K plan management through a
third party and partners with a licensed insurance specialist to provide asset-based long-term care insurance.
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, 2005 should be read in conjunction with the Bank’s financial
statements and related notes thereto, located on pages 22 to 39 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 2005
and April 2003 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 quarterly cash dividends of ten cents per common share totaling $495
thousand in August 2005 and $495 thousand in November 2005. In June of 2004 the Bank declared a cash
dividend of forty cents per share totaling $1.8 million.
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 14 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.
Annual Report - 5
They are re-graded as they are renewed, when there is a new loan to the same borrower and/or when
identified facts demonstrate heightened risk of nonpayment. 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
In December 2004, the Financial Accounting Standards Board (“FASB”) adopted Statement of Financial
Accounting Standards (“SFAS”) No.123-R, Share-Based Payment, which addresses the accounting for share-
based payment transactions in which the Bank receives services in exchange for stock options of the Bank.
SFAS No.123-R requires the Bank to recognize the grant-date fair value of stock options issued to employees
and directors in the income statement.
The Bank expects to adopt the requirements of SFAS No.123-R prospectively in January 2006 and estimates
the impact to be an increase to non-interest expense and reduction to net income of approximately $150
thousand to $200 thousand per quarter.
For additional discussion of the impact of the adoption of SFAS No.123-R, see Note 1 of the Notes to Financial
Statements under the sub heading “Stock Based Compensation.”
RESULTS OF OPERATIONS
Overview
Highlights of the Bank’s results are presented in the following table.
As of and for the 12 months ended December 31,
(Dollars in thousands, except per share data)
For the period:
Net income
Net income per share*
2005
$11,737
Basic
Diluted
Return on average equity
Return on average assets
Cash dividend payout ratio
Efficiency ratio
At period end:
Book value per share*
Total assets
Total loans
Total deposits
Loan-to-deposit ratio
2.39
2.23
16.15%
1.46%
8.37%
52.14%
$15.77
840,449
686,661
721,172
95.21%
2004
$9,518
1.99
1.85
15.64%
1.38%
20.10%
54.68%
$13.55
737,094
576,957
645,079
89.44%
2003
$7,473
1.62
1.51
14.46%
1.28%
---
58.20%
$11.94
642,607
450,881
584,116
77.19%
*These per-share amounts have been adjusted for all stock splits and dividends.
The 2005 financial performance for the Bank produced growth in loans, deposits and net income. Total
deposits reached $721.2 million at December 31, 2005, an increase of $76.1 million or 11.8% from the prior
year. Total gross loans finished the year at $686.7 million compared to $577.0 million in 2004, representing
an increase of $109.7 million or 19.0%. Net income for 2005 was $11.7 million or $2.23 per share (diluted)
Annual Report - 6
compared with $9.5 million or $1.85 per share (diluted) in 2004. The year over year change in net income
represents an improvement of 23.3%.
The Bank’s return on average assets (ROA) and return on average equity (ROE) improved over the prior year.
In 2005 the Bank’s ROA and ROE were, respectively, 1.46% and 16.15% compared to 1.38% and 15.64% in
2004. 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 2004 to June 2005 (the latest date for which the information is available), the Bank’s
market share of total Marin County deposits increased from 8.47% to 8.82%.
Net interest income was a principal source of the earnings improvement for the year, as it reached $39.4
million, an increase of $7.2 million or 22.4% over 2004. The interest income component of net interest
income was up 31.6% to $49.5 million, and is primarily the result of the increase in the size of the Bank’s
loan portfolio. Total interest expense of $10.0 million in 2005 was up from 2004 by $4.7 million, or 87.6%,
primarily attributable to an increasing interest rate environment as well as growth in the Bank’s deposit
portfolio.
The Bank provided $1.5 million to the allowance for loan losses in 2005, and net charge-offs were $536
thousand. This compares to a provision of $934 thousand and net charge-offs of $282 thousand in 2004.
At year-end 2005 and 2004, the allowance for loan losses as a percentage of total loans was 1.04% and 1.06%,
respectively.
Non-interest income is comprised of service charges on deposit accounts, Wealth Management Services
(WMS) revenue, and other income. In 2005, total non-interest income was $3.7 million, which is an
improvement of $65 thousand or 1.78% over 2004. Service charges on deposit accounts decreased to $1.0
million versus $1.1 million one year ago. WMS revenue grew to $958 thousand, an increase of $36 thousand,
and other income finished the year at $1.7 million compared to $1.6 million in the prior year.
Non-interest expenses increased from $19.6 million in 2004 to $22.5 million in 2005, an increase of $2.9
million or 14.7% increase and was largely due to the growth in the operations of the Bank. The overall
efficiency of the Bank improved from 54.68% in 2004 to 52.14% in 2005.
Assets of the Bank totaled $840.4 million at December 31, 2005, an increase of $103.4 million or 14.0% from
December 31, 2004.
Summary of Quarterly Results of Operations
Table 1 sets forth the quarterly results of operations for 2005 and 2004.
Table 1 Summarized Statement of Operations
(Dollars in thousands)
Dec. 31
2005 Quarters Ended
Sept. 30
June 30
Mar. 31
Dec. 31
2004 Quarters Ended
Sept. 30
June 30
Mar. 31
Interest income ............................................ $13,754 $13,097 $11,745 $10,889
1,809
Interest expense ..........................................
9,080
326
2,853
Net interest income ................................. 10,713 10,244
491
Provision for loan losses .....................
2,340
9,405
390
3,041
334
$10,488 $9,821 $8,855 $8,425
1,243
7,182
100
1,535
8,953
425
1,374
8,447
304
1,200
7,655
105
Net interest income after provision
for loan losses ................................... 10,379
954
5,866
5,467
2,135
Non-interest income ....................................
Non-interest expense ..................................
Income before provision for income taxes
Provision for income taxes ..................
Net income ...............................................
Net income per common share*
8,754
870
5,550
4,074
1,551
$3,332 $3,086 $2,796 $2,523
9,753
963
5,679
5,037
1,951
9,015
921
5,403
4,533
1,737
8,528
951
5,152
4,327
1,662
7,082
870
4,732
3,220
1,191
$2,665 $2,507 $2,317 $2,029
7,550
916
4,745
3,721
1,404
8,143
906
4,991
4,058
1,551
Basic .....................................................
Diluted ..................................................
$0.67
$0.63
$0.63
$0.59
$0.57
$0.53
$0.52
$0.48
$0.55
$0.50
$0.52
$0.49
$0.49
$0.45
$0.43
$0.40
*These per-share amounts have been adjusted for all stock splits and dividends.
Annual Report - 7
Net Interest Income
Net interest income is the Bank’s largest source of income (91.4%). Net interest income is the difference
between the interest earned on loans, investments and other interest earning assets, and the interest
expense on deposits and other interest bearing liabilities.
Net interest income is impacted by changes in general market interest rates and by changes in the amounts
and composition of interest earning assets and interest bearing liabilities. 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 2005, 2004 and 2003. The table also indicates net interest income, net interest margin and net
interest rate spread for each year.
Table 2 Distribution of Average Statements of Condition and Analysis of Net Interest Income
(Dollars in thousands)
Assets
Federal funds sold ............................
Investment securities
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
32,407
4,229
assets, net .......................................
10,989
Total Assets ................................ $803,495
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
Savings and money market accounts
Time accounts ...................................
Purchased funds ...............................
Borrowed funds .................................
Total interest-bearing liabilities
Demand accounts ..............................
Interest payable and other liabilities
Stockholders’ equity ..........................
70,710
333,165
116,302
16,074
5,000
276
5,530
3,396
543
298
541,251 10,043
185,873
3,676
72,695
0.39
1.66
2.92
3.38
5.97
1.86
2005
Interest
Income/ Yield/
Average
Balance Expense(1) Rate(1)
2004
Interest
Income/ Yield/
Average
Balance Expense(1) Rate(1)
2003
Interest
Income/ Yield/
Average
Balance Expense(1)Rate(1)
$ 4,343
$156
3.58% $ 5,410 $ 61
1.13% $ 23,312 $ 243 1.04%
7,082
73,212
8,701
21,838
155
2,930
448
1,141
640,694 44,988
755,870 49,818
2.19
4.00
5.14
5.23
7.02
6.60
12,265
67,888
13,725
27,843
324
2,257
795
1,468
514,299 33,140
641,430 38,045
2.64
3.32
5.79
5.27
6.44
5.93
11,459
32,672
12,303
23,991
518
1,018
791
1,381
434,908 29,301
538,645 33,252
4.52
3.11
6.43
5.72
6.74
6.17
35,009
4,198
10,621
$691,258
66,084
298,091
93,189
2,805
2,705
462,874
164,881
2,639
60,864
33,056
4,361
5,513
$581,575
257
2,961
1,968
49
117
5,352
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
207
2,426
2,534
2
--
5,169
0.40
1.07
2.29
1.71
--
1.33
Total Liabilities and
Stockholders' Equity .............. $803,495
Net Interest Income ..................................
Net Interest Margin ..................................
Net Interest Spread ..................................
$39,775
$32,693
$28,083
$691,258
$581,575
5.26%
4.74%
5.10%
4.78%
5.21%
4.84%
(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 2005, the Bank’s net interest income increased by $7.2 million, or 22.4% over 2004 and by $4.6 million,
or 16.6% in 2004 over 2003. The Bank’s net interest margin improved to 5.26% in 2005 compared to 5.10%
in 2004, and declined in 2004 from 5.21% in 2003. The increases in net interest income are attributable
primarily to growth in interest earning assets, mainly loans which comprise the largest and highest yielding
component of earning assets, as well as higher yields due to the increasing rate environment. Net interest
Annual Report - 8
income was positively affected by a shift in the mix of asset balances to higher yielding loans from lower
yielding securities in 2005 and from lower yielding Federal funds sold to securities and loans in 2004.
Partially offsetting these increases were higher costs of interest bearing funding sources, primarily money
market and CD accounts, as well as growth in the balances of interest-bearing liabilities in 2005 and 2004.
The Bank’s 2005 average loan-to-deposit ratio was 90.7%, up from 82.7% in 2004 and 82.5% in 2003.
Earning assets consist of loans, investment securities and Federal funds sold. Average earning assets of
$755.9 million in 2005 represented an increase of 17.8% from 2004. The growth in earning assets from 2003
to 2004 was 19.1%. The Bank’s yield on interest earning assets improved from 5.93% in 2004 to 6.60% in
2005 due to increasing yields on the largest components of earning assets which are loans and agency
securities. The yield on earning assets declined from 6.17% in 2003 to 5.93% in 2004 due to a decline in
average market interest rates.
The yield on the loan portfolio, which comprised 84.8% and 80.2% of average earning assets in 2005, and
2004, respectively, increased from 6.44% in 2004 to 7.02% in 2005 . New loans in 2005 were added to the
portfolio at higher market rates due to a generally rising interest rate environment. The yield on loans
declined from 6.74% in 2003 to 6.44% in 2004 due to a decline in market rates.
The yield on agency securities which comprised 9.7% of average earning assets in 2005, increased from
3.32% in 2004 to 4.00% in 2005 and from 3.11% in 2003 to 3.32% in 2004. The Bank’s agency securities
generally have an average life of approximately three years and will mature or be called more quickly than
other securities in the Bank’s portfolio. The increase in the volume and changes in yield on agency
securities primarily relates to purchases of securities at then-current market rates in a rising rate
environment.
Market rates are in part based on the Federal Reserve Open Market Committee target Federal funds interest
rate (the interest rate banks charge each other for short-term borrowings). The increase in the Federal
funds sold and purchased rates is the result of rate increases implemented by the Federal Reserve Board.
In 2004 there was a 125 basis point increase in the Federal funds interest rate and in 2005, a 200 basis point
increase.
The declines in yields on the Bank’s U.S. Treasury securities, other securities (largely comprised of
corporate notes) and municipal bonds from 2004 to 2005 and from 2003 to 2004 primarily relate to maturities
of older higher-yielding instruments.
The Bank’s average balance of interest-bearing liabilities was $541.3 million in 2005, an increase of 16.9%
from $462.9 million in 2004. The growth in interest bearing liabilities from 2003 to 2004 was 19.1%. The
rate paid on interest bearing liabilities increased to 1.86% in 2005 from 1.16% in 2004. This is primarily
the result of the rising market interest rates and adjustments due to competitive market conditions. The
rate paid on interest bearing liabilities declined from 1.33% in 2003 to 1.16% in 2004. This is primarily the
result of a lagged effect of changes in market interest rates originating from actions taken by the Federal
Reserve Open Market Committee in 2003 and 2004.
The mix of customer deposit types remained fairly constant from 2004 to 2005 with savings and money
market accounts the largest component. All categories of deposits showed increases over 2004. Interest
transaction accounts grew 7.0% to $70.7 million. Savings and money market accounts grew 11.8% to $333.2
million. Time deposits grew 24.8% to $116.3 million. Purchased funds increased from $2.8 million to $16.1
million from 2004 to 2005 to support the growth in earning assets and include a $10 million fixed-rate FHLB
advance issued in July 2005 at 4.23%. Interest on purchased funds increased from 1.74% in 2004 to 3.38%
in 2005. Interest on other borrowed funds increased from 4.32% in 2004 to 5.97% in 2005 due to higher LIBOR
market rates.
Interest rate changes can create fluctuations in the Bank’s net interest margin due to an imbalance in the
repricing or maturity of assets or liabilities. Interest rate risk exposure is managed with the goal of
minimizing the impact of interest rate volatility on the Bank’s net interest margin. The Bank’s balance
sheet is fairly evenly matched, which tends to minimize changes to the Bank’s net interest margin;
Annual Report - 9
however, it is slightly asset sensitive. In 2005, the Bank achieved a net interest margin (NIM) of 5.26%, up
from the NIM of 5.10% experienced in 2004 and 5.21% in 2003.
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 2005 and 2004.
Table 3 Analysis of Changes in Net Interest Income
(Dollars in thousands)
Assets
Year ended December 31,
2005 compared to 2004
Yield/
Rate*
Total
Volume
Year ended December 31,
2004 compared to 2003
Yield/
Rate*
Volume
Total
Federal funds sold ............................ $ (14) $ 109
Investment securities
$ 95
$ (187)
$ 5 $ (182)
U. S. Treasury securities ..............
U. S. government agencies ...........
Other ..............................................
Municipal bonds ............................
(121)
186
(266)
(316)
Loans and bankers’ acceptances ...... 8,670
Total interest-earning assets ........ 8,139
(48)
487
(81)
(11)
(169)
673
(347)
(327)
3,178 11,848
3,634 11,773
36
1,096
(42)
186
(230)
143
46
(99)
5,348 (1,509)
6,437 (1,644)
(194)
1,239
4
87
3,839
4,793
Liabilities
Interest-bearing transaction accounts
Savings and money market accounts
Time accounts ...................................
Purchased funds ...............................
Borrowed funds ................................
19
380
561
412
124
Total interest-bearing liabilities ... 1,496
--
2,189
867
82
57
3,195
19
2,569
1,428
494
181
4,691
58
770
(402)
46
117
589
(8)
(235)
(164)
1
--
(406)
50
535
(566)
47
117
183
Net Interest Income .............................. $6,643
$439 $7,082
$5,848 $(1,238) $4,610
*
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 2005 was $1.5 million versus $934 thousand for
2004 and $686 thousand in 2003. Net charge-offs for 2005 totaled $536 thousand compared with $282
thousand in 2004 and $262 thousand in 2003. Table 4, Non-performing Loans at December 31, shows that
there were no non-performing assets at December 31 for the last five years.
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 ..........................
2005
$ --
--
--
$ 0
2004
$ --
--
--
$ 0
2003
$ --
--
--
$ 0
2002
$ --
--
--
$ 0
2001
$ --
--
--
$ 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 non-accrual status, any accrued but uncollected interest is reversed
from current income, and additional income is recorded only as payments are received.
Annual Report - 10
Non-interest Income
Non-interest income includes service charges on deposit accounts, WMS income and other income. Non-
interest income grew to $3.7 million in 2005, up from $3.6 million in 2004 and $3.0 million in 2003.
Service charges on deposits in 2005 decreased by $93 thousand. This decrease is primarily attributable to
increasing earnings credits provided to certain customer accounts, based on balances maintained. The
earnings credits are tied to the 90-day treasury bill rate, which rose during 2005. The effect of increased
earnings credits was partially offset by growth in deposit balances and related activity. Growth in service
charges of $117 thousand in 2004 is attributable to the growth in the number of accounts. WMS revenue
increased to $958 thousand in 2005, an increase of $36 thousand over the prior year and increased by $107
thousand in 2004. These increases are primarily the result of growth in assets under management. The
increase in “other” income in 2005 of $122 thousand reflects higher reverse mortgage fees and fees due to
increases in debit and credit card usage, partially offset by a decrease in Bank Owned Life Insurance (BOLI)
income. The increase in “other” income in 2004 is attributed to growth in other services associated with
an expanding customer base, increased BOLI income from investments made in 2003, as well as higher
commissions and fees due to increased debit and credit card usage.
Table 5 Significant Components of Non-Interest Income
(Dollars in Thousands)
2005
Service charges ............................ $1,044
Wealth Management Services .....
958
Other income
Year ended
December 31,
2004
2005 compared to 2004
Amount
Increase
2003 (Decrease)
Percent
Increase
(Decrease)
2004 compared to 2003
Amount
Increase
(Decrease)
Percent
Increase
(Decrease)
$1,137
922
$1,020
815
($93)
36
(8.2)%
3.9
$117
107
11.5%
13.1
442
512
203
(70)
(13.7)
Bank Owned Life Insurance
Customer banking fees and
other charges ....................
Other income ........................
Total other income ......................
483
781
1,706
465
607
1,584
408
514
1,125
Total ...................................... $3,708
$3,643
$2,960
Non-interest Expense
309
57
93
459
152.2
14.0
18.1
40.8
1.8%
$683
23.1%
18
174
122
$65
3.9
28.7
7.7
Table 6, Significant Components of Non-interest Expense, summarizes the amounts and changes in dollars
and percentages. In 2005 non-interest expense increased 14.7% while average loans and deposits increased
24.6% and 13.5%, respectively. In 2004, non-interest expense increased 10.1%, while average loans and
deposits increased 18.3% and 18.1%, respectively. The Bank’s efficiency ratio improved from 54.68% in 2004
to 52.14% in 2005 and from 58.20% in 2003.
Table 6 Significant Components of Non-Interest Expense
(Dollars in Thousands)
2005
Year ended
December 31,
2004
2005 compared to 2004
Amount
Increase
2003 (Decrease)
Percent
Increase
(Decrease)
2004 compared to 2003
Amount
Increase
(Decrease)
Percent
Increase
(Decrease)
Salaries and related benefits ...... $13,819 $11,954 $10,767
1,676
Occupancy and equipment ..........
992
Depreciation and amortization ....
Data processing fees ...................
1,039
Other expense
1,864
949
1,210
2,074
846
1,330
Advertising ...........................
Professional services ...........
Director expense ..................
Other expense ......................
Total other expense ....................
427
809
415
2,778
4,429
275
726
371
2,271
3,643
260
684
312
2,087
3,343
$1,865
210
(103)
120
152
83
44
507
786
15.6% $1,187
188
11.3
(43)
(1.1)
171
9.9
55.3
11.4
11.9
22.3
21.6
15
42
59
184
300
11.0%
11.2
(4.3)
16.5
5.8
6.1
18.9
8.8
9.0
Total ...................................... $22,498 $19,620 $17,817
$2,878
14.7%
$1,803
10.1%
Annual Report - 11
For a discussion of the impact on non-interest expense of the adoption of SFAS No.123-R, see page 6, “Future
Adoption of Accounting Standard.”
In 2005, salaries and benefits costs increased by $1.9 million or 15.6%, primarily due to a higher number
of full-time equivalent (FTE) employees, regular salary adjustments, an increase in bonus accrual and
workers compensation insurance costs, as well as higher ESOP contributions. In 2005 there were expenses
of $889 thousand for the Bank’s Employee Stock Ownership and Savings Plan (ESOP), and $1.4 million for
staff and officer incentive bonus plans. The number of FTE employees increased to 185, up from 167 at year-
end 2004. The increase represents necessary expenses to support the growth of the Bank by hiring additional
staff.
In comparing 2004 with 2003, salaries and benefits cost increased by $1.2 million or 11.0%, primarily due
to annual merit pay increases, increased accruals for bonuses and ESOP contributions, as well as higher
medical benefit and worker’s compensation costs. The number of FTE employees increased by six from
December 31, 2003 to 167 at December 31, 2004. In 2004, there were expenses of $1.2 million for the Bank’s
ESOP and $1.2 million for staff and officer incentive bonus plans.
The increases in 2005 and 2004 in occupancy and equipment costs of $210 thousand and $188 thousand,
respectively, are largely due to annual rent increases in the branch and administration facilities, as well
as the addition of new leases in June of 2005 and October 2005.
The decreases in 2005 and 2004 in depreciation and amortization expense of $103 thousand and $43
thousand, respectively, are primarily attributable to certain fixed assets becoming fully depreciated during
the year.
In 2005, data processing costs were $1.3 million, an increase over 2004 of $120 thousand or 9.9 %. 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 2004,
data processing expense increased by $171 thousand, and is attributable to the increase in the growth in
the operations of the Bank.
Other non-interest expenses of $4.4 million represent a $786 thousand or 21.6% increase over 2004. The
change includes increases in most expense categories, including advertising costs, contributions, travel,
business meals, professional services, information technology, printing and postage. In 2004, other non-
interest expenses increased by $300 thousand or 9.0%. 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) in 2005 of 52.14% improved over the prior year of 54.68%.
In January 2006, the Bank signed a lease on an office building in which to relocate its loan production,
operations and administrative personnel. The Bank expects to occupy the space beginning in the third
quarter of 2006. Rent is fixed at $57,698 per month for the first twelve months. Rental increases are fixed
at 3% per year, thereafter. The annualized incremental cost of the new lease, after deducting the cost of the
two properties being vacated, is approximately $300 thousand per year. In addition, related leasehold
improvements, which are expected to total approximately $2 million, will be depreciated over fifteen years.
Furniture, fixtures and equipment for the new site, which are expected to total approximately $500 thousand,
will be depreciated over three-to-eight years.
Provision for Income Taxes
The Bank reported a provision for income taxes of $7.4 million, $5.8 million and $4.6 million for the years
2005, 2004 and 2003, respectively. These provisions reflect accruals for taxes at the applicable rates for
Federal income and California State franchise 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.
Annual Report - 12
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 7 shows the
makeup of the securities portfolio at December 31, 2005 and 2004.
Table 7 Securities Investments
Type and Maturity Grouping
(Dollars in thousands)
Held to maturity
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 ...........................
Principal
Amount
$5,955
4,770
3,780
3,325
17,830
2,500
1,000
--
--
3,500
21,330
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 ........................................
1,500
2,500
--
--
4,000
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 .........................
8,548
66,722
2,288
5,774
83,332
87,332
December 31, 2005
Book
Value*
Value
Market Average
Yield
$5,966
4,909
4,014
3,471
18,360
2,544
991
--
--
3,535
21,895
1,523
2,603
--
--
4,126
8,583
67,299
2,315
5,775
83,972
88,098
$5,981
4,954
4,043
3,307
18,285
2,515
1,034
--
--
3,549
21,834
1,513
2,549
--
--
4,062
8,463
66,258
2,252
5,742
82,715
86,777
4.04%
4.11
3.54
3.36
3.83
3.53
7.57
--
--
4.68
3.97
2.13
2.38
--
--
2.29
2.39
4.40
5.21
5.19
4.27
4.18
Principal
Amount
December 31, 2004
Market
Value
Book
Value*
Average
Yield
$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
4.44
2.54
2.28
--
--
2.44
4.22
3.75
4.93
--
3.90
3.70
Total ...................................................... $108,662 $109,993 $108,611
4.14% $110,617 $112,397 $112,396
3.95%
Interest income and yields on tax-exempt securities are not presented on a tax-equivalent basis. Maturities for securities
are based on expected versus contractual maturities.
*
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 $3.3 million or 3.0% in 2005. As
loan demand grew in 2005, maturities of securities were replaced with loans. U.S. treasuries, representing
3.8% of the portfolio decreased by $6.2 million. U.S. government agency securities made up 76.1% of the
portfolio and increased by $18.9 million. State and municipal securities decreased by $7.9 million and
represented 16.9% of the portfolio and corporate bonds totaling $3.5 million or 3.3% of the portfolio decreased
by $8.1 million in 2005. The weighted average maturity of the portfolio at December 31, 2005 was
approximately forty-four months.
Annual Report - 13
At December 31, 2003, the book value of investments in obligations of U. S. Treasury and other U. S.
government agencies and corporations was $80.1 million, the book value of investments in obligations of
state and municipal subdivisions was $30.5 million and the book value of investments in corporate bonds
was $11.7 million.
Loans
Loans, net, increased by $108.7 million, 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.
Approximately 74% and 71% of the Bank’s outstanding loans are secured by real estate at December 31, 2005
and 2004, respectively. 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 8 shows an analysis
of loans by type.
Table 8 Loans Outstanding by Type at December 31
(Dollars in thousands)
2005
2004
2003
2002
2001
Commercial loans .................................................. $144,510
Real estate
$120,006 $ 105,847
$ 85,192
$ 68,517
Commercial ........................................................
Construction ......................................................
Residential .........................................................
Installment ............................................................
Total loans .........................................................
Allowance for loan losses ..................................
282,564
112,116
36,304
111,167
686,661
7,115
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
Net loans ............................................................ $679,546
$570,847
$445,423
$405,120
$321,669
Table 9 shows a shift towards fixed rate loans within the portfolio in 2005 when compared to 2004. In 2005,
the Bank’s fixed rate loans were 45.1% of the portfolio, and the variable portion was 54.9%. 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). 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 9 Loan Portfolio Maturity Distribution and Interest Rate Sensitivity
(Dollars in thousands)
December 31, 2005
December 31, 2004
Fixed
Rate
Variable
Rate
Total
Percent
Fixed
Rate
Variable
Rate
Total Percent
Due within 1 year ................................ $ 51,750 $145,083 $196,833
214,797
Due after 1 but within 5 years ............
275,031
Due after 5 years ..................................
133,934
124,167
80,863
150,864
28.7% $ 27,284 $139,083 $166,367
166,726
31.3
243,864
40.0
103,734
102,754
62,992
141,110
28.8%
28.9
42.3
Total ............................................... $309,851 $376,810 $686,661 100.0% $233,772 $343,185 $576,957 100.0%
Percentage .....................................
45.1%
54.9% 100.0%
40.5%
59.5%
100.0%
Note: The "Due within 1 year" data includes demand loans, overdrafts and past due loans.
Allowance for Loan Losses
Credit risk is innate 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.
Annual Report - 14
The allowance for loan losses to total loans at December 31, 2005 was 1.04% versus 1.06% at the end of 2004.
At December 31, 2003, the allowance for loan losses to total loans was 1.21%. Based on the current conditions
of the loan portfolio, management believes that the $7.1 million allowance for loan losses at December 31,
2005 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 10 shows the activity in the allowance for loan losses for each of the years in the five-year period ended
December 31, 2005. At December 31, 2005 and 2004 the Bank had no loans that were past due 90 days or
otherwise non-performing.
Table 10 Allowance for Loan Losses at December 31
(Dollars in thousands)
2005
2004
2003
2002
2001
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 ...............................
$6,110
1,541
$5,458
934
$5,035
685
$4,580
577
$4,003
619
(362)
--
--
(402)
(764)
6
--
--
222
228
(536)
(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)
Ending balance ...................................................
$7,115
$6,110
$5,458
$5,035
$4,580
Total loans outstanding at end of year, before
deducting allowance for loan losses ..............
$686,661
$576,957
$450,881
$410,155
$326,249
Average total loans outstanding during year .....
$640,726
$514,299
$434,908
$366,408
$291,717
Ratio of allowance for loan losses to total loans
at end of year ..................................................
1.04%
1.06%
1.21%
1.23%
1.40%
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 are 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.
Annual Report - 15
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, 2005 the allowance for loan losses was $7.1 million consisting of a specific allowance of $1.1
million, an allowance factor of $5.2 million, and an economic allowance of $0.8 million. At December 31, 2004
the allowance for loan losses was $6.1 million consisting of a specific allowance of $1.0 million, an allowance
factor of $4.5 million, and an economic allowance of $0.6 million.
Table 11 shows the allocation of the allowance by loan type as well as the percentage of total loans in each
of the same loan types.
Table 11 Allocation of Allowance for Loan Losses
(Dollars in thousands)
December 31, 2005
Allowance Loans as
balance percent of
allocation total loans
December 31, 2004
Allowance Loans as
balance percent of
allocation total loans
December 31, 2003
Loan as
Allowance
balance percent of
allocation total loans
December 31, 2002
December 31, 2001
Allowance
Loans as
percent of
allocation total loans allocation total loans
Loans as Allowance
balance
balance percent of
Commercial .................. $2,510
1,764
Construction ................
1,435
Real estate ...................
Installment ..................
1,406
Total allowance
for loan losses ... $7,115
Total percent ........
Deposits
21.1% $2,320
1,315
16.3
1,260
46.4
1,215
16.2
20.8% $2,288
734
14.1
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%
8.4
51.2
19.4
$6,110
$5,458
$5,035
$4,580
100.0%
100.0%
100.0%
100.0%
100.0%
Deposits increased by $76.1 million from December 31, 2005 as compared to December 31, 2004. 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 12 and 13 show the relative composition of the Bank’s average
deposits for the years 2005, 2004 and 2003, and the maturity groupings for the Bank’s time deposits of
$100,000 or more.
Table 12 Distribution of Average Deposits
(Dollars in thousands)
Amount
Percent
Amount
Percent
2005
Year ended December 31,
2004
2003
Amount Percent
Demand ....................................... $185,873
Interest checking ........................
70,710
79,482
Savings .......................................
Money market .............................. 253,683
Time deposits
26.3%
10.0
11.3
35.9
$164,881
66,084
98,778
199,313
26.5%
10.6
15.9
32.0
$138,214
51,664
84,161
142,128
26.2%
9.8
16.0
27.0
Less than $100,000 .............
$100,000 or more .................
39,683
76,619
Total time deposits ........ $116,302
5.6
10.9
16.5
37,392
55,797
93,189
6.0
9.0
15.0
39,756
70,984
110,740
7.5
13.5
21.0
Total Average Deposits ................ $706,050
100.0%
$622,245
100.0%
$526,907
100.0%
Note:
Refer to Table 2 for the average amount of and the average rate paid on each deposit category.
Table 13 Maturities of Time Deposits of $100,000 or more at December 31
(Dollars in thousands)
December 31,
2005
2004
2003
Three months or less ................................................ $47,155
7,249
Over three months through six months ..................
16,729
Over six months through twelve months ................
20,795
Over twelve months ..................................................
$30,538
6,193
10,849
21,140
$39,276
6,470
8,535
17,239
Total ................................................................ $91,928
$68,720
$71,520
Annual Report - 16
Commitments
The following is a summary of the Bank’s contractual commitments as of December 31, 2005.
Table 14 Contractual Obligations at December 31
(Dollars in thousands)
Operating leases ....................................................
FHLB borrowings ...................................................
Subordinated debt ..................................................
< 1 year
$1,424
--
--
Payments due by period
4-5 years
1-3 years
>5 years
$2,697
10,000
--
$2,259
--
--
$2,482
--
5,000
Total
$ 8,862
10,000
5,000
Total ............................................................
$1,424
$12,697
$2,259
$7,482
$23,862
Not reflected in the table above is the effect of a fifteen-year lease signed in January 2006, for office space.
The Bank expects to occupy the space beginning in the third quarter of 2006. Rent is fixed at $57,698 per
month for the first twelve months, with fixed increases of 3% per year thereafter.
The contract amount of loan commitments not reflected on the statement of condition was $226.8 million at
December 31, 2005 and $184.6 million at December 31, 2004.
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 2005, the Bank’s risk based capital ratio improved from
11.37% at December 31, 2004 to 11.52% at December 31, 2005.
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 2005, the Bank had approximately $40.7 million in cash, Federal funds sold and securities
maturing within one year. The remainder of the securities portfolio of $90.2 million provides additional
liquidity. At year-end 2004, the Bank had approximately $64.5 million in cash, Federal funds sold and
securities maturing within one year. The remainder of the securities portfolio of $77.4 million provided
additional liquidity. During 2005, the Bank’s loan demand was strong, resulting in a decline in the Bank’s
one-year liquidity. The overall liquidity remains strong with total cash and securities equal to 15.6% of
assets. Management expects to be able to meet the liquidity needs of the Bank during 2006 primarily through
balancing loan growth with corresponding increases in deposits and borrowings. See discussion below for
additional sources of liquidity for the Bank.
The Bank did utilize borrowings from FHLB and Federal funds lines during 2005. The Bank had outstanding
balances of $31.0 million at December 31, 2005, as compared to $17.8 million at December 31, 2004.
During the year, the combination of 11.8% deposit growth and 19.0% gross loan growth resulted in a year-
end loan-to-deposit ratio of 95.2% compared to 89.4% at December 31, 2004.
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 9.3% equity capital base, provides a very stable funding base. The Bank also has unsecured
lines of credit totaling $54.8 million 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 (secured under
terms of a blanket collateral agreement by a pledge of loans) for advances, $162.8 million ($131.8 million
of which was available at December 31, 2005) at an interest rate that is determined daily. Borrowings under
the line are limited to eligible collateral.
Annual Report - 17
The Bank had undisbursed loan commitments of $226.8 million, including $103.9 million under lines of
credit (these commitments are contingent upon customers maintaining specific credit standards), $54.3
million under revolving home equity lines, and $56.1 million 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 Asset and Liability
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
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 15 summarizes the effect on NII and Capital due to changing interest rates as measured against the
flat rate scenario.
Table 15 Effect of Interest Rate Change on Net Interest Income and Capital
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 NII)
at December 31,
Estimated change in capital
(as percent of capital)
at December 31,
2005
4.9%
3.3%
1.6%
--
(2.7%)
(5.6%)
(8.5%)
2004
4.6%
3.1%
1.5%
--
(2.3%)
(4.5%)
N / A
2005
2.7%
1.8%
0.9%
--
(1.5%)
(3.1%)
(4.7%)
2004
2.6%
1.7%
0.9%
--
(1.3%)
(2.5%)
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.
Annual Report - 18
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 of the relative magnitude of repricing. Interest rate sensitivity management focuses on the
maturity of assets and liabilities and their repricing during periods of change in market rates. Interest rate
sensitivity gaps are calculated as the difference between the amounts of assets and liabilities that are
subject to repricing during various time periods.
Table 16 shows the Bank’s repricing gaps as of December 31, 2005. 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 16 Interest Rate Sensitivity
(Dollars in thousands)
At December 31, 2005
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 ..................
Loans ............................................
Total ...........................................
$1,200 $ --
2,478
18,009
20,487
--
210,751
211,951
$ --
3,869
23,451
27,320
$ --
12,138
25,386
37,524
$ --
90,187
401,949
492,136
$1,200
108,672
679,546
789,418
Interest Bearing Liabilities
--
Transaction and savings deposits
5,000
Other borrowings .........................
7,608
Time deposits less than $100,000
33,105
Time deposits $100,000 or more
45,713
Total .......................................
--
Demand Deposits .............................
Sensitivity for period ........................
(25,226)
Sensitivity - cumulative .................... $(222,317) $(247,543)
395,001
21,000
4,114
14,153
434,268
--
(222,317)
--
--
7,276
7,523
14,799
--
12,521
--
--
6,671
15,997
22,668
--
14,856
$(235,022) $(220,166)
395,001
--
36,000
10,000
35,619
9,950
91,928
21,150
558,548
41,100
198,624
198,624
252,412 $ 32,246
$32,246
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, 2005, the Bank’s aggregate payment obligations under this plan totaled $1.4
million.
Annual Report - 19
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
Short-term borrowings consist primarily of Federal funds purchased and borrowings from the Federal Home
Loan Bank of San Francisco (FHLB).
Federal Home Loan Bank Borrowings
As of December 31, 2005, overnight borrowings with the FHLB totaled $21.0 million as compared to $17.8
million at December 31, 2004. Based on a blanket collateral agreement by a pledge of loans, at December
31, 2005 the FHLB line provided for maximum borrowings of approximately $162.8 million. At December 31,
2005 the Bank had an unused borrowing capacity with the FHLB of $131.8 million.
In July of 2005, the Bank executed a $10.0 million fixed-rate advance due July 18, 2008 from the FHLB at
4.23%.
Federal Funds Purchased from Correspondent Banks
The Bank has available unused unsecured lines of credit totaling $50.0 million for Federal funds
transactions with correspondent banks. At December 31, 2005, Federal funds purchased were at zero.
Federal Reserve Line of Credit
The Bank also has available an unused line of credit with the Federal Reserve Bank totaling $4.8 million
at December 31, 2005, secured by agency securities.
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 - 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Bank of Marin
We have audited the accompanying statements of condition of Bank of Marin (the “Bank”) as of December
31, 2005 and 2004 and the related statements of operations, changes in stockholders’ equity and cash flows
for the years then ended. We have also audited management’s assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting, that the Bank maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Bank of Marin’s management is responsible for these financial statements, maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on
management’s assessment, and an opinion on the effectiveness of the Bank’s internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of Bank of Marin as of December 31, 2005 and 2004 and the results of its operations and cash
flows for the years then ended in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion management’s assessment that Bank of Marin maintained effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects,
based on criteria established in Internal Control - Integrated Framework issued by the COSO. Furthermore,
in our opinion, Bank of Marin maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO.
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 financial statements resulting from the stock split in 2004 and
the stock dividend in 2005. In our opinion, such adjustments are appropriate and have been properly
applied.
Santa Rosa, California
March 10, 2006
/s/ Moss Adams LLP
Annual Report - 21
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 statements of operations, stockholders’ equity and cash
flows of Bank of Marin for the year ended December 31, 2003 (prior to the restatement for a stock
split in 2004 and a stock dividend in 2005, 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 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, such financial statements present fairly, in all material respects, the results of
operations of the Bank and its cash flows for the year 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 - 22
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
$88,098 in 2005 and $74,554 in 2004)
Total investment securities
Loans, net of allowance for loan losses of
$7,115 in 2005 and $6,110 in 2004
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 and
Federal Home Loan Bank borrowing
Subordinated debenture
Interest payable and other liabilities
Total liabilities
December 31,
2005
2004
$ 21,062
1,200
22,262
21,895
86,777
108,672
679,546
5,034
24,935
$840,449
$ 29,499
---
29,499
37,843
74,140
111,983
570,847
3,911
20,854
$ 737,094
$ 198,624
$ 170,385
75,652
319,349
127,547
721,172
31,000
5,000
5,056
762,228
68,259
306,067
100,368
645,079
17,800
5,000
3,607
671,486
Stockholders' Equity
Common stock, no par value
Authorized - 15,000,000 shares
Issued and outstanding - 4,960,248 shares in 2005
and 4,609,685 shares in 2004
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
50,957
28,030
(766)
78,221
40,208
25,640
(240)
65,608
Total liabilities and stockholders’ equity
$ 840,449
$ 737,094
The accompanying notes are an integral part of these financial statements.
Annual Report - 23
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
Total interest income
Interest expense
Years ended December 31,
2005
2004
2003
$44,988
$33,140
$29,301
155
2,930
808
448
156
324
2,257
1,012
795
61
518
1,018
954
791
243
49,485
37,589
32,825
Interest on interest bearing transaction deposits
Interest on savings and money market deposits
Interest on time deposits
Interest on borrowed funds
276
5,530
3,396
841
257
2,961
1,968
166
207
2,426
2,534
2
Total interest expense
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
10,043
5,352
5,169
39,442
1,541
32,237
934
27,656
686
37,901
31,303
26,970
1,044
958
1,706
1,137
922
1,584
1,020
815
1,125
Total non-interest income
3,708
3,643
2,960
Non-interest expense
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
Data processing
Other expense
13,819
2,074
846
1,330
4,429
11,954
1,864
949
1,210
3,643
10,767
1,676
992
1,039
3,343
Total non-interest expense
22,498
19,620
17,817
Income before provision
for income taxes
Provision for income taxes
Net income
Net income per common share*
Basic
Diluted
Dividends declared per common share
19,111
15,326
12,113
7,374
$ 11,737
5,808
$ 9,518
4,640
$ 7,473
$2.39
$2.23
$0.20
$1.99
$1.85
$0.40
$1.62
$1.51
$0.00
* Restated for the 5% stock dividend declared in April 2005 and for the 3-for-2 stock split declared in April 2004.
The accompanying notes are an integral part of these financial statements.
Annual Report - 24
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, 2002
2,757,393
$31,969
$14,662
$551
$(65)
$47,117
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss)
on available for sale securities
(net of tax liability of $215)
Comprehensive income
Stock options exercised
Tax benefit from exercised
stock options
Stock issued on 5% stock
dividend declared Apr. 10
Stock issued in payment of
director fees
Change in unearned ESOP
shares
Balance at Dec. 31, 2003
---
---
48,958
---
138,461
9,242
---
2,954,054
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
Tax benefit from exercised
stock options
3-for-2 stock split declared
April 15
Cash dividend paid
June 1
Stock issued in payment of
director fees
Balance at Dec. 31, 2004
1,519,714
---
---
9,016
4,609,685
---
---
126,901
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss)
on available for sale securities
(net of tax benefit of $381)
Comprehensive income
Stock options exercised
Tax benefit from exercised
stock options
Stock issued on 5% dividend
declared on April 14
Cash dividends paid
Stock issued in payment of
director fees
Balance at Dec. 31, 2005
233,025
---
10,829
4,960,248
---
---
106,709
---
---
7,473
---
---
7,473
---
---
757
198
---
7,473
---
---
4,162
(4,180)
281
---
(296)
(296)
---
---
---
---
---
---
---
---
---
---
(296)
7,177
757
198
(18)
281
---
$37,367
---
$17,955
---
$255
65
$---
65
$55,577
---
---
9,518
---
---
9,518
---
---
1,875
652
---
---
---
9,518
---
---
(9)
(1,824)
(495)
(495)
---
---
---
---
---
---
---
---
---
---
(495)
9,023
1,875
652
(9)
(1,824)
314
$40,208
---
$25,640
---
$(240)
---
$---
314
$65,608
---
---
11,737
---
---
11,737
---
---
1,351
680
8,340
---
---
11,737
---
---
(8,357)
(990)
(526)
(526)
---
---
---
---
---
---
---
---
---
---
(526)
11,211
1,351
680
(17)
(990)
378
$50,957
---
$28,030
---
$(766)
---
$---
378
$78,221
The accompanying notes are an integral part of these financial statements.
Annual Report - 25
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,
2005
2004
2003
$11,737
$ 9,518
$ 7,473
1,541
410
821
846
934
344
1,570
949
686
281
1,107
992
(621)
89
(2,762)
1,709
2,033
(362)
(25)
(3,468)
1,046
988
19
(81)
(495)
(2,605)
(96)
Net cash provided by operating activities
13,770
10,506
7,377
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
Proceeds from sales of securities
Purchase of bank owned life insurance policies
Loans originated and principal collected, net
Additions to premises and equipment
(1,205)
(33,630)
(5,363)
(38,545)
(14,277)
(87,479)
15,915
19,511
992
(698)
(110,240)
(1,969)
9,350
42,878
---
---
(126,358)
(352)
6,972
34,578
---
(10,000)
(40,989)
(949)
Net cash used in investing activities
(111,324)
(118,390)
(112,144)
Cash Flows from Financing Activities:
Net increase in deposits
Proceeds from stock options exercised
Net increase in Federal funds purchased and
Federal Home Loan Bank borrowings
Dividends paid in cash
Subordinated debt issued
Other
76,093
2,031
60,963
2,527
98,087
955
13,200
(1,007)
---
---
17,800
(1,824)
5,000
(9)
---
---
---
(18)
Net cash provided by financing activities
90,317
84,457
99,024
Net decrease in cash and cash equivalents
(7,237)
(23,427)
(5,743)
Cash and cash equivalents at beginning of year
29,499
52,926
58,669
Cash and cash equivalents at end of year
$22,262
$29,499
$52,926
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
$9,911
$7,400
$5,319
$5,599
$5,250
$4,822
The accompanying notes are an integral part of these financial statements.
Annual Report - 26
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
(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 two 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. 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. In periodic evaluations
of the adequacy of the allowance balance, the Bank considers the Bank’s past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability
to repay, the estimated value of any underlying collateral, current economic conditions and other
factors. The allowance for loan losses is based on estimates and ultimate losses may vary from
current estimates.
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,
Annual Report - 27
etc.). Allowances for identified problem loans are based on specific analysis of individual credits.
Loss estimation factors for loan pools are based on analysis of local economic factors applicable to
each loan pool. Due to the Bank’s minimal historic losses, loss estimation factors are based only
in part on the previous historical loss experience for each pool. Allowances for changing
environmental factors are management’s best estimate of the probable impact these changes have
had on the loan portfolio as a whole.
The Bank considers a loan 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 judgment of the Loan Committee and management, changes are
warranted.
Transfers of Financial Assets The Bank has entered into certain participation agreements with
other organizations. The Bank accounts for these transfers of financial assets as sales when control
over the assets has been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the Bank does not maintain effective control over the transferred assets
through either (a) an agreement to repurchase them before their maturity or (b) the ability to
otherwise cause the holder to return specific assets. No gain or loss has been recognized by the Bank
on the sale of these participation interests.
Bank Premises and Equipment consist of leasehold improvements, furniture, fixtures and equipment
and are stated at cost, less accumulated depreciation and amortization, which are calculated on
a straight-line basis over the estimated useful life of the property or the term of the lease (if less).
Furniture and fixtures are depreciated over 8 years and equipment is generally depreciated over
3 to 20 years. Leasehold improvements are amortized over the terms of the leases or their estimated
useful lives, whichever is shorter. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the accounts and any resulting
gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged
to expense as incurred.
Employee Stock Ownership Plan (ESOP) and Related Debt The Bank accounts for shares acquired
by its ESOP in accordance with the guidelines established by the American Institute of Certified
Public Accountants Statement of Position 93-6, “Employers’ Accounting for Employee Stock
Ownership Plans.” The Bank recognizes compensation cost equal to the fair value of the ESOP
shares during the periods in which they become committed to be released. To the extent that the
fair value of the Bank’s ESOP shares committed to be released differ from the cost of those shares,
the differential is charged or credited to equity. The ESOP 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.
Annual Report - 28
Cash and Cash Equivalents include 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 zero and $10.5 million for December 31, 2005 and 2004, 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
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 2005.
2005
2004
2003
Weighted average basic shares outstanding
Add: Potential common shares related to
stock options
4,918,059
4,774,176
4,612,610
335,749
368,735
331,371
Weighted average diluted shares outstanding
5,253,808
5,142,911
4,943,981
The number of antidilutive shares not included in the calculation of diluted earnings per shares
were 61,350, 14,250 and 17,366 at December 31, 2005, 2004 and 2003, 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
2005
$11,737
(833)
$10,904
2004
$9,518
(905)
$8,613
2003
$7,473
(959)
$6,514
$2.39
2.23
2.22
2.08
$1.99
1.85
1.80
1.68
$1.62
1.51
1.41
1.32
$11.61
$11.74
$7.44
4.38%
1.13%
9
22.87%
4.05%
1.22%
8
29.96%
4.00%
0.00%
8
28.83%
Annual Report - 29
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 first quarter of 2006. Historically, option grants have vested 20% immediately and
20% on each anniversary of the grant for four years. The Bank changed the vesting in the fourth
quarter of 2005 such that all grants on or after January 1, 2006 will vest 20% on each anniversary
of the grant for five years. The Bank expects to adopt the requirements of SFAS No. 123-R
prospectively in January 2006 and estimates the impact, after giving effect to the change in vesting
described above, to be a reduction to net income of approximately $150 thousand to $200 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.
Segment Information The Bank’s two operating segments include the traditional community
banking activities provided through its ten 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 $958
thousand in 2005, $922 thousand in 2004 and $815 thousand in 2003, 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, 2005 and 2004
consisted of the following:
(In thousands)
2005 Held to maturity
Oblig. of state & political subdivisions
Corporate debt securities and other
2005 Available for sale
U. S. Treasury Securities
Securities of U.S. Government Agencies
Amortized Cost
Gains
Gross Unrealized
Fair
Losses Market Value
$18,360
3,535
21,895
4,126
83,972
88,098
$115
43
158
---
17
17
$(190)
(29)
(219)
(64)
(1,274)
(1,338)
$18,285
3,549
21,834
4,062
82,715
86,777
Total
$109,993
$175
$(1,557)
$108,611
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
Annual Report - 30
$26,249
11,594
37,843
10,351
64,203
74,554
$112,397
$472
213
685
6
130
136
$821
$(261)
(11)
(272)
(77)
(473)
(550)
$26,460
11,796
38,256
10,280
63,860
74,140
$(822)
$112,396
The amortized cost and estimated market value of investment securities at December 31, 2005 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, 2005
Held to maturity
Available for sale
Amortized
Fair
Cost Market Value
Amortized
Fair
Cost Market Value
$8,510
5,900
4,014
3,471
$8,496
5,988
4,043
3,307
$10,106
69,903
2,315
5,774
$9,975
68,808
2,252
5,742
Total
$21,895
$21,834
$88,098
$86,777
During 2005, the Bank sold one security due to deterioration of the issuer’s credit worthiness. The
proceeds from the sale totaled $992 thousand and resulted in a gain of $1 thousand. For the years
ended December 31, 2004 and 2003 the Bank did not sell any of its investment securities, and
accordingly, did not recognize any gains or losses. At December 31, 2005, investment securities
carried at $20.5 million were pledged with the Federal Reserve Bank: $4.7 million to secure the
Bank’s Treasury, Tax and Loan account and trust deposits, $4.9 million to provide collateral for
potential future borrowings to meet unusual short-term liquidity needs, and $10.9 million to secure
the Bank’s public fund deposits. In addition, at December 31, 2005 $684 thousand was pledged
to provide collateral for the Bank’s interest rate swap.
Investment securities with unrealized losses are summarized and classified according to the
duration of the loss period as follows:
December 31, 2005
(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
$4,454
---
4,454
---
39,744
39,744
Total temporarily impaired securities
$44,198
$(22)
---
(22)
---
(514)
(514)
$(536)
$ 3,850
2,014
5,864
4,063
37,285
41,348
$(168)
(29)
(197)
(64)
(760)
(824)
$47,212
$(1,021)
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)
$---
---
---
---
---
---
$---
$ ---
---
---
---
---
---
$---
Management periodically evaluates each investment security in an unrealized loss position to
determine if the impairment is temporary or other than temporary. Included are forty-one securities
at December 31, 2005 and twenty-seven securities at December 31, 2004 with fair values of $91.4
million and $59.2 million, respectively, and unrealized losses of $1.6 million and $822 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.
Annual Report - 31
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 74% and 71% of the loans are secured by real
estate at December 31, 2005 and 2004 respectively.
Outstanding loans by type, net of deferred loan fees of $2.8 million and $2.0 million at December
31, 2005 and 2004, respectively, are as follows:
(In thousands)
Commercial loans
Real estate
Commercial
Construction
Residential
Installment
Total loans
Less - Allowance for loan losses
Net Loans
2005
$144,510
2004
$120,006
282,564
112,116
36,304
111,167
686,661
(7,115)
$679,546
250,326
81,549
30,692
94,384
576,957
( 6,110)
$570,847
At December 31, 2005 and 2004, the Bank had no loans that were past due greater than 90 days.
At December 31, 2005, the Bank’s FHLB line of credit and advances were secured under terms of
a blanket collateral agreement by a pledge of certain qualifying collateral, including loans.
The Bank has, and expects to have in the future, banking transactions in the ordinary course of
its business with directors, officers, principal stockholders and their associates. These transactions,
including loans, are granted on substantially the same terms, including interest rates and collateral
on loans, as those prevailing at the same time for comparable transactions with others. Likewise,
these transactions do not involve more than the normal risk of collectibility or present other
unfavorable features.
An analysis of net loans to related parties for the years ended December 31, 2005 and 2004, is as
follows:
(In thousands)
Balance at beginning of year
New loans to related parties
Repayments
Balance at end of year
2005
$2,497
2,384
(254)
$4,627
2004
$1,730
1,044
(277)
$2,497
The undisbursed commitment to related parties as of December 31, 2005, was $1.9 million.
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,
2005
$6,110
1,541
(764)
228
$7,115
2004
$5,458
934
(427)
145
$ 6,110
2003
$ 5,035
685
(376)
114
$ 5,458
before deducting allowance for loan losses
$686,661
$ 576,957
$ 450,881
Average total loans outstanding during the year
Ratio of allowance for loan losses
to total loans at end of year
$640,726
$ 514,299
$ 434,908
1.04%
1.06%
1.21%
Loans classified as nonaccrual amounted to $0 at December 31, 2005 and 2004.
Annual Report - 32
At December 31, 2005, 2004 and 2003 the Bank had no impaired loans. The average recorded
investment in impaired loans was $214 thousand for the year ended December 31, 2005 and zero
for the years ended December 31, 2004 and 2003.
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
2005
$ 6,438
6,845
13,283
(8,249)
$ 5,034
2004
$ 5,276
6,038
11,314
(7,403)
$3,911
The amount of depreciation and amortization was $846 thousand, $949 thousand and $992
thousand for the three years in the period ended December 31, 2005, 2004 and 2003, 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 ($11.9 million cash surrender value at December 31, 2005 and $10.7
million cash surrender value at December 31, 2004) 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 $442 thousand in 2005 and $512 thousand in 2004
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 $91.9 million and $68.7 million at
December 31, 2005 and 2004, respectively. Interest on these deposits was $2.8 million, $1.6 million
and $2.0 million in 2005, 2004 and 2003, respectively. Scheduled maturities of these deposits at
December 31, 2005 follows:
(In thousands)
Scheduled maturities
of time deposits
2006
2007
2008
2009
2010
Thereafter
Total
$70,778
$10,833
$2,807
$5,076
$2,434
$---
$91,928
The Bank accepts deposits from shareholders, directors and employees in the normal course of
business, and the terms are comparable to those with non-affiliated parties.
Note 8: Borrowings
Purchased Funds Short-term debt at December 31, 2005 and 2004 included overnight borrowings
from the Federal Home Loan Bank (“FHLB”) in the amount of $21.0 million and $17.8 million,
respectively. Short-term borrowing available to the Bank of $162.8 million consists of a line of credit
for advances with the FHLB secured under terms of a blanket collateral agreement by a pledge of
loans. At December 31, 2005 the Bank had an unused capacity with the FHLB of $131.8 million.
The Bank also has unused unsecured lines of credit totaling $50.0 million with correspondent
banks for overnight borrowings. At December 31, 2005, interest rates on lines of credit with
correspondent banks ranged from 3.38% to 5.13%.
Federal Home Loan Bank Advance During the third quarter of 2005, the Bank obtained a Federal
Home Loan Bank advance for $10.0 million. Each month, the Bank pays an annualized fixed rate
of interest of 4.23% on the three-year advance. The principal of $10.0 million is due in its entirety
upon maturity in the third quarter of 2008.
Federal Reserve Line of Credit The Bank also has available an unused line of credit with the Federal
Reserve Bank totaling $4.8 million at 5.25% at December 31, 2005, secured by agency securities.
Annual Report - 33
Subordinated Debt On June 17, 2004 the Bank issued a 15-year, $5.0 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 $1.0
million 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, 2005 was 6.98%. The debenture is subordinated to the claims of depositors and other
creditors of the Bank.
Borrowings at December 31, 2005 and 2004 are summarized as follows:
(In thousands)
Overnight borrowings
FHLB three-year advance
Subordinated debenture
Carrying
Value
$21,000
10,000
5,000
2005
Average
Balance
$11,498
4,575
5,000
Carrying
Average
Rate
Value
3.04% $17,800
---
4.23
5,000
5.97
2004
Average Average
Rate
Balance
1.74%
$2,805
---
---
4.32
2,705
The maximum amount outstanding at any month end for overnight borrowings was $39.4 million
and $18.8 million, during 2005 and 2004, 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 7.25% for 2005, 7.00% for 2004 and 6.00% for the period
from September 1, 2003 to December 31, 2003. The Bank’s deferred compensation obligation of
$1.4 million and $722 thousand at December 31, 2005 and 2004, respectively, is included in
“interest payable and other liabilities.”
The Bank also established a Split Dollar Plan and a Survivor Income Plan in 2003 for officers
designated by the Board of Directors. Death benefits are provided under the specific terms of these
plans. The Bank has purchased life insurance policies on the designated officers in connection with
these plans. The expense recognized under this plan totaled $56 thousand and $52 thousand for
the years ended December 31, 2005 and 2004, respectively.
The Bank’s 401(k) Plan commenced in May 1990 and is available to all employees. Under the Plan
employees can defer up to 50% of their base pay, up to the maximum amount allowed by the Internal
Revenue Code. The Bank will match 50% of each participant’s contribution up to a maximum match
of $4 thousand annually. Employer contributions totaled $338 thousand, $306 thousand and $267
thousand for the years ended December 31, 2005, 2004 and 2003, 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, 2005, 2004 and 2003 the Bank contributed $889
thousand, $754 thousand and $653 thousand, respectively. Generally, cash dividends on the
Bank’s stock held by the Plan are used to purchase additional shares in the open market. All shares
of the Bank’s stock held by the Plan are included in the calculations of basic and diluted earnings
per share. At December 31, 2005 the Bank had a $1.0 million, 26-month revolving line of credit
at prime plus 1/4% from an unaffiliated community bank. At December 31, 2005 the balance on
the line was zero.
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.
Annual Report - 34
Note 10: Income Taxes
The current and deferred components of the income tax provision for each of the three years
ended December 31, 2005 are as follows:
In thousands
Current tax provision
Federal
State
Total current
Deferred tax (benefit)/liability
Federal
State
Total deferred
Total income tax provision
2005
2004
2003
$6,113
2,220
8,333
(769)
(190)
(959)
$7,374
$ 4,791
1,828
6,619
(619)
(192)
(811)
$5,808
$3,465
1,405
4,870
(145)
(85)
(230)
$4,640
Income taxes recorded directly to comprehensive income are not included above. These income tax
benefits/(liabilities) relating to changes in the unrealized gains and losses on available for sale
investment securities amounted to $381 thousand, $358 thousand and ($215) thousand in 2005,
2004 and 2003, 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:
Loan origination costs
Net deferred tax asset
2005
2004
$3,426
381
185
697
582
5,271
$2,895
304
123
423
174
3,919
(164)
(179)
$5,107
$3,740
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 2005, 2004 and 2003 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
2005
35.0%
6.9
(1.6)
(1.7)
38.6%
2004
35.0%
6.9
(2.3)
(1.7)
37.9%
2003
34.0%
7.2
(2.8)
(0.1)
38.3%
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 2021. At December 31, 2005 the approximate minimum
future commitments payable under non-cancellable contracts for leased premises are as follows:
(In thousands)
Operating leases
2006
$1,424
2007
$1,345
2008
$1,352
2009
$1,246
2010
$1,013
Thereafter
$2,482
Total
$8,862
Rent expense included in “occupancy” totaled $1.5 million, $1.3 million and $1.2 million in 2005,
2004 and 2003, respectively.
Not reflected in the table above is the effect of a fifteen-year lease signed in January 2006, for office
space. The Bank expects to occupy the space beginning in the third quarter of 2006. Rent is fixed
at $57,698 per month for the first twelve months, with fixed increases of 3% per year thereafter.
Annual Report - 35
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 $122 thousand, $120 thousand and
$116 thousand for the years ended December 31, 2005, 2004 and 2003, 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,
2005 and 2004 follows:
2005
2004
(In thousands)
Financial assets
Cash and cash equivalents
Investment securities
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Federal funds purchased
Federal Home Loan Bank borrowings
Subordinated debenture
Accrued interest payable
Carrying
Amounts
$22,262
108,672
679,546
3,934
721,172
21,000
10,000
5,000
396
Fair Value
$22,262
108,611
675,189
3,934
720,810
21,000
9,832
5,000
396
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
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.
Accrued Interest Receivable and Payable - The accrued interest receivable and payable
balance approximates its fair value.
Deposits - The fair value of non-interest bearing deposits, interest bearing transaction
accounts and savings accounts is the amount payable on demand at the reporting
date. The fair value of time deposits is estimated by discounting the future cash flows
using current rates offered for deposits of similar remaining maturities.
Federal Funds Purchased - The balance represents its fair value due to the short-term
nature of these borrowings.
Federal Home Loan Bank Borrowings - The fair value is estimated by discounting the
future cash flows using current rates offered for similar borrowings.
Subordinated Debenture - The balance represent its fair value as it has a variable
interest rate.
Commitments - The fair value of commitments represents the carrying amount of the
related unamortized loan fees and is not material.
Note 13: Stockholders’ Equity
On April 14, 2005 and April 10, 2003, the Board of Directors declared 5% stock dividends. Cash
was paid in lieu of issuing fractional shares.
During the third quarter of 2005, the Bank implemented a quarterly dividend program and as a
result paid a ten cents per common share cash dividend in each of the third and fourth quarters
Annual Report - 36
of 2005, totaling $495 thousand in each quarter. The cash dividends were recorded as a reduction
to retained earnings.
A 3-for-2 stock split was paid 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.
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 1,062,504 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
181,871 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, 2005, 2004 and 2003 and changes for the years then ended is presented in the
following table. The 2003 information has been restated to reflect the 3-for-2 stock split that
occurred in 2004. The 2004 and 2003 information has been restated for the 5% stock dividend that
occurred in 2005.
Outstanding at beg. of year
Granted
Exercised
Cancelled/forfeited
Outstanding at end of year
Shares
763,974
92,125
(109,534)
(4,465)
742,100
2005
Weighted Avg.
Exercise Price
$15.10
$34.52
$12.34
$23.26
$17.87
2004 2003
Weighted Avg.
Shares Exercise Price
856,373
105,295
(176,416)
(21,278)
763,974
Shares
872,798
82,314
(78,592)
(20,147)
856,373
$12.61
$28.43
$10.63
$17.74
$15.10
Weighted Avg.
Exercise Price
$11.76
$19.10
$9.63
$14.11
$12.61
Exercisable at end of year
560,050
$14.61
565,198
$12.99
601,926
$11.66
A summary of the options outstanding and exercisable by price range as of December 31, 2005 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
3,484
23,542
377,339
120,454
27,685
84,188
95,958
9,450
742,100
0.1
0.9
3.7
6.2
6.4
8.3
9.4
9.0
5.4
Weighted Avg.
Exercise Price
$4.52
$5.98
$12.13
$16.65
$21.03
$27.68
$34.10
$35.91
$17.87
Weighted Avg.
Exercisable Exercise Price
$4.52
$5.98
$12.11
$16.53
$21.03
$27.68
$33.88
$35.73
$14.61
3,484
23,542
375,255
83,496
16,610
33,673
21,155
2,835
560,050
Under California state banking laws, payment of dividends is restricted to the lesser of retained
earnings or the amount of undistributed net profits from the three most recent fiscal years. Under
this restriction, approximately $25.9 million of the retained earnings balance was available for
payment of dividends as of December 31, 2005.
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
Annual Report - 37
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, 2005 and 2004, that the
Bank met all capital adequacy requirements to which it is subject.
As of December 31, 2005, 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, 2005 and 2004, are presented in the
following table.
(In thousands)
As of December 31, 2005
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
As of December 31, 2004
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
$91,556 11.52%
$78,988 9.94%
$78,988 9.38%
>$63,561 >8.0%
>$31,781 >4.0%
>$33,673 >4.0%
>$79,452 >10.0%
>$47,671 > 6.0%
>$42,092 > 5.0%
$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%
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 $226.8 million at December 31,
2005. This amount included $103.9 million under commercial lines of credit (these commitments
are contingent upon customers maintaining specific credit standards), $54.3 million under
revolving home equity lines and $56.1 million under undisbursed construction loans, at rates
ranging from 3.88% to 18.00%. The Bank has set aside an allowance for losses in the amount of
$454 thousand for these commitments, which is recorded in “interest payable and other liabilities.”
Approximately 57% of the commitments expire in 2006 with approximately 43% expiring between
2007 and 2016.
Note 16: Derivative Financial Instruments and Hedging Activities
In the second quarter of 2005, Bank of Marin entered into an interest-rate swap, primarily as an
asset/liability management strategy, in order to hedge the change in the fair value of a long-term
fixed-rate loan due to changes in interest rates. Such hedges allow the Bank to offer long-term fixed
rate loans to customers without assuming the interest rate risk of a long-term asset by swapping
the Bank’s fixed-rate interest stream for a floating-rate interest stream tied to the one-month
LIBOR. Such modification of the interest characteristics of the loan protects the Bank against an
adverse effect on earnings and the net interest margin due to fluctuating interest rates.
Annual Report - 38
The Bank’s derivative contract is designated as a fair value hedge and qualifies for fair value hedge
accounting in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. The interest rate swap is carried on the balance sheet at its fair value in
other assets (when the fair value is positive) and in other liabilities (when the fair value is negative).
As a result of interest rate fluctuations, the hedged loan will gain or lose market value. In a fair value
hedging strategy, the effect of this unrealized gain or loss will generally be offset by gain or loss on
the interest rate swap derivative linked to the hedged loan. Changes in the fair value of the derivative
and the offsetting changes in the fair value of the hedged loan are recorded in “other non-interest
income” and net to zero, as the hedge was 100% effective for year ended December 31, 2005. The
full change in value of the derivative was included in the assessment of hedge effectiveness.
The interest rate swap held by the Bank is scheduled to mature in June of 2020. Information on
the interest rate swap at December 31, 2005 was as follows:
(in thousands)
Notional or contractual amount
Credit risk amount (1)
Estimated net fair value
Weighted average pay rate
Weighted average receive rate
Gain (loss) on designated derivative contract
Increase (decrease) in value of designated loans
Net gain (loss) on derivatives used to hedge
loans recorded in income
At December 31, 2005
$7,828
$123
$123
Year ended
December 31, 2005
4.59%
3.70%
$123
(123)
$0
(1) Credit risk represents the amount of unrealized gain included in derivative assets which is subject
to counterparty credit risk. It reflects the effect of master netting agreements.
Annual Report - 39
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)*
Cash dividend payout ratio
2001
$ 455,417
326,249
411,818
40,601
8.9%
2001
$ 21,456
619
1,873
14,428
5,148
1.11
0%
2002
$ 539,025
410,155
486,029
47,117
8.7%
2002
$ 25,522
577
2,318
17,125
6,242
1.30
0%
2003
$ 642,607
450,881
584,116
55,577
8.6%
2003
$ 27,656
686
2,960
17,817
7,473
1.51
0%
2004
$ 737,094
576,957
645,079
65,608
8.9%
2004
$ 32,237
934
3,643
19,620
9,518
1.85
20.1%
2005
$ 840,449
686,661
721,172
78,221
9.3%
2005
$39,442
1,541
3,708
22,498
11,737
2.23
8.4%
04/05
% change
14.0%
19.0%
11.8%
19.2%
04/05
% change
22.4%
65.0%
1.8%
14.7%
23.3%
20.5%
.
4
0
4
8
$
.
1
7
3
7
$
%
4
2
1
.
%
6
2
1
.
%
8
2
1
.
%
6
4
1
.
%
8
3
1
.
%
2
1
4
1
.
%
6
4
4
1
.
%
9
5
3
1
.
%
4
6
5
1
.
%
5
1
6
1
.
.
6
2
4
6
$
.
0
9
3
5
$
.
4
5
5
4
$
01
02
03
04
05
01
02
03
04
05
01
02
03
04
05
Total Assets (in millions)
Return on Assets
Return on Equity
3
2
2
$
.
.
5
8
1
$
.
7
7
5
1
$
.
5
5
3
1
$
.
4
9
1
1
$
.
3
3
0
1
$
3
0
9
$
.
1
5
1
$
.
.
0
3
1
$
1
1
1
$
.
01
02
03
04
05
01
02
03
04
05
Total Assets (in millions)
Net Income Per Share (diluted)*
Book Value Per Share*
*Restated for stock dividends declared April 2001, 2002, 2003 and 2005, and a 3-for-2 stock split declared
April 2004.
Annual Report - 40
DIVIDEND INFORMATION, STOCK PRICE
AND MARKETPLACE DESIGNATION
In April 2005 the Board of Directors declared a
5% stock dividend. Additionally, the Board of
Directors declared cash dividends of ten cents
per common share in August 2005 and in
November 2005. In April 2004, the Board of
Directors declared a 3-for-2 stock split and in
June 2004 declared a cash dividend of $0.40
per share.
During 2005 there were 2,002 trades at prices
ranging from a high of $37.48 to a low of
$30.80. In 2004 there were 1,999 trades at
prices ranging from a high of $38.76 to a
low of $25.30.
Bank of Marin common stock trades on the
NASDAQ SmallCap Market under the symbol
BMRC. There were 774 holders of record of the
Bank’s common stock as of February 28, 2006.