bank of marin bancorp
building relationships
that drive success
2010 annual report
For Bank of Marin, 2010 was a year of
strength and opportunity, with healthy
fi nancial results, ongoing strategic
expansion in the North Bay, and a
continued commitment to our customers
and the community.
f i n a n c i a l p e r f o r m a n c e
(dollars in thousands, except per share data)
At December 31,
Total assets
Total loans
Total deposits
Total stockholders' equity
Equity-to-asset ratio
For the Year Ended December 31,
2010
2009
2008
2007
2006
$ 1,208,150
941,400
1,015,739
121,920
$ 1,121,672
917,748
944,061
109,051
$ 1,049,557
890,544
852,290
125,546
$ 933,901
724,878
834,642
87,774
$ 876,578
719,778
736,697
89,525
10.1%
9.7%
12.0%
9.4%
10.2%
Net income
Net income per share (diluted)1
Cash dividend payout ratio on common stock2
13,552
2.55
23.6%
12,765
2.19
25.8%
12,150
2.31
23.9%
12,324
2.31
21.4%
11,883
2.11
20.8%
As of December 31,
Total Capital (to risk-weighted assets)
13.34%
12.33%
14.08%
12.06%
12.56%
1 Restated for all stock dividends and stock splits.
2 Calculated as dividends on common share divided by basic net income per common share.
a message from the president &
chairman of the board
We are pleased to report that we have started our third
decade in business with strong financial results, while
maintaining our position as the number one community
bank in Marin County.* Our continued success is based
on our disciplined, conservative approach to underwriting,
a focus on building strong relationships with our customers
and an unwavering commitment to the communities we
serve. These fundamental operating principles have been
in place since we opened the first Bank of Marin branch in
1990 and will continue to serve us well in the years ahead.
B U I L D I N G B U S I N E S S R E L A T I O N S H I P S
As a community bank, we recognize the importance of
building and maintaining strong relationships with our
customers and the business communities where we operate.
This is a focus for our employees every day, from participat-
ing in programs with our local Chambers of Commerce, to
sponsoring school and non-profit events. Our employees
are well-connected in the communities we serve and are
dedicated to providing legendary service to our new and
long-time customers.
F I N A N C I A L S T R E N G T H & S T A B I L I T Y
This past year was an outstanding year for Bank of Marin
in many ways. We posted annual earnings of $13.6 million,
a 6.2 percent increase over 2009. Deposits grew 7.6 percent
and loans were up 2.6 percent. Most importantly, we main-
tained excellent credit quality due to our exceptional
underwriting standards and proactive management of rela-
tionships with our customers. We continue to be a strong,
healthy institution with a Risk-Based Capital Ratio of 13.3
percent, which is well in excess of the regulatory standard
for a “Well Capitalized” financial institution. Additionally,
we were again awarded the highest Bauer Five Star Rating,
which we have received for over ten straight years.
N O R T H B A Y E X P A N S I O N
We characterized 2010 as a “year of opportunity” for Bank
of Marin as we continued our strategic expansion into the
North Bay by opening a new commercial loan office in
Santa Rosa and began planning for a full service branch in
Sonoma to open by summer of 2011. In February, 2011 we
had the opportunity to acquire Charter Oak Bank in Napa
through an FDIC assisted transaction. This strategic acqui-
sition positions the Bank in the middle of the prosperous
Napa Valley and gives us presence in the three major coun-
ties in the North Bay region.
C O M M U N I T Y C O M M I T M E N T
Bank of Marin contributed over one percent of pre-tax earn-
ings to charity in 2010, by giving $370,000 to non-profit
organizations in the North Bay. Our financial contributions
are complemented by the donation of more than 7,000
employee volunteer hours during the year, while also serving
on the Boards of close to 70 non-profit organizations.
We continue to be recognized for our work in the commu-
nity. For the eighth year in a row Bank of Marin was
honored as one of the “Top Corporate Philanthropists in
the Bay Area” by the San Francisco Business Times. In 2010,
we also received the Western Banker 2010 Community
First Award, which recognizes banks for demonstrating a
commitment to helping their local communities and
creating a healthier environment through tangible programs,
policies and projects.
We are pleased with our accomplishments in 2010 and look
to the year ahead with a continued focus on doing our best
for our customers, our community, our employees, and our
shareholders. Thank you for your ongoing support and
your role in making Bank of Marin the strong and healthy
institution it is today.
Sincerely,
Russell A. Colombo
President and Chief Executive Officer
Joel Sklar, MD
Chairman of the Board
* Based on total deposit market share for Marin County-headquartered banks, FDIC, June 2010
bank of m ar in bancor p
2010 annual r eport 1
from left to right:
michael kadel, bank of marin central marin regional manager
michael ghilotti, ceo, ghilotti brothers inc.
2
• doyle drive construction, san francisco, california •
ghilotti brothers inc.
s a n r a fa e l , c a l i for n i a
A phone call from Mario Ghilotti to Bill Murray, the
founder of Bank of Marin, was the beginning of a long
banking relationship that remains as strong today as it
was sixty years ago.
ability to expedite things separates them from other
financial institutions. They understand what we do and
when challenges come up, we feel supported every step
of the way.”
Michael Ghilotti tells the story this way. “Years ago, my
father Mario and his brothers got started in business
with a call to the Bank after they bought a shipment of
army surplus equipment and needed to pay for it. That
was the beginning of a fantastic relationship that’s
helped us become a multi-million dollar company and
one of the largest employers of construction personnel in
northern California.”
He adds, “In today’s world the challenge is to turn things
around quickly and Bank of Marin does just that. They
jump in and help at the drop of a phone call. Their
“What makes the relationship work is our ability to be
responsive” says Michael Kadel. “Whether it’s providing
a line of credit or just an opportunity to brainstorm
ideas, we recognize the importance of being accessible
for our customers.”
“We are continuously challenged to grow our company
and develop it, and we couldn’t do that without the sup-
port of Bank of Marin,” says Michael Ghilotti.
bank of m ar in bancor p
2010 annual r eport 3
• highway 12 vineyards & winery, sonoma, california •
highway 12 vineyards & winery
s onom a, c a l i for n i a
Bank of Marin’s new full service branch is set to open in
the town of Sonoma this summer. Yet Highway 12
Vineyards and Winery and Bank of Marin have shared a
relationship for years. Co-founders Michael Sebastiani
and Paul Giusto have grown the upstart winery from
650 cases in their first release in 2006 to more than
19,000 cases in 2010. And they’ve done it along the
renowned Highway 12 corridor through the Sonoma
Valley, home to dozens of world-class wineries.
“We’re a small winery in a small town and Bank of Marin
has been a very good fit for our business. Their personal-
ized approach blends well with our family-style opera-
tion, and their experience in the wine industry has
provided invaluable guidance,” says Michael.
Commercial lender Cheryl Cinelli adds, “There are
unique lending needs in the wine business. It’s very capi-
tal intensive and because of our team’s experience in the
industry, we can anticipate and be very responsive. All
decisions are made in our local office so we can act
quickly, which is one of the keys to our success.”
“Having a local connection to our Bank gives us a lot of
confidence. We know we’ve got a supportive partner
behind the scenes,” says Paul. “Bank of Marin under-
stands our business and they contribute to the commu-
nity which is very important to us. They are also our
only Bank and that says a lot right there.”
4
bank of m ar in bancor p
2010 annual r eport
from right to left:
michael sebastiani, co-founder and winemaker, highway 12 vineyards & winery
paul giusto, co-founder and president, highway 12 vineyards & winery
cheryl cinelli, bank of marin commercial lender
5
from left to right:
chuck silverman, founder and principal, silverman & light
tim myers, manager, bank of marin san francisco commercial banking office
6
• cragmont elementary school, berkeley, california •
silverman & light
e m e r y v i l l e , c a l i for n i a
When Chuck Silverman needed a commercial loan for his
engineering business, and later a real estate loan for his
company’s headquarters in Emeryville, he wanted to work
with a bank that wasn’t a hassle and a lender open to new
ideas. That’s when he heard about Bank of Marin.
The Bank’s relationship with Chuck started with a single
project and has grown as Silverman & Light has also
grown. The firm now has projects that include commer-
cial and government facilities, hospitals and laboratories,
residential housing and restaurants.
Says Chuck, “I was with a big bank and realized I needed
more of a ‘people bank’. I wanted a person to work with
who wasn’t just number crunching and hindered by
bureaucracy. I wanted a bank that was flexible.”
Tim says, “The similarities between Chuck’s company
and Bank of Marin are that we both have high expecta-
tions, and we run our respective businesses with a focus
on building strong relationships backed by a team of very
qualified people.
“Chuck is a very creative, bright guy,” Tim concludes. Like
any relationship we’ve grown it over time, we‘ve earned it,
and as a result Chuck will say, “I’m going to have some-
thing else in the works and I’d like you to be part of it. In
our business, that’s the best compliment and something
we love to hear.”
bank of m ar in bancor p
2010 annual r eport 7
Experienced leadership
B O A R D of D I R E C T O R S
Joel Sklar, MD
Chief Medical Officer,
Marin General Hospital,
Chairman, Bank of Marin &
Bank of Marin Bancorp
Russell A. Colombo
President and Chief Executive
Officer, Bank of Marin &
Bank of Marin Bancorp
Thomas M. Foster
Retired CPA and Independent
Financial Consultant
Robert Heller
Former Governor, U.S. Federal
Reserve Board and former President
and CEO, Visa USA
Norma J. Howard
Business Consultant
Stuart D. Lum
President and Chief Executive
Officer, Edgewood Pacific Inc.
Joseph D. Martino
Retired Banker
William H. McDevitt, Jr.
President, McDevitt & McDevitt
Construction Corp.
Brian M. Sobel
Principal Consultant,
Sobel Communications
of Petaluma
J. Dietrich Stroeh
Partner, CSW/Stuber-Stroeh
Civil Engineering Firm
Jan I. Yanehiro
President, Jan Yanehiro Inc.,
Director, School of Multi Media
Communications, Academy of Art
University, San Francisco
E X E C U T I V E O F F I C E R S
Russell A. Colombo
President and
Chief Executive Officer
Christina J. Cook
Executive Vice President and
Chief Financial Officer
Kevin K. Coonan
Executive Vice President and
Chief Credit Officer
Peter Pelham
Executive Vice President and
Director of Retail Banking
Nancy Rinaldi Boatright
Senior Vice President and
Corporate Secretary
8 bank of m ar in bancor p
2010 annual r eport
committed to
your business and
our community
At Bank of Marin, we develop trusting,
personal relationships with our customers,
taking time to understand their needs and
how they operate their businesses. An integral
part of Bank of Marin is our dedication and
support of local communities.
b u s i n e s s
Our experienced team of bankers provides creative financial solu-
tions tailored to any size business, delivered with responsiveness,
respect and trust.
– Commercial Loans & Lines of Credit
– Asset Based Loans
– Construction & Commercial Real Estate Loans
– Cash Management
– Zero Balance & Sweep Accounts
– ACH Origination & Management,
Remote Deposit & Image Lockbox
– Business Employee Services & Fraud Protection Products
– Business Credit Cards & Merchant Services
c o m m u n i t y
Dedicated to the success and well being of our communities
through charitable contributions, volunteerism, leadership, and
local lending, we are proud to support the communities where
we live and work.
w e a lt h m a n a g e m e n t & p r i va t e b a n k i n g
Delivering extraordinary attentive service, backed by integrity
and commitment, our dedicated team provides the highest level
of accountability and service. We offer professional guidance,
customized financing, and financial solutions to manage your
most complex banking needs. And we’re always available, just
around the corner.
– Investment Management
– Trust Services
– Retirement Benefit Plans
corporate
information
t r a n s f e r a g e n t a n d r e g i s t r a r
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3506
(800) 368-5948
www.rtco.com
i n d e p e n d e n t a u d i t o r s
Moss Adams LLP
Stockton, CA
l e g a l c o u n s e l
Stuart | Moore
San Luis Obispo, CA
n a s d a q s y m b o l
BMRC
a n n u a l m e e t i n g
6:00 p.m., May 17, 2011
10 Avenue of the Flags
San Rafael, CA 94903
p e r i o d i c r e p o r t s
The Company’s annual report for 2010 on Form 10-K, which is
required to be filed with the SEC, is available to any shareholder
without charge. The report may be obtained by written request to
Corporate Secretary, Bank of Marin Bancorp, P.O. Box 2039,
Novato, CA 94948. It is available in the Investor Relations section
of the Company’s website at www.bankofmarin.com.
f o r w a r d - l o o k i n g s t a t e m e n t s
This discussion of financial results includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, (the “1933 Act”)
and Section 21E of the Securities Exchange Act of 1934, as amended, (the “1934 Act”).
Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-
looking statements to encourage companies to provide prospective information about
their financial performance so long as they provide meaningful, cautionary statements
identifying important factors that could cause actual results to differ significantly
from projected results.
Our forward-looking statements may include descriptions of plans or objectives of
Management for future operations, products or services, and forecasts of our revenues,
earnings or other measures of economic performance. Forward looking statements can
be identified by the fact that they do not relate strictly to historical or current facts.
They often include the words “believe,” “expect,” “intend,” “estimate” or words of
similar meaning, or future or conditional verbs such as “will,” “would,” “should,”
“could” or “may.”
Forward-looking statements are based on Management’s current expectations regarding
economic, legislative, and regulatory issues that may impact our earnings in future
periods. A number of factors—many of which are beyond Management’s control—
could cause future results to vary materially from current Management’s expectations.
Such factors include, but are not limited to, general economic conditions, the current
financial turmoil in the United States and abroad, changes in interest rates, deposit
flows, real estate values and competition; changes in accounting principles, policies
or guidelines; changes in legislation or regulation; and other economic, competitive,
governmental, regulatory and technological factors affecting our operations, pricing,
products and services. These and other important factors are detailed in Item 1A Risk
Factors section of this report. Forward-looking statements speak only as of the date
they are made. We do not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements are
made or to reflect the occurrence of unanticipated events.
c o r p o r a t e h e a d q u a r t e r s
504 r edWood blvd.
novato, ca 94947
415.763.4520
c o r t e m a d e r a
504 tamalpais dr.
corte mader a, ca 94925
415.927.2265
s a n f r a n c i s c o
235 pine st.
san fr ancisco, ca 94104
415.403.5580
g r e e n b r a e
501 sir fr ancis dr ake blvd.
gr eenbr ae, ca 94904
415.785.1565
s a u s a l i t o
3 harbor dr.
sausalito, ca 94965
415.289.8710
m i l l v a l l e y
23 r eed blvd.
mill valley, ca 94941
415.381.2265
19 sunnyside ave.
mill valley, ca 94941
415.380.4665
s a n r a f a e l
999 andersen dr.
san r afael, ca 94901
415.259.0365
1101 fourth st.
san r afael, ca 94901
415.485.2265
4460 r edWood hW y.
san r afael, ca 94903
415.472.2265
n o v a t o
368 ignacio blvd.
novato, ca 94949
415.884.2265
1450 gr ant ave.
novato, ca 94945
415.899.7338
p e t a l u m a
799 bay Wood dr.
petaluma, ca 94954
707.781.2210
8 4th st.
petaluma, ca 94952
707.781.1810
1371 n. mcdoWell blvd.
petaluma, ca 94954
707.658.4210
s a n t a r o s a
50 santa rosa ave.
santa rosa, ca 95404
707.508.3377
s o n o m a
136 W. napa st.
sonoma, ca 95476
707.933.3750
n a p a
600 tr ancas st.
napa, ca 94558
707.265.2000
s t. h e l e n a
1050 adams st.
st. helena, ca 94574
707.967.9353
W W W.b a n kof m a r i n.c om
2 0 1 0 a n n u a l r e p o r t
T h i s p a g e i n t e n t i o n a l l y l e f t b l a n k .
BANK OF MARIN BANCORP
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2010
or
(cid:134)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________________ to __________________
Commission File number: 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
20-8859754
(IRS Employer Identification No.)
504 Redwood Blvd., Suite 100, Novato, CA
(Address of principal executive office)
94947
(Zip Code)
(415) 763-4520
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, No Par Value,
and attached Share Purchase Rights
(Title of each class)
NASDAQ Capital Market
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes (cid:134)
No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes (cid:134)
No ⌧
Note – checking the box above will not relieve any registrant required to file reports pursuant to section 13 or
15(d) of the Exchange Act from their obligations under these sections.
Page - 1
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧
No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
Yes (cid:134)
No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-
accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check One):
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134)
Accelerated filer ⌧
Smaller reporting company (cid:134)
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b(2) of the Exchange Act.
Yes (cid:134)
No (cid:55)
As of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, the
aggregate market value of the voting and non-voting common equity held by non-affiliates, based upon the
closing price per share of the registrant’s common stock as reported by the NASDAQ, was approximately $163
million. For the purpose of this response, directors and officers of the Registrant are considered the affiliates at
that date.
As of February 28, 2011 there were 5,300,685 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2011
are incorporated by reference into Part III.
Page - 2
TABLE OF CONTENTS
PART I
Forward-Looking Statements
BUSINESS
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
LEGAL PROCEEDINGS
REMOVED AND RESERVED
PROPERTIES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
ITEM 7.
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
Executive Summary
Critical Accounting Policies
RESULTS OF OPERATIONS
Net Interest Income
Provision for Loan Losses
Non-interest Income
Non-interest Expense
Provision for Income Taxes
FINANCIAL CONDITION
Investment Securities
Loans
Allowance for Loan Losses
Other Assets
Deposits
Borrowings
Deferred Compensation Obligations
Off Balance Sheet Arrangements
Commitments
Capital Adequacy
Liquidity
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Note 2: Investment Securities
Note 3: Loans
Note 4: Allowance for Loan Losses and Impaired Loans
Note 5: Bank Premises and Equipment
Note 6: Bank Owned Life Insurance
Note 7: Deposits
5
5
5
12
20
20
20
20
21
21
23
24
24
24
25
28
29
33
33
34
36
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44
44
45
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46
46
46
48
50
56
56
62
65
69
71
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71
Page - 3
Note 8: Borrowings
Note 9: Stockholders’ Equity and Stock Option Plans
Note 10: Fair Value of Assets and Liabilities
Note 11: Benefit Plans
Note 12: Income Taxes
Note 13: Commitments and Contingencies
Note 14: Concentrations of Credit Risk
Note 15: Derivative Financial Instruments and Hedging Activities
Note 16: Regulatory Matters
Note 17: Financial Instruments with Off-Balance Sheet Risk
Note 18: Condensed Bank of Marin Bancorp Parent Only Financial Statements
Note 19: Subsequent Event
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
72
73
77
80
80
82
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84
85
86
87
89
89
90
91
91
91
91
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96
Page - 4
Forward-Looking Statements
PART I
This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended, (the “1934 Act”). Those sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking
statements to encourage companies to provide prospective information about their financial performance so long as
they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ
significantly from projected results.
Our forward-looking statements may include descriptions of plans or objectives of Management for future operations,
products or services, and forecasts of our revenues, earnings or other measures of economic performance. Forward-
looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often
include the words “believe,” “expect,” “intend,” “estimate” or words of similar meaning, or future or conditional verbs
such as “will,” “would,” “should,” “could” or “may.”
Forward-looking statements are based on Management’s current expectations regarding economic, legislative, and
regulatory issues that may impact our earnings in future periods. A number of factors - many of which are beyond
Management’s control - could cause future results to vary materially from current Management’s expectations. Such
factors include, but are not limited to, general economic conditions, the current financial turmoil in the United States and
abroad, changes in interest rates, deposit flows, real estate values and competition; changes in accounting principles,
policies or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory
and technological factors affecting our operations, pricing, products and services. These and other important factors are
detailed in Item 1A Risk Factors section of this report. Forward-looking statements speak only as of the date they are
made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the
date the forward-looking statements are made or to reflect the occurrence of unanticipated events.
ITEM 1.
BUSINESS
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 or “DFI”) and commenced operations in January 1990.
The Bank is an insured bank under the Federal Deposit Insurance Act (“FDIC”). On July 1, 2007 (the “Effective Date”), a
bank holding company reorganization was completed whereby Bank of Marin Bancorp (“Bancorp”) became the parent
holding company for the Bank, the sole and wholly-owned subsidiary of Bancorp. On the Effective Date, each
outstanding share of Bank of Marin common stock was converted into one share of Bank of Marin Bancorp common
stock. Bancorp assumed the ticker symbol BMRC, which was formerly used by the Bank. Prior to the Effective Date, the
Bank filed reports and proxy statements with the FDIC pursuant to Sections 12 of the Securities Exchange Act of 1934
(the “1934 Act”). Upon formation of the holding company, Bancorp became subject to regulation under the Bank Holding
Company Act of 1956, as amended, which subjects Bancorp to Federal Reserve Board reporting and examination
requirements.
References in this report to “Bancorp” mean Bank of Marin Bancorp, parent holding company for the Bank. References
to “we,” “our,” “us” mean the holding company and the Bank that are consolidated for financial reporting purposes.
Virtually all of our business is conducted through Bancorp’s sole subsidiary, the Bank, which is headquartered in
Novato, California. As of December 31, 2010, we operated through sixteen offices in San Francisco, Marin and Sonoma
counties with a strong focus on supporting the local community. As discussed in Note 19 to the Consolidated Financial
Statements in Item 8 of this report, in February 2011, we expanded our community banking footprint to Napa County
through an FDIC-assisted acquisition of certain assets and assumption of certain liabilities of the former Charter Oak
Bank. Our customer base is made up of business and personal banking relationships from the communities near the
branch office locations. Our business banking focus is on small to medium-sized businesses, professionals and not-for-
profit organizations.
We offer a broad range of commercial and retail deposit and lending programs designed to meet the needs of our target
markets. Our loan products include commercial loans and lines of credit, construction financing, consumer loans, and
home equity lines of credit. Merchant card services are available for our customers in retail businesses. Through a third
party vendor, we offer a proprietary Visa® credit card product combined with a rewards program to our customers, as
well as a Business Visa® program for business and professional customers. We also offer cash management sweep to
business clients through a third party vendor.
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We offer a variety of personal and business checking and savings accounts, and a number of time deposit
alternatives, including time certificates of deposit, Individual Retirement Accounts (“IRAs”), Health Savings
Accounts, and Certificate of Deposit Account Registry Service (“CDARS®”). CDARS® is a network through which
we offer full FDIC insurance coverage in excess of the regulatory maximum by placing deposits in multiple banks
participating in the network. We also offer remote deposit capture, direct deposit of payroll, social security and
pension checks, fraud prevention services including an insurance protected Identity Theft Prevention Program
and image lockbox services. A valet deposit pick-up service is available to our professional and business clients.
Automatic teller machines (“ATM’s”) are available at each branch location.
Our ATM network is linked to the PLUS and NYCE networks. In January 2009, we began offering free access to a
network of nation-wide surcharge-free ATM’s called MoneyPass. We also offer our depositors 24-hour access to
their accounts by telephone and through our internet banking products available to personal and business
account holders.
We offer Wealth Management and Trust Services (“WMTS”) which include customized investment portfolio
management, financial planning, trust administration, estate settlement and custody services, and advice of
charitable giving. We also offer 401(k) plan services to small and medium businesses through a third party
vendor.
We offer branch-based Private Banking as a natural extension of our services. Our Private Banking includes
deposit services and loans, as well as a full range of banking services.
We do not directly offer international banking services, but do make such services available to our customers
through other financial institutions with whom we have correspondent banking relationships.
We hold no patents, licenses (other than licenses required by the appropriate banking regulatory agencies),
franchises or concessions. The Bank has registered the service marks “The Spirit of Marin”, the words “Bank of
Marin”, the Bank of Marin logo, and the Bank of Marin tagline “Committed to your business and our community”
with the United States Patent & Trademark Office. In addition, Bancorp has registered the service marks for the
words “Bank of Marin Bancorp” and for the Bank of Marin Bancorp logo with the United States Patent &
Trademark Office.
All service marks registered by Bancorp or the Bank are registered on the United States Patent & Trademark
Office Principal Register, with the exception of the words “Bank of Marin Bancorp” which is registered on the
United States Patent & Trademark Office Supplemental Register.
Market Area
Our primary market area reaches from Sonoma County to San Francisco and lies between the Pacific Ocean on
the west and San Francisco Bay to the east. See also Note 19 to the Consolidated Financial Statements in Item 8
of this report regarding our subsequent expansion into Napa County in February 2011. Our customer base is
made up of business and personal banking relationships from the communities near the branch office locations.
We attract deposit relationships from individuals, merchants, small to medium-sized businesses, not-for-profit
organizations and professionals who live and/or work in the communities comprising our market areas. As of
December 31, 2010, approximately 82% of our deposits are in Marin and southern Sonoma counties, and
approximately 56% of our deposits are from businesses and 44% are from individuals.
Competition
The banking business in California generally, and in our market area specifically, is highly competitive with
respect to attracting both loan and deposit relationships. The increasingly competitive environment is impacted by
changes in regulation, interest rate environment, technology and product delivery systems, and the consolidation
among financial service providers. The banking industry is seeing extreme competition for quality loans. Larger
banks are seeking to expand lending to small businesses, which are traditionally community bank customers. The
Marin County market area is dominated by two major nation-wide banks, each of which has more branch offices
than us in the defined service area. Additionally, there are several thrifts, credit unions and other independent
banks.
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As of June 30, 2010, the latest data available shows 89 banking offices with $8.8 billion in total deposits served
the Marin County market. As of that same date, there were approximately 3 thrift offices in Marin with $0.6 billion
in total deposits. We have the largest business core deposit market share, representing 24.3% of business core
deposits in Marin County1. A significant driver of our franchise value is the growth and stability of our checking
and savings deposits, which are a low cost funding source for our loan portfolio. We have also gained overall
deposit market share in our primary market area in 20101. The four financial institutions with the greatest deposit
market share in Marin County are Wells Fargo Bank, Bank of America, Bank of Marin, and Westamerica Bank
with deposit market shares of 26.0% and 17.9%, 9.9%, and 8.6%, respectively1.
In the southern Sonoma County area of Petaluma, there are approximately 25 banking and thrift offices with $1.5
billion in total deposits as of June 30, 2010. Compared with our share of 4.5%, the four banking institutions with
the greatest overall market share, Wells Fargo Bank, Bank of America, Bank of the West, and First Community
Bank had deposit market shares in Petaluma of 28.7%, 15.6%, 9.3%, and 8.9%, respectively1.
We also compete for depositors’ funds with money market mutual funds and with non-bank financial institutions
such as brokerage firms and insurance companies. Among the competitive advantages held by some of these
non-bank financial institutions are their ability to finance extensive advertising campaigns, and to allocate
investment assets to regions of California or other states with areas of highest demand and, therefore, often
higher yield.
Nationwide banks have the competitive advantages of national advertising campaigns and technology
infrastructure to achieve economies of scale. Large commercial banks also have substantially greater lending
limits and have the ability to offer certain services which are not offered directly by us.
In order to compete with the numerous, and often larger, financial institutions in our primary market area, we use,
to the fullest extent possible, the flexibility and rapid response capabilities which are accorded by our independent
status. Our competitive advantages also include an emphasis on personalized services, community involvement,
philanthropic giving, local promotional activities and personal contacts. The commitment and dedication of our
organizers, directors, officers and staff have also contributed greatly to our success in competing for business.
Employees
At December 31, 2010, we employed 203 full-time equivalent (“FTE”) staff. The actual number of employees,
including part-time employees, at year-end 2010 included 4 executive officers, 77 other corporate officers and 142
staff. None of our employees are presently represented by a union or covered by a collective bargaining
agreement. We believe that our employee relations are good. We have been recognized as one of the “Best
Places to Work in the San Francisco Bay Area” by the San Francisco Business Times and the “Best Places to
Work” by North Bay Business Journal.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal and state law. The following
discussion summarizes certain significant laws, rules and regulations affecting Bancorp and the Bank.
Bank Holding Company Regulation
Upon formation of the bank holding company on July 1, 2007, we became subject to regulation under the Bank
Holding Company Act of 1956, as amended (“BHCA”) which subjects Bancorp to Federal Reserve Board
reporting and examination requirements. Under the Federal Reserve Board’s regulations, a bank holding
company is required to serve as a source of financial and managerial strength to its subsidiary banks.
1 Based on the latest available FDIC deposit market share data as of June 30, 2010.
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The BHCA regulates the activities of holding companies including acquisitions, mergers and consolidations and,
together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities.
Bank Regulation
Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking
system as a whole. These regulations affect our lending practices, consumer protections, capital structure, investment
practices and dividend policy.
As a state chartered bank, we are subject to regulation and examination by the DFI. We are also subject to regulation,
supervision and periodic examination by the FDIC. If, as a result of an examination of the Bank, the FDIC or the DFI
should determine that the financial condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of our operations are unsatisfactory, or that we have violated any law or regulation, various
remedies are available to those regulators including issuing a “cease and desist” order, restricting our growth or
removing officers and directors.
Dividends
The payment of cash dividends by the Bank to Bancorp is subject to restrictions set forth in the California Financial
Code (the “Code”). Prior to any distribution from the Bank to Bancorp, a calculation is made to ensure compliance with
the provisions of the Code and to ensure that the Bank remains within capital guidelines set forth by the DFI and the
FDIC. As the Bank made a $28 million distribution to Bancorp in March 2009 in connection with Bancorp’s repurchase
of preferred stock discussed in Note 9 to the Consolidated Financial Statements in Item 8 of this report, distributions
from the Bank to Bancorp are subject to advance regulatory approval from the DFI for three years beginning in 2010.
Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to Bancorp to meet
its funding requirements for the foreseeable future. See also Note 9 to the Consolidated Financial Statements, under
the heading “Dividends” in Item 8 of this report.
FDIC Insurance Assessments
Our deposits are insured by the FDIC to the maximum amount permitted by law, which is currently $250,000 per
depositor. The 2010 enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
made the deposit insurance coverage permanent at the $250,000 level retroactive to January 1, 2008. The Dodd-Frank
act also provides depositors at all FDIC-insured institutions with unlimited deposit insurance coverage on traditional
checking accounts that do not pay interest and Interest on Lawyers Trust Accounts beginning December 31, 2010
through the end of 2012.
During 2009 and 2010, we elected to participate in the Temporary Transaction Account Guarantee Program, which
provided full deposit insurance coverage to non-interest bearing transaction accounts (including low-interest negotiable
order of withdrawal accounts and interest on lawyer trust accounts), by paying a 10 basis point surcharge on the non-
interest bearing transaction accounts over $250,000 through December 31, 2009, and a 15 basis point surcharge
through December 31, 2010, when the program ended.
Effective April 1, 2009, the FDIC revised its risk-based insurance assessment system, effectively increasing the overall
assessment rate. The revised base assessment rates for banks in the best risk category range from twelve to sixteen
cents annually for every $100 of domestic deposits held. In addition, the FDIC also imposed a one-time special Deposit
Insurance assessment of five basis points on all insured institutions’ total assets minus Tier 1 capital at June 30, 2009 in
order to replenish the Deposit Insurance Fund. On November 12, 2009, the FDIC finalized a Deposit Insurance Fund
restoration plan that required banks to prepay, on December 30, 2009, their estimated quarterly risk-based
assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. Under the plan, banks were assessed
through 2010 according to the risk-based premium schedule adopted in April 2009.
On February 7, 2010, as required by the Dodd-Frank Act, the FDIC approved a rule that changes the FDIC insurance
assessment base from adjusted domestic deposits to a bank’s average consolidated total assets minus average
tangible equity, defined as Tier 1 capital. Since the new base is larger than the current base, the new rule lowers
assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category, and 30
to 45 basis points for banks in the highest risk category. The change will be effective beginning with the second quarter
of 2011 and payable at the end of September 2011. The new rule is expected to lower our FDIC insurance by more
than 30%. Since we have a solid core deposit base and do not rely heavily on borrowings and brokered deposits, the
benefit of the lower assessment rate (which is expected to drop by half for us) will significantly outweigh the effect of a
wider assessment base.
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The following discussion summarizes certain significant laws, rules and regulations affecting both Bancorp and
the Bank
Community Reinvestment Act
We are subject to the provisions of the Community Reinvestment Act (“CRA”), under which all banks and thrifts
have a continuing and affirmative obligation, consistent with safe and sound operations, to help meet the credit
needs of their entire communities, including low and moderate income neighborhoods. The act requires a
depository institution’s primary federal regulator, in connection with its examination of the institution, to assess the
institution’s record in meeting the requirements in CRA. The regulatory agency’s assessment of the institution’s
record is made available to the public. The record is taken into consideration when the institution establishes a
new branch that accepts deposits, relocates an office, applies to merge or consolidate, or expands into other
activities. CRA performance is evaluated by the FDIC under the intermediate small bank requirements. The
FDIC’s last CRA and consumer compliance examination performed on us was completed on May 7, 2009 with a
rating of “Satisfactory,” which is the highest rating possible.
Anti Money–Laundering Regulations
A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 require banks to prevent,
detect, and report illicit or illegal financial activities to the federal government to prevent money laundering,
international drug trafficking, and terrorism. Under the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, financial institutions are subject to
prohibitions against specified financial transactions and account relationships as well as enhanced due diligence
and “know your customer” standards in their dealings with high risk customers, foreign financial institutions, and
foreign individuals and entities. We have extensive controls in place to comply with these requirements.
Privacy and Data Security
The Gramm-Leach Bliley Act (“GLBA”) of 1999 imposes requirements on financial institutions with respect to
consumer privacy. The GLBA generally prohibits disclosure of consumer information to non-affiliated third parties
unless the consumer has been given the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to consumers annually. The GLBA also directs
federal regulators, including the FDIC, to prescribe standards for the security of consumer information. We are
subject to such standards, as well as standards for notifying consumers in the event of a security breach. We
must disclose our privacy policy to consumers and permit consumers to “opt out” of having non-public customer
information disclosed to third parties. We are required to have an information security program to safeguard the
confidentiality and security of customer information and to ensure proper disposal of information that is no longer
needed. Customers must be notified when unauthorized disclosure involves sensitive customer information that
may be misused.
Consumer Protection Regulations
Our lending activities are subject to a variety of statutes and regulations designed to protect consumers, including
the Fair Credit Reporting Act, Equal Credit Opportunity Act, the Fair Housing Act, and the Truth-in-Lending Act.
Our deposit operations are also subject to laws and regulations that protect consumer rights including Funds
Availability, Truth in Savings, and Electronic Funds Transfers. Additional rules govern check writing ability on
certain interest earning accounts and prescribe procedures for complying with administrative subpoenas of
financial records. Additionally, the provision of the Federal Reserve Regulation E has been changed effective July
1, 2010. It puts restrictions on institutions assessing overdraft fees on consumer’s accounts relating to electronic
funds transfers. As a result, our overdraft fee income has been negatively impacted.
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Restriction on Transactions between Member Banks and their Affiliates
Transactions between Bancorp and the Bank are quantitatively and qualitatively restricted under Sections 23A
and 23B of the Federal Reserve Act and Federal Reserve Regulation W. Section 23A places restrictions on the
Bank’s “covered transactions” with Bancorp, including loans and other extensions of credit, investments in the
securities of, and purchases of assets from Bancorp. Section 23B requires that certain transactions, including all
covered transactions, be on market terms and conditions. Federal Reserve Regulation W combines statutory
restrictions on transactions between the Bank and Bancorp with Board interpretations in an effort to simplify
compliance with Sections 23A and 23B.
Capital Requirements
The Federal Reserve and the FDIC have adopted risk-based capital guidelines for bank holding companies and
banks. Bancorp’s ratios exceed the required minimum ratios for capital adequacy purposes and the Bank meets
the definition for well capitalized. Undercapitalized depository institutions may be subject to significant restrictions.
Payment of interest and principal on subordinated debt of the Bank could be restricted or prohibited, with some
exceptions, if the Bank were categorized as “critically undercapitalized” under applicable FDIC regulations. For
further information on risk-based capital, see Note 16 to the Consolidated Financial Statements in Item 8 of this
Form 10-K.
Sarbanes-Oxley Act of 2002
We are subject to the requirements of the Sarbanes-Oxley Act of 2002 which implemented legislative reforms
intended to address corporate and accounting improprieties.
Emergency Economic Stabilization Act of 2009 (the “EESA”)
In response to the financial crisis affecting the banking system and financial markets and going concern threats of
investment banks and other financial institutions, on October 3, 2008, the EESA was signed into law, which gave
the U.S. Treasury the authority to, among other things, inject $700 billion capital into the market to stabilize the
financial industry. Pursuant to the EESA, the U.S. Treasury also purchased senior preferred shares from the
largest nine financial institutions in the nation and the other financial institutions in a program known as the
Treasury Capital Purchase Program (“TCPP”) that was carved out of the Troubled Asset Relief Program
(“TARP”). As a result of our participation in the TCPP, we were subject to restrictions on executive compensation
and limitations on dividends and stock repurchases from December 5, 2008 to March 31, 2009, the period that the
preferred stock issued to the U.S. Treasury was outstanding.
The American Recovery and Reinvestment Act of 2009 (the “Recovery Act”)
The Recovery Act was signed into law on February 17, 2009 in an effort, among other things, to jumpstart the
U.S. economy, prevent job losses, expand educational opportunities, and provide affordable health care and tax
relief. Among the various measures in the Recovery Act, it imposes further restriction on executive compensation
and corporate expenditure limits of recipients of the TCPP funds, while allowing them to repurchase the preferred
stock at liquidation amount without regard to the original TCPP transaction terms. See Note 9 to the Consolidated
Financial Statements in Item 8 of this report for discussion regarding our repurchase of preferred stock issued
under the TCPP.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection
Act, a landmark financial reform bill comprised of massive volume of new rules and restrictions that will impact
banks going forward. It includes key provisions aimed at preventing a repeat of the 2008 financial crisis and a new
process for winding down failing, systemically important institutions in a manner as close to a controlled
bankruptcy as possible. The Act includes other key provisions as follows:
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(1) The Act establishes a new Financial Stability Oversight Council to monitor systemic financial risks. The Board
of Governors of the Federal Reserve (“Fed”) are given extensive new authorities to impose strict controls on large
bank holding companies with total consolidated assets equal to or in excess of $50 billion and systemically
significant nonbank financial companies to limit the risk they might pose for the economy and to other large
interconnected companies. The Fed can also take direct control of troubled financial companies that are
considered systemically significant.
The Act restricts the amount of trust preferred securities (“TPS”) that may be considered as Tier 1 Capital. For
bank holding companies below $15 billion in total assets, TPS issued before May 19, 2010 will be grandfathered,
so their status as Tier 1 capital does not change. Beginning January 1, 2013, bank holding companies above $15
billion in assets will have a three-year phase-in period to fill the capital gap caused by the disallowance of the TPS
issued before May 19, 2010. However going forward, TPS will be disallowed as Tier 1 capital.
(2) The Act creates a new process to liquidate failed financial firms in an orderly manner, including giving the
FDIC broader authority to operate or liquidate a failing financial company.
(3) The Act also establishes a new independent Federal regulatory body for consumer protection within the
Federal Reserve System known as the Bureau of Consumer Financial Protection (the “Bureau”), which will
assume responsibility for most consumer protection laws (except the Community Reinvestment Act). It will also be
in charge of setting appropriate consumer banking fees and caps. The Office of Comptroller of the Currency will
continue to have authority to preempt state banking and consumer protection laws if these laws “prevent or
significantly” interfere with the business of banking.
(4) The Act effects changes in the FDIC assessment as discussed in section “FDIC Insurance Assessments”
above.
(5) The Act places certain limitations on investment and other activities by depository institutions, holding
companies and their affiliates, including comprehensive regulation of all over-the-counter derivatives.
The impact of the Act on our banking operations is still uncertain due to the massive volume of new rules still
subject to adoption and interpretation.
Available Information
On our internet web site, www.bankofmarin.com, we post the following filings as soon as reasonably practicable
after they are filed with or furnished to the SEC: Annual Report on Form 10-K, Proxy Statement for the Annual
Meeting of Shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934.
The text of the Code of Ethical Conduct for Bancorp and the Bank is also included on the website. All such filings
on our website are available free of charge. This website address is for information only and is not intended to be
an active link, or to incorporate any website information into this document. In addition, copies of our filings are
available by requesting them in writing or by phone from:
Corporate Secretary
Bank of Marin
504 Redwood Blvd., Suite 100
Novato, CA 94947
415-763-4523
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ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business. The material risks and
uncertainties that Management believes may affect our business are described below. Before making an
investment decision, investors should carefully consider the risks and uncertainties described below together with
all of the other information included or incorporated by reference in this report. The risks and uncertainties
described below are not the only ones facing our business. Additional risks and uncertainties that Management is
not aware of or focused on or that Management currently deems immaterial may also impair business operations.
This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, our financial condition and results of operations could be materially and
adversely affected.
Our Earnings are Significantly Influenced by General Business and Economic Conditions
We are operating in an uncertain economic environment. While the economic recession ended in 2009 and there
are signs of economic conditions improving, the persistent high unemployment rate, weak business and
consumer spending, and the U.S. budget deficit underline that the economy remains very fragile. Economic
recovery is expected to be slow and long. The housing market is not expected to recover soon amid a bleak job
market. Business activity across a wide range of industries and regions is greatly affected. Local and state
governments are in difficulty due to the reduction in sales taxes resulting from the lack of consumer spending and
property taxes resulting from declining property values. Financial institutions continue to be affected by the
contraction of the real estate market, elevated foreclosure rates, high unemployment rates and a stricter
regulatory environment. While our service area has not experienced the same degree of challenge in
unemployment as other areas2, the effects of these issues have trickled down to households and businesses in
our markets. There can be no assurance that the recent economic improvement is sustainable and credit
worthiness of our borrowers will not deteriorate.
Continued declines in real estate values and home sale volumes, financial stress on borrowers, including job
losses, and customers’ inability to pay debt could adversely affect our financial condition and results of operations
in the following aspects:
• Demand for our products and services may decline
• Low cost or non-interest bearing deposits may decrease
• Collateral for our loans, especially real estate, may decline further in value
• Loan delinquencies, problem assets and foreclosures may increase
Our deposit growth level has outpaced our loan growth recently, which leads to excess liquidity earning a less
favorable yield. As the economy is still fragile, consumers are wary of their debts and are reducing their borrowing
activities. We have noticed a decrease in loan demand due to an unfavorable economic climate and intensified
competition for creditworthy borrowers, all of which could impact our ability to generate profitable loans.
2 Based on the latest available labor market information from Employment Development Department. Preliminary
December 2010 results show that the unemployment rate in Marin County was the lowest in California at 7.9%
and in Sonoma County at 10.0%, compared to the state of California at 12.3%.
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Nonperforming Assets Take Significant Time To Resolve And Adversely Affect Our Results Of Operations
And Financial Condition.
Our nonperforming assets have been maintained at a manageable level historically. As discussed in Note 19 to
the Consolidated Financial Statements in Item 8 of this report, we acquired certain assets of the failed Charter
Oak Bank on February 18, 2011. The acquisition may expose us to credit issues of acquired assets, which may
become nonperforming in the future.
Nonperforming assets may adversely affect our net income in various ways. Until economic and market
conditions improve, we expect to continue to incur additional losses relating to nonperforming assets. We do not
record interest income on non-accrual loans, thereby adversely affecting our income and increasing our loan
administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark
the related loan to the then fair market value of the collateral, which may result in a loss. While we have tried to
reduce our problem assets through workouts, restructurings and otherwise, decreases in the value of these
assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due
to economic and market conditions beyond our control, could adversely affect our business, results of operations
and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of
time from management, which can be detrimental to the performance of other responsibilities. There can be no
assurance that we will not experience further increases in nonperforming loans in the future.
Recently Enacted Legislation and Other Measures Undertaken by the Government May not Help Stabilize
the U.S. Financial System and The Impact of New Financial Reform Legislation is Yet to be Determined
As discussed in Item 1, Section captioned “Supervision and Regulation” above, in 2010, President Obama signed
into law a landmark financial reform bill—the Dodd-Frank Act. The current rules and interpretations being
considered under the Dodd-Frank Act may change banking statutes and the operating environment of Bancorp
and the Bank in substantial and unpredictable ways, and could increase the cost of doing business, decrease our
revenues, limit or expand permissible activities or affect the competitive balance depending upon whether or how
regulations are implemented. We may be forced to invest significant management attention and resources to
make any necessary changes related to the Dodd-Frank Act and any regulations promulgated there under. The
ultimate effect of the changes would have on the financial condition or results of operations of Bancorp or the
Bank is uncertain at this time.
The actual impact of the recently enacted legislation and such related measures undertaken to alleviate the
aftermaths of the credit crisis is unknown. The capital and credit markets have experienced volatility and
disruption at an unprecedented level in the past few years. In some cases, the markets have produced downward
pressure on credit availability for certain issuers without regard to those issuers’ underlying financial strength. If
the recent years’ disruption and volatility return, there can be no assurance that we will not experience an adverse
effect on our ability to access credit or capital.
In addition to changes resulting from the Dodd-Frank Act, recent proposals published by the Basel Committee on
Banking Supervision, if adopted, could lead to significantly higher capital requirements, higher capital charges and
more restrictive leverage and liquidity ratios. On September 12, 2010, the Basel Committee announced an
agreement on additional capital reforms that increases required Tier 1 capital and minimum Tier 1 common equity
capital and requires banks to maintain an additional capital conservation buffer during times of economic
prosperity. If adopted, it could restrict our ability to grow or require us to raise additional capital. As a result, it may
affect the result of our financial condition, or business’ prospects in the future.
The Recent Repeal of Federal Prohibitions on Payment of Interest on Demand Deposits Could Increase
Our Interest Expense
The Dodd-Frank Act has lifted the prohibitions on payment of interest on demand deposits. Beginning on July 21,
2011, financial institutions can start paying interest on demand deposits in an effort to compete for deposits.
Although we do not know what interest rates will be offered by our competitors, we would increase our interest
expense and interest rate sensitivity and experience an overall decrease in the net interest margin if we were to
offer interest on demand deposits to attract or retain customers. As a result, it may affect the result of our financial
condition, or business’ prospects in the future.
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We May Experience Unfavorable Outcomes with Growth
We seek to expand our franchise safely and consistently. A successful growth strategy requires us to manage
multiple aspects of the business simultaneously, such as following adequate loan underwriting standards,
balancing loan and deposit growth without increasing interest rate risk or compressing our net interest margin,
maintaining sufficient capital, and recruiting, training and retaining qualified professionals. We have recently
expanded into Santa Rosa and plan to expand to the town of Sonoma through a new branch opening. These new
markets may have characteristics unfamiliar to us. We also expect significant increase in non-interest expenses
associated with new branches with a lag in profitability.
Our growth strategy also includes merger and acquisition opportunities that either enhance our market presence or
have potential for improved profitability through financial management, economies of scale or expanded services. As
discussed in Note 19 to the Consolidated Financial Statement in Item 8 of this report, we acquired certain assets
and certain liabilities of Napa-based Charter Oak Bank on February 18, 2011 through an FDIC-assisted transaction.
While FDIC-assisted acquisitions provide attractive opportunities in part due to loans purchased at significant
discounts, acquiring other banks or branches involves risks such as exposure to potential asset quality issues of the
target company, potential disruption to our normal business activities and diversion of Management’s time and
attention due to integration and conversion efforts. If we pursue our growth strategy too aggressively and fail to
execute integration properly, we may not be able to achieve expected synergies or other anticipated benefits.
Interchange Reimbursement Fees and Related Practices Have Been Receiving Significant Legal and
Regulatory Scrutiny, and the Resulting Regulations Could Have a Significant Impact on Interchange Fees
We Earn
The Dodd-Frank Act includes provisions that will regulate the debit interchange rates and certain other network
industry practices (the “Durbin Amendment”). In addition, the Federal Reserve now has the power to regulate
network fees to the extent necessary to prevent evasion of the new rules on interchange rates. The Federal
Reserve has proposed rules to restrict interchange fees on debit cards to about 12 cents per transaction for
institutions with $10 billion or more in assets. Interchange represents a transfer of value between the financial
institutions participating in a payments network such as Visa and NYCE, in which we participate. In connection
with transactions initiated with cards in a payments system, interchange reimbursement fees are typically paid to
issuers, the financial institutions such as us that issue debit cards to cardholders. They are typically paid by
owners, the financial institutions that offer network connectivity and payment acceptance services to merchants.
In January 2010, Visa announced that it will implement a two-tiered pricing system for debit interchange -- one for
banks with more than $10 billion in assets, and one for all those under the $10 billion threshold. However, it may still
not alleviate the negative consequences that the Durbin amendment and the Federal Reserve’s proposed rules will
have for banks of all sizes and consumers. Despite the statutory attempt to separate out smaller banks from the
price controls embodied in the Durbin amendment, the marketplace may drive business to the lowest cost option.
Merchants may switch to lower-cost cards and accounts of larger institutions, applying downward pressure on the
fees paid to small institutions to compete. Community banks such as us may ultimately be harmed as a result. We
may be forced to charge lower fees to customers, affecting our profitability. Owners of networks in which we do not
participate could elect to charge higher discount rates to merchants, leading merchants not to accept cards for
payment, or to steer Visa cardholders to alternate payment systems, hence reducing our transaction volumes.
Negative Conditions Affecting Real Estate May Harm Our Business
Concentration of our lending activities in the California real estate sector could negatively impact our results of
operations if the adverse changes in the real estate market in our lending area intensify. Although we do not offer
traditional first mortgages, nor have sub-prime or Alt-A residential loans or significant amount of securities backed
by such loans in the portfolio, we are not immune from the effect of the set-back of the real estate market.
Approximately 86% of our loans were secured by real estate at December 31, 2010, of which 65% were secured
by commercial real estate and the remaining 21% by residential real estate. Real estate valuations are impacted
by demand, and demand is driven by factors such as employment; when unemployment rises, demand drops.
The unemployment rate has stayed at an elevated level since 2009. Most of the properties that secure our loans
are located within Marin and Sonoma Counties. While we have seen improvement in real estate sales statistics3
after a few years of falling prices, there is no guarantee that the recent trend will continue.
3 Based on the latest available real estate information from Keegan & Coppin Company, Inc.
Page - 14
Loans secured by commercial real estate include those secured by small office buildings, owner-user
office/warehouses, mixed-use residential/commercial properties and retail properties. In 2010, office vacancy
rates in Marin County have fallen slightly from 26.3% to 25.7%, while industrial and retail rates have risen slightly
from approximately 4% to 6%4. In Sonoma County, vacancy rates are generally higher than in Marin County: the
rate of industrial, retail, and office vacancies decreased from 15.5%, 9.2%, and 24.8% in 2009 to 13.9%, 8.5%,
and 22.3% in 2010, respectively4. There can be no assurance that the companies or properties securing our loans
will generate sufficient cash flows to allow the borrowers to make full and timely loan payments to us.
In late 2006, Federal banking regulators issued final guidance regarding commercial real estate lending to
address a concern that rising commercial real estate lending concentrations may expose institutions to
unanticipated earnings and capital volatility in the event of adverse changes in the investor commercial real estate
market. This guidance suggests that institutions that are potentially exposed to significant commercial real estate
concentration risk will be subject to increased regulatory scrutiny. Institutions that have experienced rapid growth
in commercial real estate lending, have notable exposure to a specific type of commercial real estate lending, or
are approaching or exceed certain supervisory criteria that measure an institution’s commercial real estate
portfolio against its capital levels, may be subject to such increased regulatory scrutiny. Although regulators have
not notified us of any concern, there is no assurance that we will not be subject to additional scrutiny in the future.
We are Subject to Interest Rate Risk
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the
difference between interest income earned on interest-earning assets, such as loans and securities, and interest
expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are sensitive to
many factors outside our control, including general economic conditions and policies of various governmental and
regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System, which regulates
the supply of money and credit in the United States. Changes in monetary policy, including changes in interest
rates, could influence not only the interest we receive on loans and securities and interest we pay on deposits and
borrowings, but could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our
financial assets and liabilities, and (iii) the average duration of our mortgage-backed securities portfolio. Our
portfolio of securities is subject to interest rate risk and will generally decline in value if market interest rates
increase, and generally increase in value if market interest rates decline. Our mortgage-backed security portfolio
is also subject to prepayment risk in a low interest rate environment.
In response to the recessionary state of the national economy, the gloomy housing market and the volatility of
financial markets, the Federal Open Market Committee of the Federal Reserve Board (“FOMC”) started a series
of decreases in Federal funds target rate with seven decreases in 2008, bringing the target rate to a historically
low range of 0% to 0.25% through December 2010.
In the current environment of historically low interest rates, it is imperative for us to mitigate exposure to potential
increases in interest rates. If interest rates rise by more than 100 basis points, we anticipate that net interest
income will rise assuming no additional deposit rate sensitivity. However, it may still take several upward market
rate movements for variable rate loans at floors to move above their floor rates. Further, a rise in index rates leads
to lower debt service coverage of variable rate loans if the borrower’s operating cash flow doesn’t also rise. This
creates a leveraged paradox of an improving economy (leading to higher interest rates), but lower credit quality as
short-term rates move up faster than the cash flow or income of the borrowers. Higher interest rates may also
depress loan demand, making it more difficult for us to grow loans.
4 Median price for single-family re-sales homes were up 3.3% in Marin County and 3.2% in Sonoma County in
2010.
Page - 15
Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or
maturity of assets or liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest
rate volatility on the net interest margin. Although we believe we have implemented effective asset and liability
management strategies, any substantial, prolonged low interest rate environment could have an adverse effect on our
financial condition and results of operations. See the sections captioned “Net Interest Income” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Quantitative and Qualitative
Disclosures about Market Risk in Item 7A of this report for further discussion related to management of interest rate risk.
We are Subject to Significant Credit Risk and Loan Losses May Exceed Our Allowance for Loan Losses in the
Future
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to
expense, that represents Management’s best estimate of probable losses that may be incurred within the existing
portfolio of loans. The level of the allowance reflects Management’s continuing evaluation of industry concentrations,
specific credit risks, loan loss experience, current loan portfolio quality and present economic, political and regulatory
conditions. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree
of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may
undergo material changes. Further, we generally rely on appraisals of the collateral or comparable sales data to
determine the level of specific reserve and/or the charge-off amount on certain collateral dependent loans. Inaccurate
assumptions in the appraisals or an inappropriate choice of the valuation techniques may lead to an inadequate level of
specific reserve or charge-offs.
Changes in economic conditions affecting borrowers, new information regarding existing loans and their collateral,
identification of additional problem loans and other factors, may require an increase in our allowance for loan losses. In
addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the
provision for loan losses or the recognition of further loan charge-offs. In addition, if charge-offs in future periods exceed
the allowance for loan losses, we will need to record additional provision for loan losses. Any increases in the allowance
for loan losses will result in an adverse impact on net income and capital.
We Face Intense Competition with Other Financial Institutions to Attract and Retain Banking Customers
We are facing significant competition for customers from other banks and financial institutions located in the markets we
serve. We compete with commercial banks, saving banks, credit unions, non-bank financial services companies and
other financial institutions operating within or near our serving areas. Many of our non-bank competitors are not subject
to the same extensive regulations as ours, thus, are able to offer greater flexibility in competing for business. We
anticipate intense competition will be continued for the coming year due to the recent consolidation of many financial
institutions and more changes in legislature, regulation and technology.
Going forward, we may see tighter competition in the industry as banks seek to take market share in the most profitable
customer segments, particularly the small business segment and the mass-affluent segment, which offers a rich source
of deposits as well as more profitable and less risky customer relationships. Further, with the rebound of the equity
markets, our deposit customers may perceive alternative investment opportunities as providing superior expected
returns. Technology and other changes have made it more convenient for bank customers to transfer funds into
alternative investments or other deposit accounts such as online virtual banks and non-bank service providers. The
current low interest rate environment could increase such transfers of deposits to higher yielding deposits or other
investments. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase
our costs. When our customers move money into higher yielding deposits or in favor of alternative investments, we can
lose a relatively inexpensive source of funds, thus increasing our funding costs.
We also compete with nationwide and regional banks much larger than our size, which may be able to benefit from
economies of scale through their wider branch network, national advertising campaigns and sophisticated technology
infrastructure.
We intend to seek additional deposits by continuing to establish and strengthen our personal relationships with our
existing customers and by offering deposit products that are competitive with those offered by other financial institutions
in our markets. If these efforts are unsuccessful, we may need to fund our asset growth through borrowings, other non-
core funding or public offerings of our common stock which could be leveraged. Increased debt would further increase
our leverage, reduce our borrowing capacity and increase our reliance on non-core funds and counterparties’ credit
availability. A public offering may have a dilutive effect on earnings per share and share ownership.
Page - 16
Our Ability to Access Markets for Funding and Acquire and Retain Customers Could be Adversely
Affected by the Deterioration of Other Financial Institutions or the Financial Service Industry’s
Reputation.
Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding the financial
services industry. The financial services industry continues to be featured in negative headlines about their roles
in the past global and national credit crisis and the resulting stabilization legislation enacted by the U.S. federal
government. These reports can be damaging to the industry’s image and potentially erode consumer confidence
in insured financial institutions. Recent bank failures in California, including in our own markets, have had a
negative impact and additional failures are expected. In addition, our ability to engage in routine funding and other
transactions could be adversely affected by the actions and commercial soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor and
counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience
increases in deposits and assets as a direct or indirect result of other banks’ difficulties or failure, which would
increase the capital we need to support such growth or we could experience severe and unexpected decreases in
deposits which could adversely impact our liquidity and heighten regulatory concern.
Bancorp and the Bank are Subject to Extensive Government Regulation and Supervision
Bancorp and the Bank are subject to extensive federal and state governmental supervision, regulation and
control. Holding company regulations affect the range of activities in which Bancorp is engaged. Banking
regulations affect the Bank’s lending practices, capital structure, investment practices and dividend policy among
other controls. Future legislative changes or interpretations may also alter the structure and competitive
relationship among financial institutions.
The historic disruptions in the financial marketplace over the past few years have prompted the Obama
administration to reform the financial market regulation. This proposed reform includes additional regulations over
consumer financial products, bond rating agencies and the creation of a regime for regulating systemic risk across
all types of financial service firms. In light of recent economic conditions as well as regulatory and congressional
criticism, further restrictions on financial service companies may adversely impact our results of operations and
financial condition, as well as increase our compliance risk.
Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or
nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical
standards set forth by regulators. Compliance risk also arises in situations where the laws or rules governing
certain bank products or activities of our clients may be ambiguous or untested. This risk exposes Bancorp and
the Bank to potential fines, civil money penalties, payment of damages and the voiding of contracts. Compliance
risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion
potential and an inability to enforce contracts.
For further information on supervision and regulation, see the section captioned “Supervision and Regulation” in
Item 1 above.
Bancorp Relies on Dividends from the Bank to Pay Cash Dividends to Shareholders
Bancorp is a separate legal entity from its subsidiary, the Bank. Bancorp receives substantially all of its revenue
from the Bank in the form of dividends, which is Bancorp’s principal source of funds to pay cash dividends to
Bancorp’s common shareholders. Various federal and state laws and regulations limit the amount of dividends
that the Bank may pay to Bancorp. In the event that the Bank is unable to pay dividends to Bancorp, Bancorp may
not be able to pay dividends to its shareholders. As a result, it could have an adverse effect on Bancorp’s stock
price and investment value.
Page - 17
Under federal law, capital distributions from the Bank would become prohibited, with limited exceptions, if the
Bank were categorized as “undercapitalized” under applicable Federal Reserve or FDIC regulations. In addition,
as a California bank, the Bank is subject to state law restrictions on the payment of dividends. Distributions from
the Bank to Bancorp are subject to advance regulatory approval for three years beginning in 2010. For further
information on the distribution limit from the Bank to Bancorp, see the section captioned “Bank Regulation” in Item
1 above and “Dividends” in Note 9 to the Consolidated Financial Statements in Item 8 below.
The Trading Volume of Bancorp’s Common Stock is Less than That of Other Larger Financial Services
Companies
Our common stock is listed on the NASDAQ’s Capital Market. Our trading volume is less than that of nationwide
or regional financial institutions. A public trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence of willing buyers and sellers of common stock at any given time. This
presence depends on the individual decisions of investors and general economic and market conditions over
which we have no control. Given the lower trading volume of our common stock, significant trades of our stock in
a given time, or the expectations of these trades, could cause the stock price to be more volatile.
Failure of Correspondent Banks and Counterparties May Affect our Liquidity
In the past few years, the financial services industry in general was materially and adversely affected by the credit
crises. We have witnessed failure of banks in the industry in recent years and the trend is expected to continue.
We rely on our correspondent banks for lines of credit. We also have two correspondent banks as counterparties
in our derivative transactions (see Note 15 to the Consolidated Financial Statements). While we continually
monitor the financial health of our correspondent banks and we have diverse sources of liquidity, should any one
of our correspondent banks become financially impaired, our available credit may decline and/or they may be
unable to honor their commitments.
Unexpected Early Termination of Our Interest Rate Swap Agreements May Impact Our Earnings
We have entered into interest-rate swap agreements, primarily as an asset/liability management strategy, in order
to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into
long-term fixed-rate loans caused by changes in interest rates. These hedges allow us to offer long-term fixed
rate loans to customers without assuming the interest rate risk of a long-term asset by swapping our fixed-rate
interest stream for a floating-rate interest stream. In the event of default by the borrowers on our hedged loans,
we may have to terminate these designated interest-rate swap agreements early, resulting in severe prepayment
penalties charged by our counterparties. On the other hand, when these interest-rate swap agreements are in an
asset position, we are subject to the credit risk of our counterparties, who may default on the interest-rate swap
agreements, leaving us vulnerable to interest rate movements.
Securities May Lose Value due to Credit Quality of the Issuers
We hold securities issued and/or guaranteed by Federal National Mortgage Association (“FNMA”) and Federal
Home Loan Mortgage Corporation (“FHLMC”). In 2008, the U.S. Government placed both FNMA and FHLMC
under conservatorship. Starting in December 2008, the U.S. Government also began purchasing mortgage-
backed securities (“MBS”) issued by FNMA. Further, in December 2009, the U.S. Treasury also announced
unlimited capital support for FNMA and FHLMC for the next three years. As a result, the MBS issued by FNMA
and FHLMC has experienced an increase in fair value and our available-for-sale security portfolio has benefitted
from this government support. However, the Obama administration released its report to Congress on reforming
the housing-finance market on February 11, 2011. The proposal would wind down FNMA and FHLMC and
incrementally shrink the government’s housing-finance footprint by, among other things, gradually increasing the
firms’ guarantee pricing, reducing their conforming loan limits, and phasing in a 10-percent down-payment
requirement. When the U.S. Government starts selling the MBS securities issued by FNMA and FHLMC, when
the government support is phased-out or completely withdrawn, or if either the FNMA or FHLMC comes under
further financial stress or deteriorates in their credit worthiness, the fair value of our securities issued or
guaranteed by these entities could be negatively affected.
Page - 18
We also invest in obligations of state and political subdivisions, some of which are experiencing financial
difficulties in part due to loss of property tax from falling home values and declines in sales tax revenues from a
reduction in retail activities. The 2009 federal stimulus funds that flowed out to state governments across the
country is running down and is expected to drop to $89.4 billion for 2011, $23.3 billion in 2012 and $14.3 billion in
2013. State and political subdivisions are expected to undergo further financial stress due to the reduced federal
funding. While we seek to minimize our exposure by diversifying geographic location of our portfolio and investing
in investment grade securities, there is no guarantee that the issuers will remain financially sound to be current
with their payments on these debentures.
Deterioration of Credit Quality or Insolvency of Insurance Companies May Impede our Ability to Recover
Losses
The recent financial crisis has led certain major insurance companies to the verge of bankruptcy. We have
property, casualty and financial institution risk coverage underwritten by several insurance companies, who may
not avoid the insolvency risk permeating in the insurance industry. In addition, some of our investment in
obligations of state and political subdivisions is insured by several insurance companies. While we closely monitor
credit ratings of our insurers and insurers of our municipality securities, and we are poised to make quick changes
if needed, we cannot predict an unexpected inability to honor commitments. We also invest in bank-owned life
insurance policies on certain members of senior management, which may lose value in the event of the carriers’
insolvency. In the event that our bank-owned life insurance policy carriers’ credit ratings fall below investment
grade, we may exchange policies underwritten by them to another carrier at a cost charged by the original carrier,
or we may terminate the policies which may result in adverse tax consequences.
Our loan portfolio is also primarily secured by properties located in earthquake or fire-prone zones. In the event of
a disaster that causes pervasive damage to the region in which we operate, not only the Bank, but also the loan
collateral may suffer losses not recovered by insurance.
We Rely on Technology and Continually Encounter Technological Change
The financial services industry is continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology will enable efficiency and meeting
customer’s changing needs. Our future success depends, in part, upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy customer demands, as well as to
create additional efficiencies in our operations. Many of our competitors have substantially greater resources to
invest in technological improvements. We may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services to retain and compete for
customers. Failure to successfully keep pace with technological change affecting the financial services industry
could have a material adverse impact of the long-term aspect our business and, in turn, our financial condition
and results of operations.
We May Experience a Breach in Security
Our business requires the secure handling of sensitive client information. We also rely heavily on communications
and information systems to conduct our business. A breach of security in the Bank, at our vendors or customers,
or widely publicized breaches of other financial institutions could significantly harm our reputation, result in a loss
of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible
financial liability. While we have systems and procedures designed to prevent security breaches, we cannot be
certain that advances in criminal capabilities, physical system or network break-ins or inappropriate access will
not compromise or breach the technology protecting our networks or proprietary client information.
We Rely on Third-Party Vendors for Important Aspects of Our Operation
We depend on the accuracy and completeness of information provided by certain key vendors, including but not
limited to, data processing, payroll processing, technology support, investment security safekeeping and
accounting. Our ability to operate, as well as the our financial condition and results of operations, could be
negatively affected in the event of an interruption of an information system, an undetected error, or in the event of
a natural disaster whereby certain vendors are unable to maintain business continuity.
Page - 19
We May Not Be Able To Attract and Retain Key Employees
Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people
in most activities engaged by us can be intense and we may not be able to hire skilled people or retain them. We
do not currently have non-competitive agreements with any of our senior officers. The unexpected loss of services
of key personnel could have a material adverse impact on our business because of the skills, knowledge of our
market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.
Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Impact
Our Business
Our primary market is located in an earthquake-prone zone in northern California. Other severe weather or
disasters, such as severe rainstorms, wildfire or flood, could interrupt our business operations unexpectedly.
Climate-related physical changes and hazards could also pose credit risks for us. For example, our borrowers
may have collateral properties located in coastal areas at risk to rise in sea level. The properties pledged as
collateral on our loan portfolio could also be damaged by tsunamis, floods, earthquake or wildfires and thereby
the recoverability of our loan could be impaired. A number of factors affect our credit losses, including the extent
of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment
and other economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay
their loans, and the cost of collection and foreclosure to us. Lastly, there could be increased insurance premiums
and deductibles, or a decrease in the availability of coverage, due to severe weather-related losses. The ultimate
impact on our business of a natural disaster, whether or not caused by climate change, is difficult to predict.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease our corporate headquarters building, which houses our primary loan production, operations, and
administrative offices, in Novato, California. We also lease other branch or office facilities within our primary
market areas in the cities of Corte Madera, San Rafael, Novato, Sausalito, Mill Valley, Greenbrae, Petaluma,
Santa Rosa, Sonoma, Napa and San Francisco, California. We consider our properties to be suitable and
adequate for our present needs. For additional information on properties, see Notes 5 and 13 to the Consolidated
Financial Statements included in Item 8 of this Form 10-K.
ITEM 3.
LEGAL PROCEEDINGS
There are no pending, or to Management’s knowledge any threatened, material legal proceedings to which we
are a party, or to which any of our properties are subject. There are no material legal proceedings to which any
director, any nominee for election as a director, any executive officer, or any associate of any such director,
nominee or officer is a party adverse to us.
We are responsible for our proportionate share of certain litigation indemnifications provided to Visa U.S.A. by its
member banks in connection with lawsuits related to anti-trust charges and interchange fees. For further details,
see Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
ITEM 4. REMOVED AND RESERVED
Page - 20
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Bancorp common stock trades on the NASDAQ Capital Market under the symbol BMRC. At February 28, 2011,
5,300,685 shares of Bancorp’s common stock, no par value, were outstanding and held by approximately 2,300
holders of record. The following table sets forth, for the periods indicated, the range of high and low sales prices
of Bancorp’s common stock.
Calendar
Quarter
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2010
High
33.60
36.14
35.50
36.00
$
$
$
$
$
$
$
$
Low
29.19
30.80
30.08
31.69
$
$
$
$
2009
High
24.44
29.25
33.81
35.75
Low
$ 17.01
$ 21.10
$ 26.55
$ 30.20
The table below shows cash dividends paid to common shareholders on a quarterly basis in the last two fiscal
years.
Calendar
Quarter
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2010
2009
Per Share
0.15
0.15
0.15
0.16
$
$
$
$
Dollars
785,000
787,000
789,000
844,000
$
$
$
$
Per Share
0.14
$
0.14
$
0.14
$
0.15
$
Dollars
$ 722,000
$ 724,000
$ 730,000
$ 784,000
For additional information regarding our ability to pay dividends, see discussion in Note 9 to the Consolidated
Financial Statement, under the heading “Dividends,” in Item 8 of this report.
During the first nine months of 2008, Bancorp repurchased 88,316 shares at an average price of $28.55, plus
commissions, for a total cost of $2.5 million. In September 2008, the repurchases were discontinued to preserve
capital during a time of extreme economic turbulence.
There were no purchases made by or on behalf of Bancorp or any “affiliated purchaser” (as defined in Rule 10b-
18(a)(3) under the Securities Exchange Act of 1934), of the Bancorp’s common stock during the fourth quarter of
2010.
On July 2, 2007, Bancorp executed a shareholder rights agreement (“Rights Agreement”) designed to discourage
takeovers that involve abusive tactics or do not provide fair value to shareholders. Refer to Exhibit 4.1 to
Registration Statement on Form 8-A12B filed with the Securities and Exchange Commission on July 2, 2007.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information as of December 31, 2010, with respect to equity compensation plans.
All plans have been approved by the shareholders.
Equity compensation plans approved by shareholders
(A)
Shares to be
issued upon
exercise of
outstanding
options
317,8041 $
(B)
(C)
Weighted average
exercise price of
outstanding
options
29.27
Shares available
for future issuance
(Excluding shares
in column A)
499,5842
1 Represents shares of common stock issuable upon exercise of outstanding options under the Bank of Marin
1990 Stock Option Plan, the Bank of Marin 1999 Stock Option Plan and the Bank of Marin Bancorp 2007 Equity
Plan.
2 Represents shares of common stock available for future grants under the 2007 Equity Plan and the 2010
Director Share Plan.
Page - 21
Stock Price Performance Graph
The following graph, provided by Keefe, Bruyette, & Woods, Inc., shows a comparison of cumulative total
shareholder return on our common stock during the five fiscal years ended December 31, 2010 compared to
Russell 2000 Stock index and peer group index of other financial institutions. We have been part of the Russell
2000 index since July 2009. The comparison assumes $100 was invested on December 31, 2005 in our common
stock and all of the dividends were reinvested. The performance graph represents past performance and should
not be considered to be an indication of future performance. Ticker symbol BMRC represents the common stock
of Bank of Marin Bancorp subsequent to its formation July 1, 2007 and represents the common stock of Bank of
Marin for periods prior to the formation of the bank holding company.
Indexed Five Year Total Return
)
%
(
s
e
c
i
r
P
d
e
x
e
d
n
I
140
120
100
80
60
40
20
0
2005
2006
2007
2008
2009
2010
Bank of Marin
Peer Group*
Russell 2000
BMRC
Peer Group1
Russell 2000
2005
100
100
100
2006
111
109
118
2007
90
69
117
2008
74
35
77
2009
101
21
98
2010
108
23
125
1BMRC Peer Group represents public California banks with assets between $500 million to $2 billion as of
December 31, 2010: FMCB, EXSR, AMBZ, BOCH, BBNK, CVCY, FNRN, FNBG, UBFO, SAEB, CWBC, SWBC,
CUNB, AMRB, OVLY, PFCF, FCAL, HTBK, HEOP, NOVB, PMBC, PPBI, PFBC, RCBC, BSRR. The peer group
composite index is weighted by market capitalization and reinvests dividends on the ex-date and adjusts for stock
splits, if applicable.
Source: Company Reports, FactSet, and SNL
Page - 22
ITEM 6. SELECTED FINANCIAL DATA
As of For the Year Ended
December 31,
(Dollars in thousands, except per
share data)
At December 31
Total assets
Total loans
Total deposits
Total stockholders’ equity
Equity-to-asset ratio
2010
2009
2008
2007
2006
$ 1,208,150 $ 1,121,672 $ 1,049,557 $ 933,901 $ 876,578
719,778
736,697
89,525
941,400
1,015,739
121,920
724,878
834,642
87,774
917,748
944,061
109,051
890,544
852,290
125,546
10.1%
9.7%
12.0%
9.4%
10.2%
For year ended December 31
$
54,909 $
52,567 $
48,359 $ 42,742 $ 41,733
5,350
5,521
33,357
13,552
5,510
5,182
31,696
12,765
5,010
5,356
28,677
12,150
685
5,718
27,673
12,324
1,266
3,972
25,891
11,883
2009/2010
% change
7.7%
2.6%
7.6%
11.8%
3.8%
4.5%
-2.9%
6.5%
5.2%
6.2%
Net interest income
Provision for loan
losses
Non-interest income
Non-interest expense
Net income
Net income per share
(diluted)
Cash dividend payout ratio
on common stock 1
2.55
2.19
2.31
2.31
2.11
16.4%
23.6%
25.8%
23.9%
21.4%
20.8%
-8.5%
1 Calculated as dividends on common share divided by basic net income per common share.
Page - 23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2010 and 2009 and results of operations for
each of the years in the three-year period ended December 31, 2010 should be read in conjunction with our
consolidated financial statements and related notes thereto, included in Part II Item 8 of this report. Average
balances, including balances used in calculating certain financial ratios, are generally comprised of average daily
balances.
Forward-Looking Statements
The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-
Looking Statements and Item 1A captioned Risk Factors of this report and other cautionary statements set forth
elsewhere in the report.
Executive Summary
We reported record annual earnings of $13.6 million in 2010, an increase of $787 thousand, or 6.2% from $12.8
million a year ago. Earnings growth reflects a lower level of credit losses, continued focus on cost controls, and
growth in interest earning assets. Our continued focus on responsible community banking fundamentals and our
strong customer relationships has led to higher deposits, a core funding source for our loan portfolio. Deposit
growth in 2010 was substantial at $71.7 million, or 7.6%, over a year ago without compromising our pricing
discipline. Demand deposits grew $51.6 million or 22.4% over a year ago and comprised 27.8% of total deposits
at December 31, 2010.
Diluted earnings per share for the year ended December 31, 2010 totaled $2.55, up $0.36 from $2.19 in the prior
year. 2009 diluted earnings per share were reduced by $0.25 related to Bancorp’s participation and withdrawal
from the TCPP and $0.06 related to an FDIC special assessment, as discussed later.
We are committed to actively lend with a focus in our local community. Total loans reached $941.4 million at
December 31, 2010, representing an increase of $23.7 million, or 2.6%, over December 31, 2009. This growth
primarily reflects growth in our San Francisco and Santa Rosa markets and represents an increase in commercial
real estate loans, partially offset by decreases in construction and commercial loans.
Our focus on prudent lending standards, proactive management of credit risk and discipline in operating within
markets that we know have kept our loan losses to a minimal level. Non-accrual loans totaled $12.9 million, or
1.37% of the Bank’s loan portfolio at December 31, 2010, compared to $11.6 million or 1.26% a year ago.
Accruing loans past due 30 to 89 days decreased to $352 thousand at December 31, 2010 from $835 thousand a
year ago.
The provision for loan losses totaled $5.4 million and $5.5 million in 2010 and 2009, respectively. The allowance
for loan losses of $12.4 million totaled 1.32% of loans at December 31, 2010 compared to $10.6 million or 1.16%
at December 31, 2009. The increase in the allowance for loan losses as a percentage of loans reflects a higher
level of non-performing loans and the related specific reserves. Net charge-offs in 2010 decreased to $3.6 million
in 2010 from $4.8 million in 2009, and primarily related to construction loans secured by real property where the
value of collateral has declined. Net loans charged off in 2010 represent 0.38% of average loans compared to
0.53% in 2009.
On March 31, 2009, Bancorp repurchased all 28,000 shares of outstanding preferred stock issued in December
2008 under the TCPP program. We determined that continued participation in the TCPP was not in the best
interest of our common shareholders, customers or our employees, and it would impede our ability to compete
after the U.S government’s actions, interpretations, and commentary regarding various aspects of the TCPP
program. The warrant issued to the U.S. Treasury to purchase 154,242 shares of our common stock remains
outstanding.
Page - 24
After the repurchase of the preferred stock under the TCPP, we continued to grow our capital during 2009 and
2010. The total risk-based capital ratio for Bancorp at December 31, 2010 totaled 13.3% compared to 12.3% at
December 31, 2009, exceeding industry standards for being well-capitalized.
The tax-equivalent net interest margin was 4.95% in 2010 compared to 5.17% in 2009. Decreases in the tax-
equivalent net interest margin were primarily due to lower yields on investment securities (as a result of increased
prepayments and lower yields on recent purchases) and a shift in the relative composition of interest-earning
assets from higher-yielding loans to lower-yielding cash held at the Federal Reserve Bank and other short-term
investments. The excess liquidity from deposit inflows has not been deployed fully into higher yielding loans as
the banking industry as a whole is experiencing challenges with loan demand from qualified borrowers.
The largest factors likely to affect our net interest margin in 2011 will be our ability to generate profitable loans to
creditworthy borrowers, as well as our responsiveness to competitive pricing on loans and deposits in our market.
In the current environment of historically low short-term interest rates, it is imperative for us to continue to mitigate
exposure to potential increases in interest rates. If interest rates increase, we anticipate that net interest income
will rise. The increase in interest income from asset repricing may be partially offset by deposit rate sensitivity.
Additionally, it may take several upward market rate movements for variable rate loans at floors to move above
the floor rates. As such, if interest rates increase by less than 100 basis points, we anticipate little impact on our
net interest income. Further, we expect loan demand to continue to be challenging due to the uncertain economic
climate and the intensifying competition for creditworthy borrowers, both of which could lead to loan rate
concession pressure and could impact our ability to generate profitable loans.
As discussed in Note 19, the Bank acquired certain assets and assumed certain liabilities of Napa-based Charter
Oak Bank on February 18, 2011. This transaction was completed under a modified whole-bank purchase and
assumption agreement with the FDIC without loss share. At December 31, 2010, Charter Oak Bank reported
gross loans totaling $107.0 million and deposits totaling $105.3 million. The purchase price reflects an asset
discount of $19.8 million and no deposit premium. Loans at the former Charter Oak Bank’s book values totaling
approximately $28.5 million as of the bid valuation date (October 18, 2010) were retained by the FDIC. The
excluded loans mainly represent loans delinquent more than sixty days or more as of the bid valuation date and
certain types of land and construction loans. Balances are subject to change based upon the activities between
the bid valuation date and the purchase date. The assets acquired and liabilities assumed are also subject to fair
value adjustments in accordance with FASB ASC 805, Business Combinations upon finalizing the valuation
process.
We have also expanded our community banking footprint into Sonoma County. On October 14, 2010, the Bank
opened a loan production office in Santa Rosa, which will be converted to a full service commercial banking office
in the second quarter of 2011. In addition, in December 2010, the Bank signed a lease for a branch in downtown
Sonoma. This office is expected to open by mid-summer 2011.
We expect our non-interest expenses to continue to increase in 2011 as we continue our expansion into Sonoma
and Napa counties. We expect that these strategic initiatives will contribute to our profitability in the long term.
Critical Accounting Policies
Critical accounting policies are those that are both most important to the portrayal of our financial condition and
results of operations and require Management’s most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain.
Management has determined the following five accounting policies to be critical: Allowance for Loan Losses,
Other-than-temporary Impairment of Investment Securities, Share-Based Payment, Accounting for Income Taxes
and Fair Value Measurements.
Page - 25
Allowance for Loan Losses
Allowance for loan losses is based upon estimates of loan losses and is maintained at a level considered adequate to
provide for probable losses inherent in the outstanding loan portfolio. The allowance is increased by provisions charged
to expense and reduced by net charge-offs. In periodic evaluations of the adequacy of the allowance balance,
Management considers our past loan loss experience by type of credit, known and inherent risks in the portfolio,
adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral,
current economic conditions and other factors. We formally assess the adequacy of the allowance for loan losses on a
quarterly basis. These assessments include the periodic re-grading of loans based on changes in their individual credit
characteristics including delinquency, seasoning, recent financial performance of the borrower, economic factors,
changes in the interest rate environment, and other factors as warranted. Loans are initially graded when originated.
They are reviewed as they are renewed, when there is a new loan to the same borrower and/or when identified facts
demonstrate heightened risk of default. Confirmation of the quality of our grading process is obtained by independent
reviews conducted by outside consultants specifically hired for this purpose and by periodic examination by various
bank regulatory agencies. Management monitors delinquent loans continuously and identifies problem loans to be
evaluated individually for impairment testing. For loans that are determined impaired, formal impairment measurement
is performed at least quarterly on a loan-by-loan basis.
Our method for assessing the appropriateness of the allowance includes specific allowances for identified problem
loans, an allowance factor for categories of credits, and allowances for changing environmental factors (e.g., portfolio
trends, concentration of credit, growth, economic factors). Allowances for identified problem loans are based on specific
analysis of individual credits. Loss estimation factors for loan categories are based on an analysis of local economic
factors applicable to each loan category, including consideration of the Bank’s historical charge-off history. Allowances
for changing environmental factors are Management’s best estimate of the probable impact these changes have had on
the loan portfolio as a whole.
Other-than-temporary Impairment of Investment Securities
At each financial statement date, we assess whether declines in the fair value of held-to-maturity and available-for-sale
securities below their costs are deemed to be other than temporary. We consider, among other things, (i) the length of
time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects
of the issuer, and (iii) our intent and ability to retain the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. Evidence evaluated includes, but is not limited to, the remaining payment terms of the
instrument and economic factors that are relevant to the collectability of the instrument, such as: current prepayment
speeds, the current financial condition of the issuer(s), industry analyst reports, credit ratings, credit default rates,
interest rate trends and the value of any underlying collateral. Credit-related other-than-temporary-impairment results in
a charge to earnings and the corresponding establishment of a new cost basis for the security. Non-credit-related other-
than-temporary impairment results in a charge to other comprehensive income, net of applicable taxes, and the
corresponding establishment of a new cost basis for the security. The other-than-temporary impairment recognized in
other comprehensive income for debt securities classified as held-to-maturity is accreted from other comprehensive
income to the amortized cost of the debt security over the remaining life of the debt security in a prospective manner on
the basis of the amount and timing of future estimated cash flows.
Share-Based Payment
We recognize all share-based payments, including stock options and non-vested restricted common shares, as an
expense in the statement of income based on the grant-date fair value of the award with a corresponding increase to
common stock.
We determine the fair value of stock options at the grant date using the Black-Scholes pricing model that takes into
account the stock price at the grant date, the exercise price, the expected dividend yield, stock price volatility and the
risk-free interest rate over the expected life of the option. The Black-Scholes model requires the input of highly
subjective assumptions, including the expected life of the stock-based award (derived from historical data on employee
exercise and post-vesting employment termination behavior) and stock price volatility (based on the historical volatility
of the common stock). The estimates used in the model involve inherent uncertainties and the application of
Management’s judgment. As a result, if other assumptions had been used, our recorded stock-based compensation
expense could have been materially different from that reflected in these financial statements. The fair value of non-
vested restricted common shares generally equals the stock price at grant date. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for those share-based awards expected to vest. If our actual
forfeiture rate is materially different from the estimate, the share-based compensation expense could be materially
different.
Page - 26
Accounting for Income Taxes
Income taxes reported in the financial statements are computed based on an asset and liability approach. We
recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities
for the expected future tax consequences that have been recognized in the financial statements. Under this
method, deferred tax assets and liabilities are determined based on the differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. We record net deferred tax assets to the extent it is more likely than not that
they will be realized. In evaluating our ability to recover the deferred tax assets, Management considers all
available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future
taxable income, tax planning strategies and recent financial operations. In projecting future taxable income,
Management develops assumptions including the amount of future state and federal pretax operating income, the
reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These
assumptions require significant judgment about the forecasts of future taxable income and are consistent with the
plans and estimates being used to manage the underlying business. Bancorp files consolidated federal and
combined state income tax returns.
We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical
merits, that the position will be sustained upon examination. For tax positions that meet the more-likely-than-not
threshold, we may recognize only the largest amount of tax benefit or least amount of tax expense that is greater
than fifty percent likely of being realized upon ultimate settlement with the taxing authority. Management believes
that all of our tax positions taken meet the more-likely-than-not recognition threshold. To the extent tax authorities
disagree with these tax positions, our effective tax rates could be materially affected in the period of settlement
with the taxing authorities.
Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine
fair value disclosures. We base our fair values on the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. Securities
available for sale, derivatives, and loans held for sale, if any, are recorded at fair value on a recurring basis.
Additionally, from time to time, we may be required to record certain assets at fair value on a non-recurring basis,
such as certain impaired loans held for investment and securities held to maturity that are other-than-temporarily
impaired. These non-recurring fair value adjustments typically involve write-downs of individual assets due to
application of lower-of-cost or market accounting.
We have established and documented a process for determining fair value. We maximize the use of observable
inputs and minimize the use of unobservable inputs when developing fair value measurements. Whenever there
is no readily available market data, Management uses its best estimate and assumptions in determining fair
value, but these estimates involve inherent uncertainties and the application of Management’s judgment. As a
result, if other assumptions had been used, our recorded earnings or disclosures could have been materially
different from those reflected in these financial statements. For detailed information on our use of fair value
measurements and our related valuation methodologies, see Note 10 to the Consolidated Financial Statements in
Item 8 of this Form 10-K.
Page - 27
RESULTS OF OPERATIONS
Overview
Highlights of the financial results are presented in the following table:
(Dollars in thousands, except per share data)
For the period:
Net income
Net income per share
Basic
Diluted
Return on average equity
Return on average assets
Common stock dividend payout ratio
Efficiency ratio
At period end:
Book value per common share
Total assets
Total loans
Total deposits
Loan-to-deposit ratio
$
$
$
As of and for the years ended December 31,
2010
2009
2008
13,552
$
12,765
$
12,150
$
2.59
2.55
$
11.67%
1.14%
23.55%
55.20%
$
2.21
2.19
$
11.46%
1.16%
25.79%
54.89%
2.34
2.31
12.73%
1.28%
23.93%
53.39%
$
23.05
$ 1,208,150
$
941,400
$ 1,015,739
$
20.85
$ 1,121,672
917,748
$
944,061
$
92.68%
$
19.14
$ 1,049,557
890,554
$
$
852,290
97.21%
104.49%
Summary of Quarterly Results of Operations
Table 1 sets forth the quarterly results of operations for 2010 and 2009:
Table 1 Summarized Statement of Income
(Dollars in thousands, unaudited)
Interest income
Interest expense
Net interest income
Provision for loan losses
Dec. 31
$ 15,364
1,305
14,059
1,050
Sept. 30 Jun. 30
Mar. 31 Dec. 31
$ 15,601 $ 15,505
1,748
13,757
1,350
1,636
13,965
1,400
$ 14,887
1,759
13,128
1,550
$ 15,204
1,814
13,390
2,525
Sept. 30
$ 15,116
1,780
13,336
1,100
Jun. 30
$ 14,837
1,804
13,033
700
Mar. 31
$ 14,577
1,769
12,808
1,185
2010 Quarters Ended
2009 Quarters Ended
Net interest income after provision for
loan losses
Non-interest income
Non-interest expense
13,009
1,360
8,037
12,565
1,307
8,507
12,407
1,505
8,591
11,578
1,349
8,222
10,865
1,341
7,763
12,236
1,331
7,776
12,333
1,273
8,600
11,623
1,237
7,557
Income before provision for income
taxes
Provision for income taxes
Net income
Preferred stock dividends and
accretion
Net income available to common
6,332
2,424
$ 3,908
5,365
2,006
5,321
1,983
$ 3,359 $ 3,338
4,705
1,758
$ 2,947
$
4,443
1,641
2,802
5,791
2,190
$ 3,601
5,006
1,873
$ 3,133
5,303
2,074
3,229
$
---
---
---
---
---
---
---
$ (1,299)
stockholders
$ 3,908
$ 3,359 $ 3,338
$ 2,947
$
2,802
$ 3,601
$ 3,133
$
1,930
Net income per common share
Basic
Diluted
$
$
0.74
0.73
$
$
0.64 $
0.63 $
0.64
0.63
$
$
0.56
0.56
$
$
0.54
0.53
$
$
0.69
0.68
$
$
0.61
0.60
$
$
0.38
0.37
Page - 28
Net Interest Income
Net interest income is the difference between the interest earned on loans, investments and other interest-earning
assets and the interest expense incurred 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. Interest rate changes can create fluctuations in the net interest
margin due to an imbalance in the timing of repricing or maturity of assets or liabilities. We manage interest rate
risk exposure with the goal of minimizing the impact of interest rate volatility on net interest margin.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest
rate spread is the difference between the average rate earned on total interest-earning assets and the average
rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent
basis. Net interest margin is 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 average interest-earning assets with interest expense and average interest-bearing liabilities for the
three years ended December 31, 2010, 2009 and 2008. The table also indicates net interest income, net interest
margin and net interest rate spread for each period presented.
Table 2 Distribution of Average Statements of Condition and Analysis of Net Interest Income
Average Statements of Condition and Analysis of Net Interest Income
(Dollars in thousands; unaudited)
Assets
Interest-bearing due from banks (1)
Federal funds sold
Investment securities
U.S. Government agencies (2)
Corporate CMOs and other (2)
Obligations of state and political subdivisions (3)
Loans and banker’s acceptances (1) (3) (4)
Total interest-earning assets (1)
Cash and non-interest-bearing due from banks
Bank premises and equipment, net
Interest receivable and other assets, net
Total assets
Liabilities and Stockholders’ Equity
Interest-bearing transaction accounts
Savings accounts
Money market accounts
CDARS® time accounts
Other time accounts
Overnight borrowings (1)
FHLB fixed-rate advances
Subordinated debenture (1)
Total interest-bearing liabilities
Demand accounts
Interest payable and other liabilities
Stockholders’ equity
Total liabilities & stockholders’ equity
Tax-equivalent net interest income/margin (1)
Reported net interest income/margin
Tax-equivalent net interest rate spread
2010
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2009
Average
Balance
Interest
Income/
Expense
Yield/
Rate
Average
Balance
2008
Interest
Income/
Expense
Yield/
Rate
$
43,028
3,049
$
143
2
0.33% $
0.07
164 $
1,752
1
4
0.60% $
0.23
---
4,212
$
---
138
---%
3.22
91,869
13,675
30,893
929,755
1,112,269
34,383
8,259
31,262
$ 1,186,173
$
98,168
51,738
390,575
71,432
124,631
2
55,000
5,000
796,546
263,742
9,791
116,094
$ 1,186,173
3,234
593
1,741
56,542
62,255
3.52
4.34
5.64
6.00
5.52
70,268
7,397
29,221
910,456
1,019,258
46,954
8,140
26,041
$ 1,100,393
3,304
506
1,677
55,071
60,563
4.70
6.84
5.74
5.97
5.86
72,606
6,124
19,541
798,369
900,852
21,990
8,354
17,325
$ 948,521
3,555
273
1,106
54,475
59,547
4.90
4.46
5.66
6.82
6.61
$
110
104
2,467
842
1,495
---
1,281
149
6,448
115
94
3,235
721
1,541
28
1,253
180
7,167
0.11% $
0.20
0.63
1.18
1.20
0.29
2.33
2.94
0.81
90,159 $
45,944
391,571
51,248
97,924
10,659
53,794
5,000
746,299
232,502
9,873
111,359
$ 1,100,033
0.13% $ 78,672
40,238
0.20
390,383
0.83
9,039
1.41
83,735
1.57
15,629
0.26
14,440
2.33
5,000
3.55
637,136
0.96
208,320
7,624
95,441
$ 948,521
$ 55,807
$ 54,909
4.95%
4.87%
4.71%
$ 53,396
$ 52,567
5.17%
5.09%
4.90%
$
344
300
6,610
200
2,466
295
306
296
10,817
$ 48,730
$ 48,359
0.44%
0.75
1.69
2.21
2.95
1.89
2.12
5.92
1.70
5.41%
5.37%
4.91%
(1) Interest income/expense is divided by actual number of days in the period times 360 days to correspond to
stated interest rate terms, where applicable.
(2) Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value,
as changes in fair value are reflected as a component of stockholders’ equity.
(3) Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis
using the Federal statutory rate of 35 percent.
(4) Average balances on loans outstanding include non-performing loans. The amortized portion of net loan
origination fees is included in interest income on loans, representing an adjustment to the yield.
Page - 29
2010 Compared with 2009:
Tax equivalent net interest income totaled $55.8 million and $53.4 million for the years ended December 31, 2010
and 2009, respectively. The $2.4 million or 4.5% increase was due to an increase in volume of interest-earning
assets, offset by the effect of lower yields on investment securities.
Average interest-earning assets increased $93.0 million, or 9.1%, in 2010 compared to 2009. This included
increases in average interest-bearing due from banks of $42.9 million, average investment securities of $29.6
million and average loan growth of $19.3 million. In October 2010, we opened our Santa Rosa loan production
office, which is expected to position the Bank for additional loan growth, particularly in commercial and industrial
loans.
The tax-equivalent net interest margin decreased to 4.95% in 2010, down twenty-two basis points from 2009. The
decrease in the tax-equivalent net interest margin was primarily due to lower yields on investment securities (as a
result of increased prepayments and lower yields on recent additions) and a shift in the relative composition of
interest-earning assets from higher-yielding loans to lower-yielding interest-bearing due from banks. The excess
liquidity from deposit inflows has not yet been deployed into funding new loans, as the banking industry as a
whole is experiencing challenges with loan demand and the competition for qualified borrowers intensified. The
net interest spread decreased nineteen basis points from the same period last year for the same reasons.
The average balance of interest-bearing liabilities increased $50.2 million, or 6.7%, in 2010 compared to 2009.
The increases are pervasive in all categories of deposit accounts except money market accounts, with the most
significant increase in time deposits (including CDARS®), which increased $46.9 million. These increases were
partially offset by a decrease in overnight borrowings of $10.7 million. We have experienced a shift in the relative
composition of interest-bearing deposits in 2010 compared to 2009 as the proportion of higher-costing time
accounts has increased, while the proportion of money market deposit accounts has decreased.
Market interest rates are in part based on the target Federal funds interest rate (the interest rate banks charge
each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee. In
December of 2008, the target interest rate was brought to a historic low with a range of 0% to 0.25% where it
remains as of December 31, 2010.
The yield on the loan portfolio, which comprised 83.6% and 89.3% of average earning assets in 2010 and 2009,
respectively, increased three basis points in 2010 compared to 2009. This is mainly due to the shift in the mix of
loans from construction and commercial loans to higher-yielding commercial real estate loans. Interest foregone
on non-accrual loans represented a seven-basis point reduction to the net interest margin in both 2010 and 2009.
The lower yields on investment securities are a result of increased prepayments resulting in accelerated
amortization of premiums, and lower yields on recently purchased securities. The yield on private-label CMOs,
agency securities and municipal bonds decreased 250 basis points, 118 basis points and ten basis points,
respectively, in 2010.
The rate on interest-bearing liabilities decreased fifteen basis points in 2010 compared to 2009, primarily
reflecting lower offering rates on money market accounts, as well as the downward re-pricing of time deposits as
they mature. In 2010, the rate on other time deposits, CDARS®, and money market accounts decreased thirty-
seven basis points, twenty-three basis points, and twenty basis points, respectively. The rate on the subordinated
debenture dropped sixty-one basis points due to a decline in the three-month LIBOR rate, to which the debenture
rate is indexed.
2009 Compared with 2008:
The tax-equivalent net interest margin decreased to 5.17% in 2009, down twenty-four basis points from 2008. The
decrease in the net interest margin was primarily due to the repricing of our loan portfolio in a declining rate
environment, and to a lesser extent, interest foregone on non-accrual loans (representing a seven-basis-point
impact on the net interest margin in 2009 versus a two-basis-point effect in 2008).
Page - 30
The net interest rate spread in 2009 is consistent with 2008, reflecting a decrease of seventy-five basis points in
the yield on interest-earning assets and a decline of seventy-four basis points in the cost of interest-bearing
liabilities.
In 2008, there were seven downward adjustments to the target Federal funds rate totaling 325 basis points,
bringing the target interest rate to a historic low with a range of 0% to 0.25%. Market rate changes have a more
immediate effect on deposit rates than on loan yields due to our fixed-rate loans (see Table 10 below for our fixed
vs. variable loans distribution). In addition, the large majority of our variable loans are tied to the U.S. Treasury
Constant Maturity Indices with repricing intervals between one year to five years. The yield on the loan portfolio,
which comprised approximately 89% of average earning assets in both 2009 and 2008, decreased eighty-five
basis points in 2009 due to the downward repricing of variable-rate loans and new loans originated at lower
market rates, as well as maturities and pay downs of higher yielding loans.
The yield on agency securities in 2009 decreased twenty basis points from 2008, mainly reflecting a tighter
spread between agency yields and Treasury rates on newly purchased agency securities due to the stabilization
of the MBS market in 2009 and increased prepayments of higher-yielding securities which accelerated the
amortization of premiums.
Average interest-earning assets increased $118.4 million, or 13.1%, in 2009 compared to 2008. The increase
primarily relates to average loan growth of $112.1 million and an increase in average investment securities of $8.6
million, partially offset by a $2.3 million decline in average Federal funds sold. There was no significant shift in the
mix of interest-earning assets in 2009.
The overall cost of liabilities is affected by offered rates and the mix of deposits and other liabilities. The overall
rate on interest-bearing liabilities decreased seventy-four basis points in 2009 over 2008. The rate on savings and
money market accounts, CDARS®, and time deposits decreased 84 basis points, 80 basis points, and 138 basis
points, respectively, in 2009 compared to 2008, reflecting lower offered rates on deposits in response to lower
market rates.
The average balance of interest-bearing liabilities increased $109.2 million, or 17.1%, in 2009 compared to 2008.
The increases are pervasive in all categories of interest-bearing liabilities, most notably in CDARS® deposits and
purchased funds, which increased $42.2 million and $34.4 million respectively in 2009. Late in the first quarter of
2008, we began to offer CDARS®, a network through which the Bank offers FDIC insurance coverage in excess of
the current $250 thousand regulatory maximum by placing deposits in multiple banks participating in the network.
CDARS® contributed to an increase in average deposits of $42.2 million in 2009. We experienced a shift in the
relative mix of interest-bearing liabilities in 2009 compared to 2008: the proportion of higher-costing liabilities
(mainly CDARS® and purchased funds) has increased from 6.1% of interest-bearing liabilities in 2008 to 15.5% in
2009, while the proportion of money market deposit accounts has decreased from 61.3% in 2008 to 52.5% in
2009.
Page - 31
Table 3, Analysis of Changes in Net Interest Income, separates the change in net interest income into two
components: 1 volume – change caused by increases or decreases in the average asset and liability balances
outstanding, and 2 yield/rate – changes in average yields on earning assets and average rates for interest-
bearing liabilities.
Table 3 Analysis of Changes in Net Interest Income
(Dollars in thousands)
Assets
Interest-bearing due from banks
Federal funds sold
Investment securities
U. S. Government agencies
Obligations of state and political
subdivisions
Municipal bonds2
Corporate CMO
Loans and bankers’ acceptances2
Total interest-earning assets
Liabilities
Interest-bearing transaction accounts
Savings accounts
Money market accounts
CDARS® time deposits
Other time accounts
Overnight borrowings
FHLB fixed-rate advances
Subordinated debenture
Total interest-bearing liabilities
Tax-equivalent net interest income
2010 compared to 2009
2009 compared to 2008
Volume
Yield/
Rate1
Total
Volume
Yield/
Rate1
Total
$
142 $
1
- $
(3)
142 $
(2)
1 $
(6)
- $
(128)
1
(134)
760
(830)
(70)
(112)
(139)
(251)
272
94
1,174
2,443
87
(185)
64
(30)
1,471
297
(751) 1,692
65
556
7,521
8,025
233
168
571
15
596
(6,925)
(7,009) 1,016
9
12
(6)
238
320
(31)
28
-
570
$ 1,873 $
(14)
(2)
(762)
(117)
(366)
3
-
(31)
(1,289)
(5)
10
(768)
121
(46)
(28)
28
(31)
(719)
538 $ 2,411 $
(273)
(218)
(229)
44
(206)
12
(3,385) (3,375)
10
521
619
(925)
366
(267)
(13)
947
917
(116)
-
1,955
(5,605) (3,650)
6,070 $ (1,404) $ 4,666
(98)
(1,291)
(254)
30
(116)
1 The changes for each category of interest income and expense are divided between the portion of change
attributable to the variance in volume and the portion of change attributable to the variance in rate for that
category. The unallocated change in rate or volume variance has been allocated between the rate and volume
variances on a pro rata basis.
2 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis
using the Federal statutory rate of 35 percent.
The table indicates that in 2010 and 2009, our net interest income was favorably affected by an increase in the
volume of interest-earning assets, partially offset by declines in yields. The decline in our asset yields in 2010
reflected the lower returns on investment securities discussed previously, while the decline in 2009 reflected the
downward repricing of our variable loans as their indexed rates reset. Further, net interest income in both 2010
and 2009 benefitted from lower rates on deposits, especially money market and time accounts.
Page - 32
Provision for Loan Losses
Management assesses the adequacy of the allowance for loan losses on a quarterly basis based on several
factors including growth of the loan portfolio, analysis of probable losses in the portfolio, recent loss experience
and the current economic climate. Actual losses on loans are charged against the allowance, and the allowance is
increased through the provision for loan losses charged to expense to bring the allowance to a level, based on
Management’s best judgment, to absorb probable losses inherent in the existing loan portfolio. For further
discussion, see the section captioned “Critical Accounting Policies.”
Our provision for loan losses totaled $5.4 million in 2010 compared to $5.5 million in 2009, which was relatively
unchanged. See the section captioned “Allowance for Loan Losses” below for further analysis of the provision for
loan losses.
Non-interest Income
The table below details the components of non-interest income.
Table 4 Significant Components of Non-interest Income
(Dollars in thousands)
Years Ended
December 31,
2009
2010
2008
2010 compared to 2009
Percent
Amount
Increase
Increase
(Decrease)
(Decrease)
2009 compared to 2008
Percent
Amount
Increase
Increase
(Decrease)
(Decrease)
Service charges on deposit accounts
Wealth Management and Trust
$ 1,797 $ 1,782 $ 1,654 $
Services
1,521
1,383
1,292
Net gain on redemption of shares in Visa,
Inc.
Other non-interest income
Earnings on Bank owned life
insurance
Customer banking fees and other
charges
Merchant interchange income
Other income
Total other non-interest income
Total non-interest income
NM - Not Meaningful
2010 Compared with 2009:
---
---
457
690
696
640
606
578
329
2,203
466
474
381
2,017
$ 5,521 $ 5,182 $ 5,356 $
409
329
575
1,953
15
138
---
(6)
140
104
(52)
186
339
0.8% $
128
7.7%
10.0
---
(0.8)
30.0
21.9
(13.6)
9.2
6.5% $
91
(457 )
56
57
145
(194 )
64
(174 )
7.0
NM
8.8
13.9
44.1
(33.7)
3.3
(3.2%)
When comparing 2010 to 2009, service charge income on deposit accounts remained relatively unchanged.
The increase in Wealth Management and Trust Services (“WMTS”) income is due to higher estate settlement and
trust-services fees received in 2010, as well as the increase in assets under management. As of December 31,
2010 and 2009, assets under management totaled approximately $254.0 million and $252.5 million, respectively.
The increase in customer banking fees, and other charges, is primarily due to higher Visa® debit card fees,
attributable to a higher volume of Visa® debit card usage, as well as a Bank-wide Visa® debit card promotion
program. As previously discussed in Item 1A Risk Factors, in December 2010, the Federal Reserve proposed a
new regulation to restrict interchange fees charged for debit card transactions by card issuers over $10 billion in
asset size. Because of the uncertainty of the final outcome of the proposed rule, and its effect on the market
pricing of the interchange fees, we can not quantify the ultimate impact of this proposal on our Visa® debit card
fees.
Merchant interchange income increased due to the higher transaction volume from our merchant customers as
well as one-time billing adjustments. The decrease in other non-interest income is mainly due to a decrease in
miscellaneous income, partially offset by an increase in the dividend received on Federal Home Loan Bank of San
Francisco (“FHLB”) stock.
Page - 33
2009 Compared with 2008:
In 2008, the mandatory redemption of a portion of our shares of Visa, Inc. generated a net gain of $457 thousand as discussed
in Note 2 to Consolidated Financial Statements in Item 8 of this report. Excluding this nonrecurring gain, non-interest income in
2009 increased $283 thousand, or 5.8%, from 2008.
The increase in service charges on deposit accounts in 2009 was primarily due to the increase in the volume of deposit
accounts.
The increase in WMTS income in 2009 primarily reflected a higher level of assets under management.
The increase in bank-owned life insurance (“BOLI”) income in 2009 is attributable to the full-year’s worth of income earned on
the $2.2 million of policies purchased in August 2008. The increase in customer banking fees in 2009 is primarily due to a
$46k increase in Visa® debit fees attributable to a higher volume of Visa® card applications resulting from a promotion, as well
as an increase in remote deposit capture fees. Merchant interchange fee income increased $145 thousand in 2009 due to
lower interchange costs charged by our data processing vendor resulting from the renegotiation of our data processing
contract. The decrease in other income in 2009 is primarily due to decreases of $164 thousand of dividends on FHLB stock
and the absence of $42 thousand in interest we received in the second quarter of 2008 on amended tax returns.
Non-interest Expense
Table 5, Significant Components of Non-interest Expense, summarizes the amounts and changes in dollars and percentages.
Our efficiency ratio (the ratio of non-interest expense divided by the sum of non-interest income and net interest income)
totaled 55.20%, 54.89%, and 53.39% in 2010, 2009 and 2008, respectively.
Table 5
Significant Components of Non-interest Expense
(Dollars in thousands)
Salaries and related benefits
Occupancy and equipment
Depreciation and
amortization
FDIC Insurance
Data processing costs
Professional services
Other non-interest expense
Advertising
Director expense
Other expense
Total other non-interest
expense
Years Ended
December 31,
2010
2009
2010 compared to 2009
Percent
Amount
Increase
Increase
(Decrease)
2008 (Decrease)
2009 compared to 2008
Amount
Increase
(Decrease)
Percent
Increase
(Decrease)
$ 18,240 $ 17,001 $ 16,097 $
3,576
3,516
3,202
1,239
60
7.3% $
1.7
904
314
1,344
1,506
1,916
1,917
459
475
3,924
1,370
1,800
1,650
1,727
528
420
3,684
1,340
507
1,825
1,600
439
444
3,223
4,858
4,632
4,106
(26)
(294)
266
190
(69)
55
240
(1.9)
(16.3)
16.1
11.0
(13.1)
13.1
6.5
30
1,293
(175)
127
89
(24)
461
226
1,661
4.9
5.2% $
526
3,019
5.6%
9.8
2.2
255.0
(9.6)
7.9
20.3
(5.4)
14.3
12.8
10.5%
Total non-interest expense
$ 33,357 $ 31,696 $ 28,677 $
2010 Compared with 2009:
The increase in salaries and benefits over the same period last year is primarily due to higher personnel-related costs
associated with branch expansion, as well as annual merit increases. The number of average FTE totaled 201 and 195 in
2010 and 2009, respectively. In addition, a rise in employee benefit rates contributed to the increase.
The increases in occupancy and equipment expense are mainly due to an increase in rent for our Greenbrae branch in its first
full-year of service in 2010, and also the new Santa Rosa loan production office, partially offset by cost savings from the
relocation of our Corte Madera branch.
The decrease in 2010 FDIC insurance is due to the absence of a special assessment totaling $496 thousand in the second
quarter of 2009, partially offset by a higher FDIC assessment rate and higher deposits. Further, we elected to participate in the
FDIC Transaction Account Guarantee Program, which provided unlimited insurance coverage on non-interest-bearing
transaction accounts defined by the FDIC, on which we paid a 10 basis point surcharge per $100 covered balances in excess
of $250 thousand through 2009. The 10 basis point surcharge on non-interest-bearing transaction accounts over $250
thousand increased to 15 basis points from January to December 2010, at which time the program expired.
Page - 34
As discussed in section the captioned “FDIC Insurance Assessments” in Item 1 Business above, on February 7,
2010, the FDIC adopted a new FDIC insurance assessment base effective in the second quarter of 2011, which is
expected to lower our FDIC insurance cost by approximately one-third annually.
The increase in data processing expense is due to process re-engineering costs, an annual contractual rate
increase, as well as the outsourcing of certain trust operations.
The increase in professional service expenses in 2010 when compared to 2009 is mainly due to higher costs
associated with strategic expansion initiatives and investment advisory fees.
Advertising expenses decreased, primarily due to a decrease in the usage of traditional print advertising channels
as part of the marketing program.
Director fees increased due to the director compensation rate increase, partially offset by fewer directors.
The increase in other non-interest expense from a year ago was primarily due to a higher provision for losses on
off-balance sheet commitments due to a higher commitment amount, operational losses, printing and stationery
costs, charitable contributions and staff relation costs.
2009 Compared with 2008:
The increase in salaries and benefits in 2009 from the prior year primarily reflected annual merit increases, higher
personnel costs associated with branch expansion, higher incentive compensation, as well as higher employee
insurance. Average FTE totaled 195 and 190 during 2009 and 2008, respectively.
The increase in occupancy and equipment expenses in 2009 from 2008 was primarily related to higher premises
rent associated with the new Greenbrae branch opened in September 2009 and increases for renewed leases, as
well as a full year of rent for the Mill Valley branch opened in June 2008.
Depreciation and amortization increased slightly in 2009 and reflected amortization of the recently capitalized
leasehold improvements of the Greenbrae and Mill Valley branches, partially offset by the effect of certain assets
that became fully-depreciated in 2009.
The increase in FDIC insurance in 2009 was due to a higher FDIC assessment rate (which more than doubled
from 2008), and higher deposits. Effective April 1, 2009, the FDIC adopted a final rule revising its risk-based
insurance assessment system and effectively increasing the overall assessment rate. The revised initial base
assessment rates for Risk Category 1 institutions ranged from twelve to sixteen basis points, on an annualized
basis. The FDIC also imposed a special deposit insurance assessment of five basis points on all insured
institutions’ total assets minus Tier 1 capital at June 30, 2009 in order to replenish the Deposit Insurance Fund. As
a result, we recognized $496 thousand from this special assessment in 2009.
Data processing costs decreased in 2009 over 2008 as we benefitted from the renegotiation of our contract with
our data processing vendor.
The increase in professional services in 2009 over 2008 was primarily due to an increase in legal expenses
relating to the repurchase of preferred shares as well as legal expenses relating to delinquent loans. These
increases were partially offset by decreases in other professional fees associated with the discontinuation of a
consulting agreement that began in July of 2006 and ended in June of 2008.
The increase in advertising expenses from 2008 is primarily due to fees associated with a new public relations
firm. The decrease in director expense in 2009 is primarily due to the departure of two directors who retired in
May 2009.
Page - 35
The increase in other expense in 2009 over 2008 reflected operational losses in the second quarter of 2009 as
well as the absence of a $242 thousand litigation liability cost reversed in 2008. In 2007, other expense included a
pre-tax non-recurring charge of $242 thousand recorded in the fourth quarter for the potential obligation to Visa
U.S.A. in connection with certain litigation indemnifications provided to Visa U.S.A. by Visa member banks. Such
amount was reversed in 2008 against other expense upon Visa Inc.’s Initial Public Offering in 2008 as discussed
in Note 13 to Consolidated Financial Statements.
Provision for Income Taxes
We reported a provision for income taxes of $8.2 million, $7.8 million, and $7.9 million for the years ended
December 31, 2010, 2009, and 2008 respectively. The effective tax rates were 37.6%, 37.9%, and 39.3% for
those same periods. These provisions reflect accruals for taxes at the applicable rates for federal income tax and
California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent
differences between income for tax and financial reporting purposes (such as earnings on qualified municipal
securities, BOLI and certain tax-exempt loans). Therefore, there are normal fluctuations in the effective rate from
period to period based on the relationship of net permanent differences to income before tax. We have not been
subject to an alternative minimum tax (“AMT”) during these periods.
Bancorp and the Bank have entered into a tax allocation agreement which provides that income taxes shall be
allocated between the parties on a separate entity basis. The intent of this agreement is that each member of the
consolidated group will incur no greater tax liability than it would have incurred on a stand-alone basis.
Page - 36
FINANCIAL CONDITION
Short-term Investment
At December 31, 2010 and 2009, we had $19.5 million and $15 million held in money market accounts with our
correspondent banks, respectively, which earned interest at rates between 0.35% to 0.55% during 2010 and at a
rate of 0.60% during 2009.
Investment Securities
We maintain an investment securities portfolio to provide liquidity and to generate earnings on funds that have not
been loaned to customers. Management determines the maturities and the types of securities to be purchased
based on the liquidity level and the desire to attain a reasonable investment yield balanced with risk exposure.
Table 6 shows the makeup of the securities portfolio by expected maturity at December 31, 2010 and 2009.
Expected maturities 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. Equity securities with a zero cost basis and
a fair value of $608 thousand are excluded from the following table because they do not have a stated maturity.
Table 6
Investment Securities
Type and Maturity Grouping
December 31, 2010
December 31, 2009
(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 held to maturity
Available for sale
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
Corporate CMOs
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Total
Total available for sale
Total
Principal
Amount
Amortized
Cost1
Fair
Value
Weighted
Average
Yield2
Principal
Amount
Amortized
Cost1
Fair
Value
Weighted
Average
Yield2
$
1,624 $
5,471
20,905
7,561
35,561
1,478 $
5,304
20,589
7,546
34,917
1,500
5,440
20,784
7,366
35,090
5.81% $
4.41
5.11
6.01
5.23
5,946
72,509
15,518
---
93,973
5,839
71,899
15,483
---
93,221
5,873
73,700
15,685
---
95,258
5.16
3.56
4.10
---
3.75
665 $
671 $
3,770
11,840
13,335
29,610
3,264
36,986
29,563
10,525
80,338
3,863
12,403
13,459
30,396
3,270
37,339
30,674
10,650
81,933
682
4,017
12,831
13,256
30,786
3,289
38,672
30,373
10,888
83,222
---
---
---
15,870
15,849
15,869
---
---
---
15,870
15,849
15,869
109,842
111,128
109,070
$ 145,403 $ 143,987 $ 146,218
2,075
---
4,628
4.27
7,893
---
14,596
4.27
3.83
97,818
4.17% $ 124,741 $ 127,148 $ 128,604
2,103
4,646
8,070
14,819
96,752
2,088
4,637
8,068
14,793
95,131
4.76%
5.41
5.72
5.78
5.69
4.62
4.99
3.84
5.06
4.56
3.91
4.89
4.62
4.60
4.57
4.83%
1 Book value reflects cost, adjusted for accumulated amortization and accretion.
2 Yields on tax-exempt securities are presented on a tax-equivalent basis and weighted average calculation is
based on amortized cost of securities.
The carrying amount of our investment securities portfolio, consisting primarily of obligations of U.S. government
agencies, state and municipal securities and corporate collateralized mortgage obligations (“CMOs”), increased
$18.4 million or 14.4% at December 31, 2010 due to our excess liquidity from deposit inflows that has not been
deployed to lending, and the recognition of a zero-cost basis equity security at its fair value of $608 thousand.
U.S. government agency securities, which make up 65.0% and 64.9% of the portfolio at December 31, 2010 and
2009 respectively, increased $12.0 million in 2010. State and municipal securities, which represented 23.8% and
23.7% of the portfolio at December 31, 2010 and 2009 respectively, increased $4.5 million. See discussion in
section captioned “Securities May Lose Value due to Credit Quality of the Issuers” in Item 1A Risk Factors above.
Corporate collateralized mortgage obligation securities increased $1.3 million in 2010. The weighted average
maturity of the portfolio at December 31, 2010 was approximately four years.
Page - 37
As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock at a zero cost basis.
These shares are restricted from resale until their conversion into Class A (voting) shares on the later of March
25, 2011 or the termination of Visa Inc.’s covered litigation escrow account upon the final resolution of the Visa
Inc. covered litigation. The stock was classified as available-for-sale securities and reported at fair value, with the
unrealized gain, net of tax, recognized in other comprehensive income. The fair value of the Class B common
stock we own was $608 thousand as of December 31, 2010 based on the Class A as-converted rate of 0.5102.
Mortgage-backed securities in the portfolio at December 31, 2010 totaled $111.1 million, which consisted of $16.4
million pass-through securities issued by FNMA and FHLMC, $78.8 million other mortgage backed securities
issued or guaranteed by FNMA, FHLMC, or Government National Mortgage Association (“GNMA”), and $15.9
million of corporate CMOs. We generally invest in mortgage-backed securities with borrowers having strong credit
scores and/or collateral compositions reflecting low loan-to-value ratios. Any investment securities in our portfolio
that may be backed by sub-prime or Alt-A mortgages relate primarily to certain GNMA agency securities, which
are guaranteed by the US government, or a portion of our corporate CMOs, which account for approximately 5%
of our total security portfolio. See Note 2 to Consolidated Financial Statements and Item 1A, Risk Factors, for
more information on investment securities.
Loans
Table 7
Loans Outstanding by Type at December 31
(Dollars in thousands)
Commercial loans
Real estate
Commercial owner-occupied
Commercial investor
Construction
Home equity
Other residential 1
Indirect auto loans
Installment and other consumer loans
Total loans
Allowance for loan losses
Total net loans
2010
$ 153,836
2009
$ 164,643
2008
$ 146,483
2007
$ 124,336
2006
$ 117,391
142,590
383,553
77,619
86,932
69,991
---
26,879
941,400
(12,392)
$ 929,008
146,133
332,752
91,289
83,977
69,369
---
29,585
917,748
(10,618)
$ 907,130
140,977
326,193
121,981
65,076
55,600
---
34,234
890,544
(9,950)
$ 880,594
132,614
257,127
97,153
34,295
44,565
---
34,788
724,878
(7,575)
$ 717,303
123,430
188,262
116,790
30,558
28,354
84,141
30,852
719,778
(8,023)
$ 711,755
1 Our residential loan portfolio includes no sub-prime loans, nor is it our normal practice to underwrite loans
commonly referred to as “Alt-A mortgages”, the characteristics of which are loans lacking full documentation,
borrowers having low FICO scores or collateral compositions reflecting high loan-to-value ratios. However,
substantially all of our residential loans are indexed to Treasury Constant Maturity Rates and have provisions to
reset five years after their origination dates.
Commercial loans decreased $10.8 million in 2010 and increased $18.2 million in 2009. The decrease in 2010
related to increased pay-downs as borrowers de-leveraged, successful resolution of problem loans and reduced
demand by qualified borrowers. The growth in 2009 was the result of our continued emphasis on commercial and
industrial lending, specifically asset-based lines of credit.
Commercial real estate loans increased $47.3 million in 2010 and $11.7 million in 2009. The increase in 2010
reflects several large new relationships in our newer markets, primarily San Francisco and Santa Rosa. Of the
commercial real estate loans at December 31, 2010, 73% are non-owner occupied and 27% are owner occupied.
Our commercial real estate loan portfolio is weighted towards term loans for which the primary source of
repayment is cash flow from net operating income of the real estate property. The following table summarizes our
commercial real estate loan portfolio by the geographic location in which the property is located as of December
31, 2010 and 2009:
Page - 38
Table 8 Commercial Real Estate Loans Outstanding by Geographic Location
(Dollars in thousands)
Marin
Sonoma
San Francisco
Alameda
Contra Costa
Napa
Sacramento
Other
Total
December 31, 2010
December 31, 2009
Amount
$ 235,584
80,563
78,307
36,083
7,855
12,117
11,057
64,577
$ 526,143
% of
Commercial
real estate
loans
Amount
44.8% $ 224,018
66,329
15.3
58,219
14.9
30,265
6.8
7,909
1.5
12,282
2.3
12,760
2.1
67,103
12.3
100.0% $ 478,885
% of
Commercial
real estate
loans
46.8%
13.8
12.2
6.3
1.6
2.6
2.7
14.0
100.0%
Construction loans decreased $13.7 million in 2010, primarily due to a slow down in construction activities, as well
as a conscious effort to reduce our concentration in construction loans. Construction loans decreased $30.7
million in 2009 primarily due to the successful completion and sell-through of construction development projects
booked in prior years. Table 9 below shows an analysis of construction loans by type and location.
Table 9 Construction Loans Outstanding by Type and Geographic Location
Construction loans by type
(Dollars in thousands)
Single family non-owner-occupied
Single family owner-occupied
Commercial non-owner-occupied
Commerical owner-occupied
Land non-owner-occupied
Land owner-occupied
Tenants-in-common and other
Total
Construction loans by geographic location
(Dollars in thousands)
Marin
Sonoma
San Francisco
Alameda
Contra Costa
Napa
Riverside
Other
Total
December 31, 2010
December 31, 2009
Amount
12,453
3,448
7,189
3,386
37,660
2,595
10,888
77,619
Amount
17,710
7,884
44,310
1,748
265
1,002
4,652
48
77,619
$
$
$
$
% of
Construction
Loans
16.0% $
4.4
9.3
4.4
48.5
3.4
14.0
100.0% $
% of
Construction
Loans
22.8% $
10.1
57.1
2.3
0.3
1.3
6.0
0.1
100.0% $
Amount
14,903
6,404
6,444
3,204
43,750
-
16,584
91,289
Amount
19,729
8,302
52,641
2,545
320
879
4,418
2,455
91,289
% of Construction
Loans
16.3%
7.0
7.1
3.5
47.9
-
18.2
100.0%
% of
Construction
Loans
21.6%
9.1
57.7
2.8
0.3
1.0
4.8
2.7
100.0%
Page - 39
Home equity lines of credit increased $3.0 million to $86.9 million in 2010. Other residential real estate loans
increased $622 thousand in 2010 and $13.8 million in 2009. The majority of the residential real estate loan growth
in 2009 was the result of the conversion from acquisition and development loans in the construction portfolio to
loans on tenants-in-common units in San Francisco.
Approximately 86% of our outstanding loans are secured by real estate at both December 31, 2010 and 2009. At
December 31, 2010, approximately 16% of our commercial real estate loans and half of our residential real estate
loans contain an interest-only feature as part of the loan terms. Approximately 88% of the interest-only
commercial real estate loans and 91% of the residential real estate loans are considered to have low credit risk
(graded “Pass”) and are current with their payments. Also see Item 1A, Risk Factors, regarding our loan
concentration risk. As of December 31, 2010, approximately $41.8 million of our loans have interest reserves, the
majority of which are construction loans. When we determine a loan is impaired before the interest reserve has
been depleted, the interest funded by the interest reserve is applied against loan principal. As of December 31,
2010, no construction loans having interest reserve balances were determined to be impaired.
Variable rate loans at their established interest rate floors or ceilings are included as fixed rate loans in the
following table. Table 10 shows a shift towards fixed rate loans within the portfolio in 2010 when compared to
2009 as variable rate loans continued to re-price down to their floor rates in a low-interest rate environment. The
large majority of the variable rate loans are tied to independent indices (such as the Wall Street Journal prime rate
or a Treasury Constant Maturity Rate). Substantially all loans with an original term of more than five years have
provisions for the fixed rates to reset, or convert to a variable rate, after one, three or five years.
Table 10 Loan Portfolio Maturity Distribution and Interest Rate Sensitivity
(Dollars in thousands)
Due within 1 year
Due after 1 but within 5
years
Due after 5 years
Total
Percentage
December 31, 2010
Variable
Rate
$ 134,346 $ 118,860
Fixed
Rate
Total
$ 253,206
December 31, 2009
Percent
Fixed
Rate
26.9% $ 114,727
Variable
Rate
94,534
$
Total
$ 209,261
Percent
22.8%
214,467
421,491
52,236
---
$ 770,304 $ 171,096
266,703
421,491
$ 941,400
28.3
44.8
198,635
336,616
100.0% $ 649,978
76,501
96,735
$ 267,770
275,136
433,351
$ 917,748
30.0
47.2
100.0%
81.83%
18.17%
100.00%
70.82%
29.18%
100.00%
Page - 40
Allowance for Loan Losses
Credit risk is inherent in the business of lending. As a result, we maintain an allowance for loan losses to absorb losses
inherent in our loan portfolio through a provision for loan losses charged against earnings. All specifically identifiable
and quantifiable losses are charged off against the allowance. The balance of our allowance for loan losses is
Management’s best estimate of the remaining losses inherent in the portfolio. The ultimate adequacy of the allowance is
dependent upon a variety of factors beyond our control, including the real estate market, changes in interest rates and
economic and political environments. Based on the current conditions of the loan portfolio, Management believes that
the $12.4 million allowance for loan losses at December 31, 2010 is adequate to absorb losses inherent in our loan
portfolio. No assurance can be given, however, that adverse economic conditions or other circumstances will not result
in increased losses in the portfolio.
The Components of the Allowance for Loan Losses
As stated previously in “Critical Accounting Policies,” and Note 1 to the Consolidated Financial Statements in this report,
the overall allowance consists of a specific allowance for individually identified impaired loans, an allowance factor for
categories of credits with similar characteristics and trends, and an allowance for changing environmental factors.
The first component, the specific allowance, results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. Through Management’s ongoing loan grading process,
individual loans are identified that have conditions that indicate the borrower may be unable to pay all amounts due
under the contractual terms. These loans are evaluated individually for impairment by Management and specific
allowances for loan losses are established when the discounted cash flows of future payments or collateral value of
collateral-dependent loans are lower than the recorded investment in the loan. Impaired loan balances increased from
$12.2 million at December 31, 2009 to $14.1 million at December 31, 2010. The specific allowance increased from $45
thousand at December 31, 2009 to $1.1 million at December 31, 2010. The increase in the specific allowance primarily
related to commercial, mobile home and home equity loans awaiting resolution of pending events before a
determination can be made as to whether or not the loan should be charged-off.
The second component, the allowance factor, is an estimate of the probable inherent losses in each loan pool stratified
by major categories or loans with similar characteristics in our loan portfolio. This analysis encompasses loan types and
economic and business conditions unique to each segment, including the Bank’s own loss history. This analysis covers
our entire loan portfolio but excludes any loans that were analyzed individually for specific allowances as discussed
above. For loans graded “Substandard” and not already evaluated for impairment in the first component analysis above,
they are also assigned an allowance factor. Confirmation of the quality of our grading process is obtained by
independent reviews conducted by consultants specifically hired for this purpose and by various bank regulatory
agencies. There are limitations to any credit risk grading process. The number of loans makes it impractical to review
every loan at every reporting date. Therefore, it is possible that in the future some currently performing loans not
recently graded will not be as strong as their last grading and an insufficient portion of the allowance will have been
allocated to them. Grading and loan review often must be done without knowing whether all relevant facts are at hand.
Troubled borrowers may deliberately or inadvertently omit important information from reports or conversations with
lending officers regarding their financial condition and the diminished strength of repayment sources.
The total amount allocated for the second component is determined by applying loss estimation factors to outstanding
loan types. At December 31, 2010 and 2009, the allowance allocated by categories of credits totaled $8.3 million and
$7.6 million, respectively. The increase mainly related to an increased allowance factor for non-owner-occupied
commercial real estate loans, as Management recognizes increased inherent risk and concentration in these loans, as
well as a factor added for loans graded “Substandard”. As disclosed in Note 3 to Consolidated Financial Statements in
Item 8 below, loans graded “Substandard” totaled $53.2 million as of December 31, 2010.
The third component of the allowance for loan losses is an economic component that is not allocated to specific loans or
groups of loans, but rather is intended to absorb losses caused by portfolio trends, concentration of credit, growth, and
economic trends. The general valuation allowance, including the economic component and unallocated allowance,
totaled approximately $3.0 million at both December 31, 2010 and 2009. Management proactively evaluates economic
and other qualitative loss factors used to determine the adequacy of the allowance for loan losses. After assessing the
economic outlook, Management did not revise the economic component in 2010 due to limited signs of economic
recovery and continued financial stress experienced by borrowers in our markets. The persistently high unemployment
rate and restrained spending by consumers and businesses are expected to prevent rapid economic expansion and
recovery of housing prices.
Page - 41
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)
Commercial loans
Real Estate
Commercial
Construction
Home Equity
Other residential
Installment and other consumer
Unallocated allowance
Total allowance for loan losses
Total percent
December 31, 2010
Loans as
percent
of total
loans
16.3% $
Allowance
balance
allocation
3,114
December 31, 2009
Loans as
percent
of total
loans
17.9% $
Allowance
balance
allocation
2,544
December 31, 2008
Loans as
percent
of total
loans
16.5% $
Allowance
balance
allocation
2,306
December 31, 2007
Loans as
percent
of total
loans
17.2% $
Allowance
balance
allocation
1,811
December 31, 2006
Loans as
percent
of total
loans
16.3%
Allowance
balance
allocation
1,710
$
5,171
1,694
643
738
835
197
$ 12,392
55.9
8.3
9.2
7.4
2.9
N/A
$
100.00%
4,006
1,832
586
734
662
254
10,618
52.2
9.9
9.2
7.6
3.2
N/A
$
100.00%
3,911
2,118
453
588
563
11
9,950
52.5
13.6
7.3
6.2
3.9
N/A
$
100.00%
2,866
1,659
205
426
430
178
7,575
53.8
13.4
4.7
6.1
4.8
N/A
$
100.00%
2,262
1,995
182
271
1,389
214
8,023
43.3
16.2
4.3
3.9
16.0
N/A
100.00%
The allowance for loan losses as a percentage of loans totaled 1.32% at December 31, 2010, compared to 1.16%
at December 31, 2009. The increase in the allowance for loan losses as a percentage of loans reflects a higher
level of non-performing loans and the related specific reserves.
Table 12 shows the activity in the allowance for loan losses for each of the years in the five-year period ended
December 31, 2010. Net charge-offs totaled $3.6 million and $4.8 million in 2010 and 2009, respectively, primarily
related to commercial and construction loans secured by real property where the value of collateral has declined,
and to a lesser extent, personal loans and home equity loans. Our 2010 and 2009 construction loan losses have
stemmed primarily from the land development and single-family residential construction projects in Oregon and
Sonoma County, California, where property values have been affected more significantly than in our core market
of Marin County. Net charge-offs in 2008 totaling $2.6 million primarily relate to construction loans secured by real
property where the value of collateral declined. The percentage of net charge-offs to average loans decreased
from 0.53% in 2009 to 0.38% in 2010, primarily due to a lower level of credit losses in the commercial portfolio.
Page - 42
Table 12
Allowance for Loan Losses at December 31
(Dollars in thousands)
Beginning balance
Cumulative-effect adjustment of election of fair value
accounting on indirect auto portfolios 1
Provision for loan losses
Loans charged off
Commercial
Real Estate
Commercial
Construction
Home equity
Installment and other consumer
Total
Loan loss recoveries
Commercial
Real Estate
Construction
Installment and other consumer
Total
Net loans charged off
Ending balance
Total loans outstanding at end of year, before
deducting allowance for loan losses
Average total loans outstanding during year
Ratio of allowance for loan losses to total loans at end
of year
Net charge-offs to average loans
2010
10,618
$
$
---
5,350
$
2009
9,950
---
5,510
2008
7,575
---
5,010
2007
8,023
$
$
(1,048)
685
(643)
(1,552)
(1,100)
---
(47)
(2,628)
(150)
(318)
(3,786)
(9)
(3,046)
(96)
(659)
(5,362)
---
(1,508)
---
(72)
(2,680)
95
52
24
95
20
210
(3,576)
12,392
941,400
929,755
$
$
$
397
71
520
(4,842)
10,618
917,748
910,456
$
$
$
---
21
45
(2,635)
9,950
890,544
798,369
$
$
$
$
$
$
---
---
---
(115)
(115)
---
---
30
30
(85)
7,575
724,878
703,087
$
$
$
2006
7,115
---
1,266
(172)
---
---
---
(424)
(596)
35
---
203
238
(358)
8,023
719,778
701,732
1.32%
0.38%
1.16%
0.53%
1.12%
0.33%
1.05%
0.01%
1.11%
0.05%
Ratio of allowance for loan losses to net charge-offs
346.5%
219.3%
377.6%
8,911.8%
2,241.1%
1 In conjunction with the election of accounting for the indirect auto loan portfolio at fair value in 2007, an unrealized loss of $3.5 million was
recorded as a reduction of loans, and the allowance for loan losses was reduced by $1.0 million.
Non-performing assets for each of the past five years are presented below. The ratio of allowance for loan losses to non-accrual loans
increased from 91.8% at December 31, 2009 to 95.9% at December 31, 2010. There were no accruing loans past due 90 days or more, nor
other real estate owned at the end of the years presented.
Table 13
Non-performing Assets at December 31
(Dollars in thousands)
Non-performing loans:
Construction
Commercial real estate
Commercial
Installment and other consumer
Home equity line of credit
Other residential
Total non-accrual loans
Repossessed personal properties
Total non-performing assets
Accruing restructured loans:
Installment and other consumer
Home Equity
Commercial
Total accruing restructured loans
Total impaired loans
Allowance for loan losses to non-accrual loans at
period end
Non-performing loans to total loans
2010
2009
$
$
9,297
632
2,486
362
-
148
12,925
135
13,060
925
259
-
1,184
14,109
95.9%
1.37%
$
6,520
3,722
910
313
100
---
11,565
96
11,661
566
---
49
615
12,180
2008
5,804
---
145
455
288
---
6,692
---
6,692
119
---
---
119
6,811
$
$
2007
2006
---
---
---
---
144
---
144
---
144
---
---
---
---
144
$
$
---
---
49
---
---
---
49
---
49
---
---
---
---
49
91.8%
148.7%
5,260.4%
NM
1.26%
0.75%
0.02%
0.01%
Page - 43
Troubled debt restructured loans, whose contractual terms have been restructured in a manner which grants a
concession to a borrower experiencing financial difficulties, totaled $1.2 million and $780 thousand as of
December 31, 2010 and 2009, respectively.
Other Assets
As financial institutions continue to fail, the FDIC Deposit Insurance Fund is depleting rapidly. Therefore, in
December 2009, the FDIC required banks to prepay their regular insurance premiums for 2010 through 2012.
Other assets included $3.0 million and $4.4 million of prepaid FDIC assessments at December 31, 2010 and
2009, respectively. Each quarter for the next two years, the prepaid insurance asset balance will be reduced by
the FDIC insurance expense that is applicable to that quarter.
BOLI totaled $18.3 million at December 31, 2010, compared to $17.6 million at December 30, 2009, and is
recorded in other assets. Other assets also include net deferred tax assets of $6.6 million and $6.5 million at
December 31, 2010 and 2009, respectively. These deferred tax assets consist primarily of tax benefits expected
to be realized in future periods related to temporary differences of allowance for loan losses, depreciation, state
tax, stock-based compensation and deferred compensation. Management believes these assets to be realizable
due to our consistent record of earnings and the expectation that earnings will continue at a level adequate to
realize such benefits.
In addition, we held $5.0 million and $4.7 million of FHLB stock recorded at cost in other assets at December 31,
2010 and 2009, respectively. The FHLB paid $16 thousand and $9 thousand in cash dividends in 2010 and 2009,
respectively. On February 22, 2011, FHLB declared a cash dividend for the fourth quarter of 2010 at an
annualized dividend rate of 0.29%. Management does not believe that FHLB stock is other-than-temporarily-
impaired as we expect to be able to redeem the stock at cost.
Deposits
Deposits, which are used to fund our interest earning assets, increased $71.7 million, or 7.6%, in 2010. Failures in
a large number of banks have led to increased customer concern over deposit safety. We believe that we have
successfully attracted new deposits due to our financial soundness, our personalized customer service, and our
focus on relationship-building and cross-selling. The economic downturn also appears to have impacted the
general public’s investment behavior, as evidenced by a national trend of increasing household savings and
movement away from higher-risk equity investments.
We have experienced a slight shift in the mix of interest-bearing deposits in 2010 compared to 2009. The
proportion of money market deposit accounts has decreased while the proportion of time deposits and non-
interest bearing deposits have increased slightly. We believe the shift in relative proportions is due to the low
interest rate environment as time deposit accounts generally offer higher interest rates and due to customers
seeking safety as CDARS® deposits are fully insured by the FDIC. No individual customer accounted for more
than 5% of deposits.
Page - 44
Table 14 shows the relative composition of our average deposits for the years 2010, 2009 and 2008.
Table 14 Distribution of Average Deposits
2010
2009
2008
Years ended December 31,
(Dollars in thousands)
Non-interest bearing
Interest bearing
Savings
Money market
CDARS®
Other Time deposits
Less than $100,000
$100,000 or more
Total other time deposits
Total Average Deposits
Amount
$ 263,742
98,168
51,738
390,575
71,432
43,069
81,562
124,631
$ 1,000,286
Percent
Amount
26.4% $ 232,502
90,159
45,944
391,571
51,248
9.8
5.2
39.0
7.1
Percent
Amount
25.6% $ 208,320
78,671
40,239
390,383
9,039
9.9
5.0
43.1
5.6
4.3
8.2
12.5
36,350
61,574
97,924
100.00% $ 909,348
4.0
6.8
10.8
39,496
44,239
83,735
100.00% $ 810,387
Percent
25.7%
9.7
5.0
48.2
1.1
4.9
5.4
10.3
100.0%
Table 15 below shows the maturity groupings for time deposits of $100,000 or more, including CDARS® deposits
at December 31, 2010, 2009 and 2008.
Table 15 Maturities of Time Deposits of $100,000 or more at December 31
(Dollars in thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Borrowings
2010
$ 77,173
24,135
35,713
18,699
$ 155,720
December 31,
2009
$ 56,456
19,446
30,458
5,830
$ 112,190
2008
$ 27,985
7,462
15,907
4,105
$ 55,459
We currently have $219.2 million in secured lines of credit with FHLB, $40.2 million with Federal Reserve Bank of
San Francisco (“FRB”) and $77.0 million in unsecured lines with correspondent banks to cover any short or long-
term borrowing needs. As of December 31, 2010, we had three FHLB fixed-rate advances outstanding totaling
$55 million, leaving $164.2 million available borrowing capacity with FHLB. The FRB and correspondent bank
lines were unutilized at December 31, 2010. For additional information, see Note 8 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
Deferred Compensation Obligations
We maintain a nonqualified, unfunded deferred compensation plan for certain key management personnel. Under
this plan, participating employees may defer compensation, which will entitle them to receive certain payments
upon retirement, death, or disability. The plan provides for payments for up to fifteen years commencing upon
retirement and reduced benefits upon early retirement, disability, or termination of employment. The participating
employee may elect to receive payments over periods not to exceed fifteen years. At December 31, 2010 and
2009, our aggregate payment obligations under this plan totaled $2.8 million and $2.7 million, respectively. For
additional information, see Note 11 to the Consolidated Financial Statements in Item 8 below.
Off Balance Sheet Arrangements
We make commitments to extend credit in the normal course of business to meet the financing needs of our
customers. For additional information, see Note 17 to the Consolidated Financial Statements in Item 8 below.
Page - 45
Commitments
The following is a summary of our contractual commitments as of December 31, 2010.
Table 16 Contractual Commitments at December 31, 2010
(Dollars in thousands)
Operating leases
Federal Home Loan Bank Borrowings
Subordinated debenture
Total
Payments due by period
$
<1 year
2,440
15,000
---
$ 17,440
$
1-3 years
4,873
40,000
---
$ 44,873
4-5 years
4,704
---
---
4,704
$
$
>5 years
$ 15,492
---
5,000
$ 20,492
Total
$ 27,509
55,000
5,000
$ 87,509
The contractual amount of loan commitments not reflected on the Consolidated Statement of Condition was
$252.7 million and $231.9 million at December 31, 2010 and 2009, respectively.
As permitted or required under California law and to the maximum extent allowable under that law, we have
certain obligations to indemnify our current and former officers and directors for certain events or occurrences
while the officer or director is, or was serving, at our request in such capacity. These indemnification obligations
are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to
be in, or not opposed to, our best interests, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments
we could be required to make under these indemnification obligations is unlimited; however, we have a director
and officer insurance policy that mitigates our exposure and enables us to recover a portion of any future amounts
paid. We believe the estimated fair value of these indemnification obligations, net of expected insurance
recoveries, is minimal.
Capital Adequacy
As discussed in Note 16 to the Consolidated Financial Statements, the Bank’s capital ratios are above regulatory
guidelines to be considered “well capitalized” and Bancorp’s ratios exceed the required minimum ratios for capital
adequacy purposes. The Bank’s total risk-based capital ratio increased from 11.60% at December 31, 2009, to
12.70% at December 31, 2010, and Bancorp’s total risk-based capital ratio increased from 12.33% at December
31, 2009, to 13.34% at December 31, 2010. The increases in the risk-based capital ratio are primarily due to the
accumulation of net income in 2010 of $13.6 million.
We expect to maintain strong capital levels. Our potential sources of capital include future earnings and shares
issued upon the exercise of stock options. In addition, the warrant issued under the TCPP to purchase 154,521
shares of our common stock remains outstanding. The warrant, if exercised, would provide us with $4.2 million
additional Tier 1 capital. We are also positioned to access capital markets, if necessary, for up to $75 million
through a shelf registration filed on Form S-3 in the fourth quarter of 2009.
Liquidity
The goal of liquidity management is to provide adequate funds to meet both loan demand and unexpected deposit
withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets, and formal lines of
credit with the FHLB, FRB and correspondent banks that enable us to borrow funds as needed. Our
Asset/Liability Management Committee (“ALCO”), which is comprised of certain directors of the Bank, is
responsible for establishing and monitoring our liquidity targets and strategies.
Management regularly adjusts our investments in liquid assets based upon our assessment of expected loan
demand, expected deposit flows, yields available on interest-earning securities and the objectives of our
asset/liability management program. ALCO has also developed a contingency plan should liquidity drop
unexpectedly below internal requirements.
We obtain funds from the repayment and maturity of loans as well as deposit inflows, investment security
maturities and paydowns, Federal funds purchased FHLB advances, and other borrowings. Our primary uses of
funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of
certificate of deposits, repayment of borrowings and dividends to stockholders.
Page - 46
We must retain and attract new deposits, which depends upon the variety and effectiveness of our customer
account products, service and convenience, and rates paid to customers, as well as our financial strength. Any
long-term decline in retail deposit funding would adversely impact our liquidity. Management does not anticipate
significant reliance on Federal funds purchased and FHLB advances in the near future, as our core deposit inflow
has provided adequate liquidity to fund our operations. If we were to rely on Federal Funds purchased or FHLB
advances in the future, we expect to have the ability to post adequate collateral for such funding requirements.
As presented in the accompanying consolidated statements of cash flows, the sources of liquidity vary between
periods. Consolidated cash and cash equivalents at December 31, 2010 totaled $85.2 million, an increase of
$46.6 million over December 31, 2009. The primary sources of funds during 2010 included a $71.7 million net
increase in deposits, $37.9 million in pay-downs and maturities of investment securities, and $23.5 million net
cash provided by operating activities. The primary uses of funds were $56.0 million for investment securities
purchases, and $26.9 million in loan originations (net of principal collections). The excess liquidity from deposit
inflows has not been deployed. The banking industry, as a whole, is experiencing diminished loan demand from
qualified borrowers.
At December 31, 2010, our cash and cash equivalents and unpledged available-for-sale securities maturing within
one year totaled $91.1 million. The remainder of the unpledged available-for-sale securities portfolio of $91.4
million provides additional liquidity. These liquid assets equaled 15.1% of our assets at December 31, 2010,
compared to 11.9% at December 31, 2009, well in excess of our internal liquidity policy. The increased liquidity at
December 31, 2010 was primarily due to deposit growth exceeding loan growth.
We anticipate that cash and cash equivalents on hand and other sources of funds will provide adequate liquidity
for our operating, investing and financing needs and our regulatory liquidity requirements for the foreseeable
future. Management monitors our liquidity position daily, balancing loan funding/payments with changes in deposit
activity and overnight investments. Our emphasis on local deposits combined with our 10.1% equity to assets
ratio, provides a very stable funding base. In addition to cash and cash equivalents, we have substantial
additional borrowing capacity including unsecured lines of credit totaling $77.0 million with correspondent banks.
Further, on March 30, 2009, we pledged a certain residential loan portfolio that increased our borrowing capacity
with the FRB, which totaled $40.2 million at December 31, 2010. As of December 31, 2010, there is no debt
outstanding to correspondent banks or the FRB. We are also a member of the FHLB and have a line of credit
(secured under terms of a blanket collateral agreement by a pledge of essentially all of our financial assets) in the
amount of $219.2 million, of which $164.2 million was available at December 31, 2010. Borrowings under the line
are limited to eligible collateral. The interest rates on overnight borrowings with both correspondent banks and the
FHLB are determined daily and generally approximate the Federal Funds target rate.
Undisbursed loan commitments, which are not reflected on the consolidated statement of condition, totaled
$252.7 million at December 31, 2010 at rates ranging from 1.91% to 8.25%. This amount included $143.8 million
under commercial lines of credit (these commitments are contingent upon customers maintaining specific credit
standards), $73.5 million under revolving home equity lines, $22.7 million under undisbursed construction loans,
$8.9 million under personal and other lines of credit, and a remaining $3.8 million under standby letters of credit.
These commitments, to the extent used, are expected to be funded primarily through the repayment of existing
loans, deposit growth and existing balance sheet liquidity. Over the next twelve months $173.8 million of time
deposits will mature. We expect these funds to be replaced with new time or savings accounts.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of
liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank
to Bancorp is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s undistributed net
profits from the previous three fiscal years. As the Bank made a $28 million distribution to Bancorp in March 2009
in connection with Bancorp’s repurchase of preferred stock, distributions from the Bank to Bancorp will be subject
to advance regulatory approval for three years beginning in 2010. The primary uses of funds for Bancorp are
stockholder dividends and ordinary operating expenses. In 2010, after approval by the DFI, the Bank paid a $3
million dividend to Bancorp, which held $6.7 million of cash at December 31, 2010 to cover Bancorp’s operational
needs and cash dividends to shareholders for the near future. Management anticipates that there will be sufficient
earnings at the Bank level to provide dividends to Bancorp to meet its funding requirements for the foreseeable
future.
Page - 47
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our most significant form of market risk is interest rate risk. The risk is inherent in our deposit and lending
activities. Management, together with ALCO, has sought to manage rate sensitivity and maturities of assets and
liabilities to minimize the exposure of our earnings and capital to changes in interest rates. Additionally, interest
rate risk exposure is managed with the goal of minimizing the impact of interest rate volatility on our net interest
margin. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing
of repricing or maturity of assets or liabilities. Interest rate risk exposure is managed with the goal of minimizing
the impact of interest rate volatility on the net interest margin.
Activities in asset and liability management include, but are not limited to, lending, borrowing, accepting deposits
and investing in securities. Interest rate risk is the primary market risk associated with asset and liability
management. Sensitivity of net interest income (“NII”) to interest rate changes results from differences in the
maturity or repricing, of asset and liability portfolios. To mitigate interest rate risk, the structure of our assets and
liabilities is managed with the objective of correlating the movements of interest rates on loans and investments
with those of deposits and borrowings. The asset and liability policy sets limits on the acceptable amount of
change to NII in changing interest rate environments. We use simulation models to forecast NII.
Exposure to interest rate risk is reviewed at least quarterly by the ALCO and the Board of Directors. They utilize
interest rate sensitivity simulation models as a tool for achieving these objectives and for developing ways in
which to improve profitability. A simplified statement of condition is prepared on a quarterly basis as a starting
point, using as inputs, actual loans, investments, borrowings and deposits. If potential changes to net equity value
and net interest income resulting from hypothetical interest changes are not within the limits established by the
Board of Directors, Management may adjust the asset and liability mix to bring interest rate risk within approved
limits.
In the following simulation of NII under various interest rate scenarios, the simplified statement of condition is
processed against four interest rate change scenarios, in 100 basis point increments. As the Federal funds target
rate at December 31, 2010 was already at its historic low of 0-0.25%, it is unlikely that there will be further
reductions in the target rate. Therefore, a reduction-in-rate scenario is not considered in the following table at
December 31, 2010. Each of these scenarios assumes that the change in interest rates is immediate and interest
rates remain at the new levels.
Table 17 summarizes the effect on NII due to changing interest rates as measured against the flat rate scenario.
Table 17 Effect of Interest Rate Change on Net Interest Income at December 31, 2010
Changes in Interest
Rates (in basis points)
up 400
up 300
up 200
up 100
Estimated change in NII
(as percent of NII)
4.5 %
2.4 %
0.6 %
(0.2 )%
The above table estimates the impact of interest rate changes. The estimated changes are within our policy
guidelines established by ALCO. The table indicates that at December 31, 2010, we were asset sensitive in a
rising interest rate environment. The results shown reflect a lag in the upward re-pricing of loans due to loans on
floors. We have mitigated earnings sensitivity somewhat through the procurement of fixed-rate borrowings.
As stated previously in the section captioned “Supervision and Regulation” included in Item 1 Business of this
report, the Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits,
thereby permitting depository institutions to pay interest on business transaction and other accounts beginning
July 21, 2011. Although the ultimate impact of this legislation on us has not yet been determined, we do not
expect to incur significant interest expense on business transaction accounts immediately when the legislation
takes effect in July 2011. If we were to pay interest on certain deposits that are currently non-interest bearing,
causing these deposits to become rate sensitive, we would become less asset sensitive than the model currently
indicates.
Page - 48
From time to time, we enter into certain interest rate swap contracts designated as fair value hedges to mitigate
the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term
fixed-rate loans caused by changes in interest rates. See Note 15 to the consolidated financial statements in this
Form 10-K.
As with any simulation model or other method of measuring interest rate risk, certain limitations are inherent in the
process. For example, although certain of our assets and liabilities may have similar maturities or repricing time
frames, they may react differently to changes in market interest rates. In addition, the changes in interest rates on
certain categories of either our assets or liabilities may precede or lag changes in market interest rates.
Also, the actual rates and timing of prepayments on loans and investment securities could vary significantly from
the assumptions used in the various scenarios. Further, changes in U.S. Treasury rates accompanied by a
change in the shape of the yield curve could produce different results from those presented in the table.
Accordingly, the results presented should not be relied upon as indicative of actual results in the event of
changing market interest rates.
Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. One aspect is the
time frame within which the interest earning assets and interest bearing liabilities are subject to change in interest
rates at repricing or maturity. An analysis of the repricing time frames is called a “gap” analysis because it shows
the gap between the amounts of assets and liabilities repricing in each of several periods of time. Another aspect
is the relative magnitude of the repricing for each category of interest earning asset and interest bearing liability
given various changes in market rates. Gap analysis gives no indication of the relative magnitude of repricing.
Interest rate sensitivity management focuses on the maturity of assets and liabilities and their repricing during
periods of change in market rates. Interest rate sensitivity gaps are calculated as the difference between the
amounts of assets and liabilities that are subject to repricing during various time periods.
Table 18 shows our repricing gaps as of December 31, 2010. Due to the limitations of gap analysis, as described
above, we do not generally use it in managing interest rate risk. Instead we rely on the more sophisticated
simulation model described above as the primary tool in measuring and managing interest rate risk. Our equity
securities (Visa Stock) with a fair value of $608 thousand are excluded from the investment securities in the
following table.
Table 18
Interest Rate Sensitivity
(Dollars in thousands)
At December 31, 2010
Interest Earning Assets
Investment securities 1
Loans
Total
Interest Bearing Liabilities
Transaction, savings and money
market deposits
CDARS® time deposits
Other time deposits less than
$100,000
Other time deposits $100,000 or
more
Federal Home Loan Bank
borrowings
Subordinated debenture
Total
Sensitivity for period
Sensitivity - cumulative
1-30
Days
31-90
Days
91-180
Days
181-365
Days
Over
one year
Total
$
$
---
142,340
142,340
$
---
20,942
20,942
$
---
49,614
49,614
7,351
43,762
51,113
$
138,694
684,742
823,436
$
146,045
941,400
1,087,445
533,289
15,989
---
35,902
---
5,103
---
10,017
---
250
533,289
67,261
4,937
7,560
9,200
12,129
7,966
41,792
9,920
17,540
19,351
24,738
19,653
91,202
---
---
564,135
(421,795)
(421,795)
$
---
5,000
66,002
(45,060)
(466,855)
---
---
33,654
15,960
(445,895)
$
---
---
46,884
4,229
(441,666)
$
$
55,000
---
82,869
740,567
293,901
$
55,000
5,000
793,544
293,901
1 Based on estimated maturities due to prepayment options.
Page - 49
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Bank of Marin Bancorp
We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and subsidiary (the
“Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. We also have
audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting
and Compliance with Applicable Laws and Regulations. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
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 the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Bank of Marin Bancorp and subsidiary as of December 31, 2010 and 2009, and the
consolidated results of their operations and their cash flows each of the three years in the period ended December 31,
2010, in conformity with generally accepted accounting principles in the United States of America. Also in our opinion,
Bank of Marin Bancorp maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
Stockton, California
March 11, 2011
Page - 50
504 Redwood Blvd, Suite 100
Novato, CA 94947
March 11, 2011
To the Stockholders:
Management’s Report on Internal Control over Financial Reporting and Compliance with Applicable Laws
and Regulations
Management of the Bank of Marin Bancorp and its subsidiary (“Bancorp”) is responsible for preparing the
Bancorp’s annual consolidated financial statements in accordance with generally accepted accounting principles.
Management is also responsible for establishing and maintaining internal control over financial reporting,
including controls over the preparation of regulatory financial statements, and for complying with the designated
safety and soundness laws and regulations pertaining to insider loans and dividend restrictions. Bancorp’s
internal control contains monitoring mechanisms, and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control, including the possibility of human error
and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions,
the effectiveness of internal control may vary over time.
Management has assessed Bancorp’s internal control over financial reporting encompassing both financial
statements prepared in accordance with generally accepted accounting principles and those prepared for
regulatory reporting purposes as of December 31, 2010. The assessment was based on criteria for effective
internal control over financial reporting described in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Management
believes that, as of December 31, 2010, Bancorp maintained effective internal control over financial reporting
encompassing both financial statements prepared in accordance with generally accepted accounting principles
and those prepared for regulatory reporting purposes in all material respects. Management also believes that
Bancorp complied with the designated safety and soundness laws and regulations pertaining to insider loans and
dividend restrictions during 2010.
Management’s assessment of the effectiveness of Bancorp’s internal control over financial reporting as of
December 31, 2010 has been audited by Moss Adams LLP, an independent registered public accounting firm,
which expresses an unqualified opinion as stated in their report which appears on the previous page.
/s/ Russell A. Colombo
Russell A. Colombo, President and Chief Executive Officer
/s/ Christina J. Cook
Christina J. Cook, EVP and Chief Financial Officer
Page - 51
CONSOLIDATED STATEMENTS OF CONDITION
at December 31, 2010 and 2009
(in thousands, except share data)
December 31, 2010
December 31, 2009
Assets
Cash and due from banks
Short-term investments
Cash and cash equivalents
Investment securities
$
$
65,724
19,508
85,232
Held to maturity, at amortized cost
Available for sale (at fair value, amortized cost $109,070 and $96,752 at
December 31, 2010 and 2009, respectively)
Total investment securities
Loans, net of allowance for loan losses of $12,392 and $10,618 at
December 31, 2010 and 2009, respectively
Bank premises and equipment, net
Interest receivable and other assets
34,917
111,736
146,653
929,008
8,419
38,838
23,660
15,000
38,660
30,396
97,818
128,214
907,130
8,043
39,625
Total assets
$
1,208,150
$
1,121,672
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Non-interest bearing
Interest bearing
Transaction accounts
Savings accounts
Money market accounts
CDARS® time accounts
Other time accounts
Total deposits
Federal Home Loan Bank borrowings
Subordinated debenture
Interest payable and other liabilities
Total liabilities
Stockholders’ Equity
Preferred stock, no par value, $1,000 per share liquidation preference
Authorized - 5,000,000 shares; none issued
Common stock, no par value
Authorized - 15,000,000 shares
Issued and outstanding - 5,290,082 shares and 5,229,529 shares at
December 31, 2010 and 2009, respectively
Retained earnings
Accumulated other comprehensive income, net
Total stockholders’ equity
$
282,195
$
230,551
105,177
56,760
371,352
67,261
132,994
1,015,739
55,000
5,000
10,491
89,660
47,871
416,481
51,819
107,679
944,061
55,000
5,000
8,560
1,086,230
1,012,621
---
---
55,383
64,991
1,546
53,789
54,644
618
121,920
109,051
Total liabilities and stockholders’ equity
$
1,208,150
$
1,121,672
The accompanying notes are an integral part of these consolidated financial statements.
Page - 52
CONSOLIDATED STATEMENTS OF INCOME
for the fiscal years ended December 31, 2010, 2009 and 2008
December 31, 2010
Years ended
December 31, 2009
December 31, 2008
$
56,239
$
54,816
$
54,475
(in thousands, except per share data)
Interest income
Interest and fees on loans
Interest on investment securities
Securities of U.S. Government agencies
Obligations of state and political subdivisions
Corporate debt securities and other
Interest on Federal funds sold and short-term
investments
Total interest income
Interest expense
Interest on interest bearing transaction accounts
Interest on savings accounts
Interest on money market accounts
Interest on CDARS® time accounts
Interest on other time accounts
Interest on borrowed funds
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 and Trust Services
Net gain on redemption of shares in Visa, Inc.
Other income
Total non-interest income
Non-interest expense
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
FDIC insurance
Professional services
Data processing
Other expense
Total non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Preferred stock dividends and accretion
Net income available to common stockholders
Net income per common share:
Basic
Diluted
Weighted average shares used to compute net
income per common share:
Basic
Diluted
Dividends declared per common share
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
3,234
1,146
593
145
61,357
110
104
2,467
842
1,495
1,430
6,448
54,909
5,350
49,559
1,797
1,521
---
2,203
5,521
18,240
3,576
1,344
1,506
1,917
1,916
4,858
33,357
21,723
8,171
13,552
---
13,552
2.59
2.55
5,238
5,314
3,304
1,103
506
5
59,734
115
94
3,235
721
1,541
1,461
7,167
52,567
5,510
47,057
1,782
1,383
---
2,017
5,182
17,001
3,516
1,370
1,800
1,727
1,650
4,632
31,696
20,543
$
$
$
$
$
7,778
12,765
$
(1,299) $
$
11,466
2.21
2.19
$
$
5,182
5,242
0.61
$
0.57
$
3,555
735
273
138
59,176
344
300
6,610
200
2,466
897
10,817
48,359
5,010
43,349
1,654
1,292
457
1,953
5,356
16,097
3,202
1,340
507
1,600
1,825
4,106
28,677
20,028
7,878
12,150
(113)
12,037
2.34
2.31
5,135
5,217
0.56
Page - 53
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
for the fiscal years ended December 31, 20010, 2009 and 2008
(dollars in thousands)
Balance at December 31, 2007
Comprehensive income:
Net income
Other comprehensive income
Net change in unrealized gain (loss) on available for
sale securities (net of tax effect of
$475)
Comprehensive income
Issuance of preferred stock
Issuance of common stock warrants
Stock options exercised
Excess tax benefit - stock-based compensation
Stock repurchased, including commission costs
Stock issued under employee stock purchase
plan
Stock-based compensation - stock options
Restricted stock granted
Stock-based compensation - restricted stock
Cash dividends paid on common stock
Dividends on preferred stock
Accretion of preferred stock
Stock issued in payment of director fees
Balance at December 31, 2008
Net income
Other comprehensive income
Net change in unrealized gain on available for sale
securities (net of tax effect of $168)
Comprehensive income
Accretion of preferred stock
Repurchase of preferred stock
Stock options exercised
Excess tax benefit - stock-based compensation
Stock issued under employee stock purchase
plan
Restricted stock granted
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock
Dividends on preferred stock
Stock issued in payment of director fees
Balance at December 31, 2009
Net income
Other comprehensive income
Net change in unrealized gain on available for sale
securities (net of tax effect of $672)
Comprehensive income
Stock options exercised
Excess tax benefit - stock-based compensation
Stock issued under employee stock purchase
plan
Restricted stock granted
Restricted stock forfeited / cancelled
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock
Stock issued in payment of director fees
Balance at December 31, 2010
Preferred
Stock
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
Total
---
5,122,971
51,059
36,983
(268)
87,774
---
---
---
12,150
---
12,150
---
---
27,039
---
---
---
---
---
---
---
---
---
---
16
---
27,055
---
---
---
---
---
95,298
---
(88,316)
---
---
---
961
1,384
380
(2,526)
---
12,150
---
---
---
---
---
1,253
---
6,700
---
---
---
---
8,892
5,146,798
---
32
404
---
24
---
---
---
247
51,965
---
---
---
---
---
(2,882)
(97)
(16)
---
46,138
12,765
---
---
945
(28,000)
---
---
---
---
---
---
61,175
---
---
---
---
---
873
291
---
12,765
(945)
---
---
---
656
656
---
---
---
---
---
---
---
---
---
---
---
---
---
388
---
230
230
---
---
---
---
656
12,806
27,039
961
1,384
380
(2,526)
32
404
---
24
(2,882)
(97)
---
247
125,546
12,765
230
12,995
---
(28,000)
873
291
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
---
894
11,575
---
---
---
---
9,087
24
---
330
73
---
---
233
5,229,529 $ 53,789 $ 54,644 $
---
---
---
---
(2,960)
(354)
---
---
---
13,552
---
---
49,940
---
---
---
895
132
---
13,552
---
---
563
6,150
(2,320)
---
---
---
6,220
17
---
---
241
109
---
200
5,290,082 $ 55,383 $ 64,991 $
---
---
---
---
---
(3,205)
---
---
---
---
---
---
---
---
24
---
330
73
(2,960)
(354)
233
618 $ 109,051
13,552
---
928
928
---
---
928
14,480
895
132
---
---
---
---
---
---
---
17
---
---
241
109
(3,205)
200
1,546 $ 121,920
Page - 54
The accompanying notes are an integral part of these consolidated financial statements.
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended December 31, 2010, 2009 and 2008
(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 expense--common stock for director fees
Stock-based compensation expense
Excess tax benefits from exercised stock options
Amortization of investment security premiums, net of accretion of discounts
Loss on sale of investment securities
Depreciation and amortization
Net gain on redemption of shares in Visa, Inc.
Loss on disposal of furniture and equipment
Loss on sale of repossessed assets
Net change in operating assets and liabilities:
Interest receivable
Interest payable
Deferred rent and other rent-related expenses
Other assets
Other liabilities
Total adjustments
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchase of securities held to maturity
Purchase of securities available for sale
Proceeds from sale of securities
Proceeds from paydowns/maturity of:
Securities held to maturity
Securities available for sale
Loans originated and principal collected, net
Purchase of bank owned life insurance policies
Additions to premises and equipment
Proceeds from sale of repossessed assets
Net cash used in investing activities
Cash Flows from Financing Activities:
Net increase in deposits
Proceeds from stock options exercised
Proceeds from issuance of preferred stock
Proceeds from issuance of warrants
Net (decrease) increase in Federal Funds purchased and Federal Home Loan Bank
borrowings
Preferred stock repurchased
Common stock repurchased
Cash dividends paid on common stock
Cash dividends paid on preferred stock
Stock issued under employee stock purchase plan
Excess tax benefits from exercised stock options
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of non-cash investing and financing activities:
Loans transferred to repossessed assets
Accretion of preferred stock
Dividend payable to preferred stockholder
Stock issued in payment of director fees
Years ended December 31,
2009
2008
2010
$
13,552
$ 12,765
$
12,150
5,350
200
350
(102)
1,194
---
1,344
---
3
15
131
97
253
23
1,138
9,996
23,548
(5,464)
(50,517)
---
790
37,158
(26,923)
---
(1,723)
216
(46,463)
71,678
895
---
---
---
---
---
(3,205)
---
17
102
69,487
46,572
38,660
5,510
210
403
(157)
337
4
1,370
---
---
29
(257)
57
260
(7,203)
675
1,238
14,003
(8,706)
(57,814)
5,343
320
36,209
(34,156)
---
(1,121)
42
(59,883)
91,771
873
---
---
(1,800)
(28,000)
---
(2,960)
(451)
24
157
59,614
13,734
24,926
$
$
$
$
$
85,232
$ 38,660
7,246
7,610
270
---
---
200
$
$
$
$
$
7,110
8,571
168
945
---
233
$
$
$
$
$
$
5,010
253
428
(207)
247
2
1,340
(457)
14
---
4
123
152
1,847
597
9,353
21,503
(12,621)
(50,677)
21,489
1,125
38,683
(165,460)
(2,219)
(1,825)
---
(171,505)
17,648
1,384
27,039
961
56,800
---
(2,526)
(2,882)
---
32
207
98,663
(51,339)
76,265
24,926
10,694
8,965
---
16
97
247
Page - 55
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the accounts of Bank of Marin Bancorp
(“Bancorp”), a bank holding company, and its sole and wholly-owned bank subsidiary, Bank of Marin (the “Bank”, a
California state-chartered commercial bank). All material intercompany transactions have been eliminated. In the
opinion of Management, the consolidated financial statements contain all adjustments necessary to present fairly the
financial position, results of operations, changes in stockholders’ equity and cash flows. All adjustments are of a normal,
recurring nature. We have evaluated subsequent events through the date of filing with the Securities and Exchange
Commission (“SEC”) and have determined that there are no subsequent events that require additional recognition or
disclosure except as discussed in Note 19.
Nature of Operations: Bancorp, headquartered in Novato, CA, conducts business primarily through its wholly-owned
subsidiary, the Bank, which provides a wide range of financial services to customers, who are predominantly
professionals, small and middle-market businesses, and individuals who work and/or reside in Marin, San Francisco
and Sonoma counties. Besides the headquarter office in Novato, CA, the Bank operates ten branches in Marin County,
one in San Francisco and three in southern Sonoma County, as well as a loan production office in Santa Rosa. As
discussed in Note 19 below, the Bank also expanded to Napa in February 2011. Our accounting and reporting policies
conform to generally accepted accounting principles and general practice within the banking industry. A summary of our
significant policies follows.
Cash and Cash Equivalents include cash, due from banks, Federal funds sold and other short-term investments with
maturity less than three months at the time of origination.
Investment Securities are classified as “held to maturity,” “trading securities” or “available for sale.” Investments
classified as held to maturity are those that we have the ability and intent to hold until maturity and are reported at cost,
adjusted for the amortization or accretion of premiums or discounts. Investments held for resale in anticipation of short-
term market movements are classified as trading securities and are reported at fair value, with unrealized gains and
losses included in earnings. Investments that are neither held to maturity or trading are classified as available for sale
and are reported at fair value. Unrealized gains and losses, net of related tax, are reported as a separate component of
comprehensive income and included in stockholders’ equity until realized. For discussion of our methodology in
determining fair value, see Note 10.
At each financial statement date, Management assesses whether declines in the fair value of held-to-maturity and
available-for-sale securities below their costs are deemed to be other-than-temporary. Management considers, among
other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial
condition and near-term prospects of the issuer, and (iii) our intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery in fair value. Evidence evaluated includes, but is not limited to, the
remaining payment terms of the instrument and economic factors that are relevant to the collectability of the instrument,
such as: current prepayment speeds, the current financial condition of the issuer(s), industry analyst reports, credit
ratings, credit default rates, interest rate trends and the value of any underlying collateral.
For debt securities that are considered other-than-temporarily impaired, are not intended for sale and will not be
required to be sold prior to recovery of our amortized cost basis, we separate the amount of the impairment into the
amount that is credit related (credit loss component) and the amount due to all other factors. The credit-related other-
than-temporary-impairment component is charged to earnings and is calculated as the difference between the security’s
amortized cost basis and the present value of its expected future cash flows, which establishes a new cost basis for the
security. The remaining difference between the security’s fair value and the present value of future expected cash flows
is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.
The other-than-temporary impairment recognized in other comprehensive income for debt securities classified as held-
to-maturity is accreted from other comprehensive income to the amortized cost of the debt security over the remaining
life of the debt security in a prospective manner on the basis of the amount and timing of future estimated cash flows.
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.
Page - 56
Loans are reported at the principal amount outstanding net of deferred fees, charge-offs and the allowance for
loan losses. Interest income is accrued daily using the simple interest method. Loans are placed on non-accrual
status when Management believes that there is doubt as to the collection of principal or interest, generally when
they become contractually past due by ninety days or more with respect to principal or interest, except for loans
that are 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-period interest income and interest income is recorded only after
the loan is brought current or after all principal and past due interest has been collected. For loans whose
contractual terms have been restructured in a manner which grants a concession to a borrower experiencing
financial difficulties (“troubled debt restructuring”), they are returned to accrual status when there has been a
sustained period of repayment performance (generally, six consecutive monthly payments) according to the
modified terms and there is reasonable assurance of repayment and of performance.
Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and
amortized as yield adjustments over the contractual lives of the related loans.
Loan Charge-Off Policy: For all types of loans except overdraft accounts, we generally fully or partially charge
down a loan to the net realizable value for a non-collateral-dependent loan, or the fair value of collateral securing
the loan for a collateral-dependent loan when: (1) it is deemed uncollectable; (2) the loan has been classified as a
loss by either our internal loan review process or external examiners; or (3) the loan is 180 days past due unless
both well secured and in the process of collection. For an overdraft account, we generally charge it off when it is
more than 90 days old.
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 for
loan losses charged against earnings and reduced by charge-offs, net of recoveries.
In periodic evaluations of the adequacy of the allowance balance, Management considers current economic
conditions, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to
repay, the estimated value of any underlying collateral, our past loan loss experience and other factors. The
allowance for loan losses is based on estimates and ultimate losses may vary from current estimates. Our
Asset/Liability Management Committee (“ALCO”) reviews the adequacy of the allowance for loan losses at least
quarterly, to include consideration of the relative risks in the portfolio and current economic conditions. The
allowance is adjusted based on that review if, in the judgment of the ALCO and Management, changes are
warranted.
The overall allowance consists of specific allowances for individually identified impaired 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.).
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 and credit monitoring 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 for
impairment individually by Management. Management considers a loan to be impaired when it is probable we will
be unable to collect all amounts due according to the contractual terms of the loan agreement. When the fair
value of the impaired loan is less than the recorded investment in the loan, the difference is recorded as the
impairment through the establishment of the specific allowance. 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, based on the loan’s observable market price, or based on the fair value of the
collateral, if the loan is collateral dependent. Generally with problem credits that are collateral-dependent, we
obtain appraisals of the collateral at least annually. We may obtain appraisals more frequently if we believe the
collateral value is subject to market volatility, if a specific event has occurred to the collateral, or if we believe
foreclosure is imminent.
Page - 57
The second component is an estimate of the probable inherent losses in each loan pool stratified by major segments of
loans with similar characteristics in our loan portfolio. This analysis encompasses our entire loan portfolio but excludes
any loans that were analyzed individually for specific allowances discussed above. Loans are segmented into the
following pools: commercial real estate, construction, commercial, and consumer loans. Management also sub-
segments these segments into classes based on the associated risks within those segments. Commercial real estate
loans are divided into the following two classes: owner-occupied and non-owner-occupied. Consumer loans are divided
into three classes: residential real estate, home equity and other consumer loans. The total amount allocated for the
second component is determined by applying loss multipliers to outstanding loans in each loan pool. Loss multipliers for
loan pools are based on analysis of local economic factors, current loan portfolio quality, historical loss experience and
trends applicable to each loan pool. Local economic factors considered include state and local unemployment rates,
occupancy rates and sales statistics as external criteria for loan loss estimation. In addition, additional loss factors are
applied to substandard loans based on the increased risk of loss inherent in those credits.
The third component of the allowance for loan losses is an economic component, which is Management’s best estimate
of the probable impact that environmental changes may have on the loan portfolio as a whole. It is not allocated to
specific loans or groups of loans, but rather is intended to absorb losses caused by portfolio trends, concentration of
credit, growth, and economic trends.
Transfers of Financial Assets: We have entered into certain participation agreements with other organizations. We
account for these transfers of financial assets as sales when control over the transferred financial assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from
us, (2) the transferee has the right to pledge or exchange the assets (or beneficial interests) it received, free of
conditions that constrain it from taking advantage of that right, and (3) we do not maintain effective control over the
transferred financial assets or third-party beneficial interests related to those transferred assets. No gain or loss has
been recognized by us on the sale of these participation interests through December 31, 2010.
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 eight years and
equipment is generally depreciated over three to twenty years. Leasehold improvements are amortized over the lesser
of their estimated useful lives or the terms of the leases. When assets are sold or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred.
Employee Stock Ownership Plan (“ESOP”) and Related Debt: We recognize compensation cost when funds become
committed for the purchase of Bancorp’s common shares into the ESOP. To the extent that the fair value of Bancorp’s
ESOP shares committed to be released differ from the cost of those shares, the differential is charged or credited to
equity. The ESOP may be externally leveraged and, as such, the ESOP debt is recorded as a liability and interest
expense is recognized on such debt. The ESOP shares not yet committed to be released are accounted for as a
reduction in stockholders’ equity. During 2010 and 2009, the Bank made cash contribution to the ESOP without
leveraging.
Income Taxes reported in the consolidated financial statements are computed based on an asset and liability approach.
We recognize the amount of taxes payable or refundable for the current year, and deferred tax assets and liabilities for
the future tax consequences that have been recognized in the financial statement or tax returns. The measurement of
tax assets and liabilities is based on the provisions of enacted tax laws. Bancorp files consolidated federal and
combined state income tax returns.
Earnings per share (“EPS”) are based upon the weighted average number of common shares outstanding during each
year. The following table shows: (1) weighted average basic shares, (2) potential common shares related to stock
options, non-vested restricted stock, and stock warrant, and (3) weighted average diluted shares. Net income available
to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock and
amortization of discounts on the preferred stock. Basic EPS are calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS are
calculated using the weighted average diluted shares. The number of potential common shares included in annual
diluted EPS is a year-to-date weighted average of the number of potential common shares included in each quarterly
diluted EPS computation under the treasury stock method. Our calculation of weighted average shares includes two
classes of our outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted
stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in
undistributed earnings.
Page - 58
(in thousands, except per share data)
Weighted average basic shares outstanding
Add: Potential common shares related to stock options
Potential common shares related to non-vested restricted stock
Potential common shares related to warrant
Weighted average diluted shares outstanding
2010
5,238
46
4
26
5,314
2009
5,182
47
2
11
5,242
2008
5,135
81
---
1
5,217
Net income
Preferred stock dividends and accretion
Net income available to common stockholders
Basic EPS
Diluted EPS
Weighted average anti-dilutive shares not included in the calculation of
diluted EPS
Stock options
Non-vested restricted stock
Total anti-dilutive shares
$ 13,552
---
$ 13,552
$ 12,765
(1,299)
$ 11,466
$ 12,150
(113)
$ 12,037
$
$
2.59
2.55
$
$
2.21
2.19
$
$
2.34
2.31
151
---
151
156
---
156
241
7
248
Share-Based Compensation: All share-based payments granted subsequent to January 1, 2006, including stock
options and restricted stock, are recognized as stock-based compensation expense in the statements of income
based on the grant-date fair value of the award with a corresponding increase in common stock. The grant-date
fair value of the award is amortized over the requisite service period, which is generally the vesting period. The
stock-based compensation expense also includes share-based awards granted prior to, but not yet vested as of
January 1, 2006, the date we adopted grant-date fair value accounting for share-based payments.
We determine fair value at grant date using the Black-Scholes pricing model that takes into account the stock
price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the
expected dividend yield and the risk-free interest rate over the expected life of the option. The Black-Scholes
option valuation model requires the input of highly subjective assumptions, including the expected life of the
stock-based award and stock price volatility. The assumptions used represent Management’s best estimates
based on historical information, but these estimates involve inherent uncertainties and the application of
Management’s judgment. As a result, if other assumptions had been used, the recorded stock-based
compensation expense could have been materially different from that recorded in its financial statements. In
addition, we are required to estimate the expected forfeiture rates. If our actual forfeiture rate is materially different
from the estimate, the share-based compensation expense could be materially different.
Derivative Financial Instruments and Hedging Activities:
Fair Value Hedges: All of our interest rate swap contracts are designated and qualified as fair value hedges. We
apply shortcut hedge accounting for one of our interest rate swap contracts, as it is structured to mirror all of the
provisions of the hedged loan agreement. This interest rate swap is carried on the balance sheet at its fair value
in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The change
in the fair value of the interest rate swap is recorded in other non-interest income. As a result of interest rate
fluctuations, the hedged fixed-rate loan also gains or loses market value. The unrealized gain or loss resulting
from the change in market value of the hedged-loan is recorded as an adjustment to the hedged loan and offset in
other non-interest income. Under shortcut hedge accounting treatment, the change in fair value of the interest rate
swap is deemed perfectly offset by the change in fair value of the hedged loan, resulting in zero impact to net
income.
Page - 59
Four of our interest rate swap contracts are accounted for using non-shortcut hedge accounting treatment. The interest
rate swaps are closely aligned to the terms of the designated fixed-rate loans. The hedging relationships are tested for
effectiveness on a quarterly basis. The interest rate swaps are carried on the balance sheet at their fair value in other
assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The changes in the fair
value of the interest rate swaps are recorded in interest income. The unrealized gains or losses due to changes in fair
value of the hedged fixed-rate loans are recorded as an adjustment to the hedged loans and offset in interest income.
For derivative instruments executed with the same counterparty under a master netting arrangement, we do not offset
fair value amounts of interest rate swaps in liability position with the ones in asset position. For further detail, see Note
15.
Advertising Costs are expensed as incurred. For the years ended December 31, 2010, 2009, and 2008, advertising
costs totaled $459 thousand, $528 thousand, and $439 thousand, respectively.
Comprehensive Income for Bancorp includes net income reported on the statement of income and changes in the fair
value of investment securities available for sale, net of related taxes, reported as a component of stockholders’ equity.
Segment Information: Our two operating segments include the traditional community banking activities provided through
our branch network and our Wealth Management and Trust Services (“WMTS”). The activities of these two segments
are monitored and reported by Management as separate operating segments. The accounting policies of the segments
are the same as those described in this note. We evaluate segment performance based on total segment revenue and
do not allocate expenses between the segments. WMTS revenues were $1.5 million, $1.4 million and $1.3 million in
2010, 2009 and 2008, respectively, which are included in non-interest income in the statement of income. Non-interest
expenses applicable to WMTS totaled $1.3 million, $1.2 million and $1.1 million in 2010, 2009 and 2008, respectively.
The revenues of the community banking segment are reflected in all other income lines in the statement of income.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America 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. Significant accounting estimates reflected in the consolidated
financial statements include allowance for loan losses, other-than-temporary impairment of investment securities, share-
based payment, accounting for income taxes and fair value measurements as discussed in the Notes herein.
Recently Issued Accounting Standards
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business
Combinations to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations. This ASU is effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning January 1, 2011. It requires a
public entity to disclose pro forma revenue and earnings of the combined entity for the current reporting period as
though the acquisition date for all business combinations that occurred during the year had been as of the beginning of
the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of
the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all
business combinations that occurred during the current year had been as of the beginning of the comparable prior
annual reporting period. The amendments also expand the supplemental pro forma disclosures to include a description
of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings.
In December 2010, the FASB also issued ASU No. 2010-28, Intangibles—Goodwill and Other (Topic 350), When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The
amendments in this ASU affect all entities that have recognized goodwill and have one or more reporting units whose
carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments
in this ASU modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than
not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors
indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires
that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We do not
expect the above two ASUs to have a significant impact on our financial condition or results of operations.
Page - 60
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses. The ASU amends FASB Accounting Standards
Codification™ (the “Codification” or “ASC”) Topic 310, Receivables, to improve the disclosures about the credit
quality of an entity’s financing receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain
existing disclosures and provide certain new disclosures about its financing receivables and related allowance for
credit losses.
Existing disclosures are amended to require an entity to provide the following disclosures about its financing
receivables on a disaggregated basis:
(1) A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end
of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of
the impairment method;
(2) For each disaggregated ending balance in item (1) above, the related recorded investment in financing
receivables;
(3) The nonaccrual status of financing receivables by class of financing receivables;
(4) Impaired financing receivables by class of financing receivables.
The amendments in the ASU also require an entity to provide the following additional disclosures about its
financing receivables:
(1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing
receivables;
(2) The aging of past due financing receivables at the end of the reporting period by class of financing
receivables;
(3) A description of the entity’s accounting policies and methodology used to estimate the allowance for credit
losses by portfolio segments;
(4) The nature and extent of troubled debt restructurings that occurred during the period by class of financing
receivables and their effect on the allowance for credit losses, as well as the nature and extent of financing
receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the
reporting period by class of financing receivables and their effect on the allowance for credit losses; and
(5) Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio
segments.
The disclosures as of the end of a reporting period were effective for interim and annual reporting periods ended
December 31, 2010, which we have provided in Note 3 and Note 4. The disclosures about activity that occurs
during a reporting period will be effective for interim and annual reporting periods beginning January 1, 2011. As
this ASU is disclosure-related only, it did not have an impact on our financial condition or results of operations.
In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update
temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU No. 2010-20,
Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses for public entities. The delay is intended to allow the FASB time to complete its deliberations on
what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt
restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring
will then be coordinated. Without the deferral, public companies would be required to comply with the new
troubled debt restructurings disclosures in financial statements for interim and annual reporting periods beginning
after December 15, 2010. The deferral does not extend to any other provisions of the ASU No. 2010-20 about
credit quality disclosures.
Page - 61
In April 2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When
the Loan Is Part of a Pool That Is Accounted for as a Single Asset. This ASU codifies the consensus reached in
Emerging Issues Task Force (“EITF”) Issue No. 09-I, Effect of a Loan Modification When the Loan Is Part of a
Pool That Is Accounted for as a Single Asset. The amendments to the Codification provide that modifications of
loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from
the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An
entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if
expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope
of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-
30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.
ASU 2010-18 was effective prospectively for modifications of loans accounted for within pools under Subtopic
310-30 occurring in the first interim or annual period ended on or after July 15, 2010. Upon initial adoption of ASU
2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-
30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool
accounting to subsequent acquisitions of loans with credit deterioration. This ASU did not have a significant
impact on our financial condition or results of operations.
On February 24, 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to
Certain Recognition and Disclosure Requirements. The amendments in this ASU remove the requirement for an
SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised
financial statements. Revised financial statements include financial statements revised as a result of either
correction of an error or retrospective application of U.S. generally accepted accounting principles. The FASB
believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the
ASU were effective upon issuance.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. This ASU requires: (1) disclosure of the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the reasons for the
transfers; and (2) separate presentation of purchases, sales, issuances, and settlements in the reconciliation for
fair value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the
requirements of the following existing disclosures set forth in the Codification Subtopic 820-10: (1) For purposes
of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use
judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide
disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-
recurring fair value measurements. ASU 2010-06 was effective for interim and annual reporting periods that
began January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1,
2011, and for interim periods within those fiscal years. As ASU 2010-06 is disclosure-related only, our adoption of
this ASU in the first quarter of 2010 did not impact our financial condition or results of operations.
Note 2: Investment Securities
Our investment securities portfolio at December 31, 2010 and 2009 consists primarily of U.S. government agency
securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued
or guaranteed by FNMA, FHLMC, or GNMA. Our portfolio also includes obligations of state and political
subdivisions, as well as, corporate CMOs, and equity securities as reflected in the table below:
Page - 62
(in thousands)
Held to maturity
Obligations of state and political
December 31, 2010
December 31, 2009
Amortized
Cost
Fair
Value
Gross Unrealized Amortized
Cost
Gains
(Losses)
Fair
Value
Gross Unrealized
(Losses)
Gains
subdivisions
$ 34,917 $ 35,090 $
666 $
(493) $
30,396 $ 30,786 $
774 $
(384)
Available for sale
Securities of U. S. government
agencies:
MBS pass-through securities
issued by FNMA and FHLMC
CMOs issued by FNMA
CMOs issued by FHLMC
CMOs issued by GNMA
Debentures of government
sponsored agencies
Corporate CMOs
Equity Securities
Total available for sale
16,119
12,770
19,725
44,607
16,424
13,236
20,177
45,421
---
15,849
---
109,070
---
15,870
608
111,736
419
466
452
884
---
185
608
3,014
(114)
---
---
(70)
---
(164)
---
(348)
12,882
18,207
30,664
15,180
5,000
14,819
---
96,752
13,086
18,527
30,912
15,657
5,040
14,596
---
97,818
253
479
530
477
46
1
---
1,786
(49)
(159)
(282)
---
(6)
(224)
---
(720)
Total investment securities
$ 143,987 $ 146,826 $ 3,680 $
(841) $ 127,148 $ 128,604 $ 2,560 $ (1,104)
As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock at a zero cost basis. These
shares are restricted from resale until their conversion into Class A (voting) shares on the later of March 25, 2011 or the
termination of Visa Inc.’s covered litigation escrow account. The conversion rate will be determined upon the final resolution of
the Visa Inc. covered litigation described in Note 13. The stock is classified as available-for-sale securities and reported at fair
value, with the unrealized gain, net of tax, recognized in other comprehensive income. The fair value of the Class B common
stock, based on the current Class A conversion rate of 0.5102, was $608 thousand, at December 31, 2010. In connection with
Visa Inc.’s initial public offering (“IPO”) on March 19, 2008, we recognized a $457 thousand gain in 2008 on the mandatory
redemption of 10,677 shares of Visa Inc. Class B common stock representing the difference between the cash proceeds
received from Visa Inc. and the zero carrying basis of the stock redeemed.
The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2010 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. Equity securities with a zero cost basis and a fair value
of $608 thousand are excluded from the following table.
(in thousands)
Within one year
After one but within five years
After five years through ten years
After ten years
Total
December 31, 2010
Held to Maturity
Available for Sale
$
Amortized
Cost
1,478
5,304
20,589
7,546
$ 34,917
$
Fair Value
1,500
5,440
20,784
7,366
$ 35,090
Amortized
Cost
---
---
15,712
93,358
$ 109,070
Fair Value
---
---
16,134
94,994
$ 111,128
In 2010, there were no sales of available-for-sale or held-to-maturity securities. During 2009, four held-to-maturity securities
issued by the same issuer with a combined carrying value of $1.1 million, and another held-to-maturity security with a carrying
value of $335 thousand were sold due to evidence of significant deterioration of creditworthiness. The proceeds from the sales
totaled $1.4 million and the transactions resulted in net losses of $9 thousand recorded against 2009 earnings. In 2008, we
sold one held-to-maturity security due to deterioration of the issuer’s creditworthiness. The proceeds from the sale totaled $1.0
million and the transaction resulted in a loss of $2 thousand in 2008. In 2009, we sold one available-for-sale security with a
carrying value of $3.9 million. The proceeds from the sale totaled $3.9 million and the sale resulted in a gain of $5 thousand
recognized in earnings. In 2008, we sold $20.0 million in available-for-sale securities at no gain or loss as they were very
short-term in nature, with an average holding period from seven to twenty-eight days.
At December 31, 2010, investment securities carried at $1.3 million were pledged with the Federal Reserve Bank of San
Francisco (“FRB”) to secure our Treasury, Tax and Loan account. At December 31, 2010, investment securities carried at
$44.4 million were pledged with the State of California: $42.3 million to secure public deposits in compliance with the Local
Agency Security Program, $1.4 million to collateralize an internal WMTS checking account, and $667 thousand to provide
collateral for trust services. In addition, investment securities carried at $3.7 million were pledged to collateralize interest rate
swaps as discussed in Note 15.
Page - 63
Other-Than-Temporarily Impaired Debt Securities
For each security in an unrealized loss position, we assess whether we intend to sell the security, or it is more likely than not that we
will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities
that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery
of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component)
and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference
between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference
between the security’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit
related and is recognized in other comprehensive income.
We do not have the intent to sell the securities that are temporarily impaired, and it is more likely than not that we will not have to sell
those securities before recovery of the cost basis. Additionally, we have evaluated the credit ratings of our investment securities and
their issuers and/or insurers, if applicable. Based on our evaluation, Management has determined that no investment security in our
investment portfolio is other-than-temporarily impaired.
Twenty-nine and thirty investment securities were in unrealized loss positions at December 31, 2010 and 2009, respectively. They are
summarized and classified according to the duration of the loss period as follows:
December 31, 2010
(In thousands)
Held-to-maturity
Obligations of state & political
< 12 continuous months
Unrealized
loss
Fair value
> 12 continuous months
Unrealized
loss
Fair value
Total Securities in a loss position
Unrealized
loss
Fair value
subdivisions
$ 11,622
$
(250) $
1,687
$
(243) $
13,309
$
(493)
Available for sale
Securities of U. S. Government
Agencies
Corporate CMOs
Total available for sale
Total temporarily impaired
securities
December 31, 2009
(In thousands)
Held-to-maturity
Obligations of state & political
12,888
7,070
19,958
(184)
(164)
(348)
---
---
---
---
---
---
12,888
7,070
19,958
$ 31,580
$
(598) $
1,687
$
(243) $
33,267
$
(184)
(164)
(348)
(841)
< 12 continuous months
Unrealized
loss
Fair value
> 12 continuous months
Unrealized
loss
Fair value
Total Securities in a loss position
Unrealized
loss
Fair value
subdivisions
$
6,351
$
(76) $
1,753
$
(308) $
8,104
$
(384)
Available for sale
Securities of U. S. Government
Agencies
Corporate CMOs
Total available for sale
Total temporarily impaired
securities
25,737
14,384
40,121
(496)
(224)
(720)
---
---
---
---
---
---
25,737
14,384
40,121
(496)
(224)
(720)
$ 46,472
$
(796) $
1,753
$
(308) $
48,225
$
(1,104)
The unrealized losses associated with debt securities of U.S. government agencies are primarily driven by changes in interest rates
and not due to the credit quality of the securities. Further, securities backed by GNMA, FNMA, or FHLMC have the guarantee of the
full faith and credit of the U.S. Federal Government. Obligations of U.S. states and political subdivisions in our portfolio are all
investment grade without delinquency history. The security in a loss position for more than twelve continuous months at December
31, 2010 relates to one debenture issued by a local political subdivision with payments collected through property tax assessments in
an affluent community. This security is still investment grade without delinquency history. This security will continue to be monitored
as part of our ongoing impairment analysis, but is expected to perform. As a result, we concluded that it was not other-than-
temporarily impaired at December 31, 2010.
The unrealized losses associated with corporate CMO’s are primarily related to securities backed by residential mortgages. All of
these securities were AAA-rated at December 31, 2010 by at least one major rating agency. We estimate loss projections for each
security by assessing loans collateralizing the security and determining expected default rates and loss severities. Based upon our
assessment of expected credit losses of each security given the performance of the underlying collateral and credit enhancements
where applicable, we concluded that these securities were not other-than-temporarily impaired at December 31, 2010.
Page - 64
Securities Carried at Cost
As a member of the FHLB, we are required to maintain a minimum investment in the FHLB capital stock
determined by the Board of Directors of the FHLB. The minimum investment requirements can also increase in
the event we need to increase our borrowing capacity with the FHLB. Shares cannot be purchased or sold except
between the FHLB and its members at its $100 per share par value. We held $5.0 million and $4.7 million of
FHLB stock recorded at cost in other assets at December 31, 2010 and December 31, 2009, respectively. On
February 22, 2011, FHLB declared a cash dividend for the fourth quarter of 2010 at an annualized dividend rate of
0.29%. Management does not believe that the FHLB stock is other-than-temporarily-impaired, as we expect to be
able to redeem this stock at cost.
Note 3: Loans
The majority of our loan activity is with customers located in California, primarily in the counties of Marin, San
Francisco and Sonoma. More than half of our loans are for commercial real estate, 75% of which are secured by
real estate located in Marin, Sonoma and San Francisco counties, California. Approximately 86% of loans were
secured by real estate at both December 31, 2010 and 2009.
Outstanding loans by class and payment aging, net of deferred loan fees of $2.8 million and $2.9 million at
December 31, 2010 and 2009, respectively, are as follows:
Page - 65
Credit Quality of Loans
(Dollars in thousands)
December 31, 2010
30-59 days past due
60-89 days past due
Greater than 90 days past due
(non-accrual) 2
Total past due
Current
Total loans
Non-accrual loans to total loans
Troubled debt restructured loans 3
Accruing
Non-accrual
Total troubled debt restructed
loans
December 31, 2009
30-59 days past due
60-89 days past due
Greater than 90 days past due
(non-accrual) 2
Total past due
Current
Total loans
Non-accrual loans to total
loans
Troubled debt restructured
loans 3
Accruing
Non-accrual
Loan Aging Analysis by Class As of December 31, 2010 and 2009
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Commercial
Construction Home equity
Other
residential 1
Installment
and other
consumer
$
20 $
-
- $
-
- $
-
- $
-
25 $
-
- $
-
307 $
-
Total
352
-
2,486
2,506
151,330
$ 153,836 $
632
632
141,958
142,590 $
-
-
383,553
383,553 $
9,297
9,297
68,322
77,619 $
-
25
86,907
86,932 $
12,925
362
148
13,277
669
148
69,843
928,123
26,210
69,991 $ 26,879 $ 941,400
1.6%
0.4%
-
12.0%
-
-
1.3%
1.4%
$
$
$
- $
-
- $
48 $
155
- $
-
- $
- $
-
- $
-
- $
- $
-
910
1,113
163,530
$ 164,643 $
-
-
146,133
146,133 $
3,722
3,722
329,030
332,752 $
- $
-
- $
- $
611
6,520
7,131
84,158
91,289 $
259 $
-
- $
-
925 $
55
1,184
55
259 $
- $
980 $
1,239
- $
-
- $
-
22 $
-
70
766
100
100
83,877
83,977 $
11,565
313
-
12,401
335
-
69,369
905,347
29,250
69,369 $ 29,585 $ 917,748
0.6%
0.0%
1.1%
7.1%
0.1%
-
1.1%
1.3%
$
49 $
-
Total troubled debt restructed
loans
$
49 $
- $
-
- $
- $
-
- $
-
-
- $
- $
-
- $
- $
-
566 $
165
615
165
- $
731 $
780
1 Our residential loan portfolio includes no sub-prime loans, nor is it our normal practice to underwrite loans commonly
referred to as “Alt-A mortgages”, the characteristics of which are loans lacking full documentation, borrowers having low FICO
scores or collateral compositions reflecting high loan-to-value ratios.
2 There were no accruing loans past due more than 90 days at December 31, 2010 or 2009.
3 Defined as loans whose contractual terms have been restructured in a manner which grants a concession to a borrower
experiencing financial difficulties. These balances are included in the impaired loan totals in the table in Note 4 below.
Our commercial loans are generally made to established small businesses to provide financing for their working capital needs
or acquisition of fixed-assets. Management examines current and projected cash flows to determine the ability of the borrower
to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower
and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as
expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by
the assets being financed or other business assets such as accounts receivable or inventory and incorporate a personal
guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts
receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers. We target stable local businesses with strong guarantors that have
proven to be more resilient in periods of economic stress. Typically the strong guarantors provide an additional source of
repayment for our credit extensions.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans, in addition to
those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. Repayment of commercial real estate loans is largely dependent on the successful operation of the property securing
the loan, or the business conducted on the property securing the loan. Underwriting for these loans must meet a minimum
debt coverage ratio of 1.20:1.00, and we also require a conservative loan-to-value of 65% or less. Furthermore, substantially
all of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be more adversely affected
by conditions in the real estate markets or in the general economy. In the event of a vacancy, strong guarantors have
historically carried the loans until a replacement tenant can be found. The owner’s substantial equity investment provides a
strong economic incentive to continue to support the commercial real estate projects. As such, we experience nominal
delinquencies in this portfolio.
Page - 66
Construction loans are generally made to developers and builders to finance land acquisition as well as the
subsequent construction. These loans are underwritten after evaluation of the borrower’s financial strength,
reputation, prior track record and obtaining independent appraisal reviews. The construction industry can be
severely impacted by several major factors, including: 1) the inherent volatility of real estate markets; 2)
vulnerability to weather delays, labor, or material shortages and price hikes; and, 3) generally thin margins and
tight cash flow. Estimates of construction costs and value associated with the complete project may be
inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project.
Consumer loans primarily consist of home equity lines of credit and loans, other residential (tenancy-in-common,
or “TIC”) loans and other personal loans. We originate consumer loans utilizing credit score information, debt-to-
income ratio and loan-to-value ratio analysis. To monitor and manage consumer loan risk, policies and
procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that
are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed
by Management on a regular basis. Underwriting standards for home equity loans include, but are not limited to, a
maximum loan-to-value percentage of 75% of loans that are $1,250,000 or less (and even more conservatively for
homes with values in excess of this amount), collection remedies, the number of such loans a borrower can have
at one time and documentation requirements. Our underwriting of the other residential loans, mostly secured by
TIC units in San Francisco, has been cautious compared to traditional residential mortgages due to the interest-
only feature of these loans. However, these borrowers tend to have a larger equity in this category, which
mitigates risk. Personal loans are nearly evenly split between mobile home loans and floating home loans along
with a small number of direct auto loans and installment loans. Personal unsecured loans are offered to
consumers with additional underwriting procedures in place, including net worth, and borrowers’ verified liquid
assets analysis. In general, personal loans usually have a higher degree of risk than other types of loans.
We use a risk rating system as a tool used to evaluate asset quality, and to identify and monitor credit risk in
individual loans, and ultimately in the portfolio. Definitions of risk grades of Criticized and Classified loans are
consistent with those used by the regulators. Our internally assigned grades are as follows:
Pass – Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate
fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in
this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt
service coverage ratios. These borrowers are capable of sustaining normal economic, market or operational
setbacks without significant financial impacts. Financial ratios and trends are acceptable. Negative external
industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate
collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category
also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be
a transitional grade, with either an upgrade or downgrade within a reasonable period.
Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential
weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not
present sufficient risk to warrant adverse classification.
Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the
collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some
loss if such weaknesses or deficiencies are not corrected. Loss potential, while inherent in the aggregate
substandard amount, does not necessarily exist in the individual assets classified Substandard. Well-defined
weaknesses include adverse trends or developments of the borrower’s financial condition, managerial
weaknesses and/or significant collateral deficiencies.
Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific
pending events that work to strengthen the asset, however, the amount or timing of the loss may not be
determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples
include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral;
and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependant.
Page - 67
We regularly review our credits for accuracy of risk grades whenever new financial information is received.
Borrowers are required to submit financial information at regular intervals:
• Generally, commercial borrowers with lines of credit are required to submit financial information
regularly with reporting intervals ranging from monthly to annually depending on credit size, risk and
complexity.
Investor commercial real estate borrowers with loans greater than $2.5 million are required to submit
rent rolls or property income statements at least annually. It has been our practice to require rent rolls
or property income statements for loans $750 thousand or greater for approximately the last two
years.
•
• Construction loans are monitored monthly, and assessed on an ongoing basis.
• Home equity and other consumer loans are assessed based on delinquency.
• Loans graded “Watch” or more severe, regardless of loan type, are assessed no less than quarterly.
The following table represents our analysis of loans by internally assigned grades as of December 31, 2010:
Credit Quality Indicators As of December 31, 2010
(Dollars in thousands)
Commercial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home
equity
Other
residential
Installment
and other
consumer
Total
Credit Risk Profile by
Internally Assigned
Grade:
Pass
Special mention
Substandard
Doubtful
Total loans
$
$
120,428 $
17,009
16,169
230
153,836 $
135,443 $
454
6,693
-
142,590 $
369,976 $
330
13,247
-
383,553 $
57,779 $ 84,830 $
10,253
9,587
-
447
1,655
-
77,619 $ 86,932 $
64,570 $ 26,280 $ 859,305
28,493
53,200
402
69,991 $ 26,879 $ 941,400
-
5,421
-
-
427
172
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying
loans equal to the amount of our line of credit, which totaled $219.2 million and $236.2 million at December 31,
2010 and 2009, respectively, In addition, we pledge a certain residential loan portfolio, which totaled $40.2 million
and $38.0 million at December 31, 2010 and 2009, respectively, to secure our borrowing capacity with the FRB.
Also see Note 8 below.
Related Party 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 persons not related to us. Likewise, these transactions do not involve more than
the normal risk of collectability or present other unfavorable features.
Page - 68
An analysis of net loans to related parties for each of the three years ended December 31, 2010, 2009 and 2008 is as follows:
(In thousands)
Balance at beginning of year
Additions
Repayments
Reclassified as unrelated-party loan
Balance at end of year
2010
7,401
95
(499)
---
6,997
$
$
2009
7,421
331
(274)
(77)
7,401
$
$
2008
7,899
72
(550)
---
7,421
$
$
The undisbursed commitment to related parties was $1.1 million as of December 31, 2010.
Note 4: Allowance for Loan Losses
Impaired loan balances and their related allowance by major classes of loans
(Dollars in thousands)
December 31, 2010
Commercial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home equity
Other
residential
Installment
and other
consumer
Total
Recorded investment in impaired
loans:
With no specific allowance
recorded
With a specific allowance
recorded
Total recorded investment in
impaired loans
Unpaid principal balance of
impaired loans:
With no specific allowance
recorded
With a specific allowance
recorded
Total unpaid principal balance
of the impaired loans
Specific allowance
Average recorded investment in
impaired loans during the
year
Interest income recognized on
impaired loans during the
year
December 31, 2009
Recorded investment in Impaired
loans:
With no specific allowance
recorded
With a specific allowance
recorded
Total recorded investment in
impaired loans
Specific allowance
Average recorded investment in
impaired loans during the
year
Interest income recognized on
impaired loans during the
year
$
959 $
633 $
--- $
8,742 $
--- $
--- $
73 $ 10,407
1,526
--- $
---
555
259
148
1,214
3,702
$
2,485 $
633 $
--- $
9,297 $
259 $
148 $
1,287 $ 14,109
$
$
$
$
$
959 $
689 $
--- $
11,485 $
--- $
--- $
115 $ 13,248
2,570
---
---
555
259
148
1,214
4,746
3,529 $
689 $
--- $
12,040 $
259 $
148 $
1,329 $ 17,994
667 $
--- $
--- $
3 $
25 $
93 $
290 $
1,078
1,326
3,086
---
6,326
191
39
1,212
12,180
85
22
---
336
8
5
66
522
626
333
3,722
---
---
---
6,520
---
100
---
---
---
452
11,420
427
760
959 $
3,722 $
--- $
6,520 $
100 $
--- $
879 $ 12,180
2 $
--- $
--- $
--- $
--- $
--- $
43 $
45
$
8,326
$
425
The gross interest income that would have been recorded had non-accrual loans been current totaled $756
thousand, $728 thousand and $180 thousand in the years ended December 31, 2010, 2009 and 2008,
respectively. We recognized interest income of $482 thousand, $407 thousand and $367 thousand on these non-
accrual loans for cash payments received during the years ended December 31, 2010, 2009 and 2008,
respectively.
Page - 69
Generally, we charge off our estimated losses related to specifically-identified impaired loans when it is deemed
uncollectible. The charged-off portion of impaired loans outstanding at December 31, 2010 totaled approximately
$3.9 million. At December 31, 2010, there were no significant commitments to extend credit on impaired loans,
including loans to borrowers whose terms have been modified in troubled debt restructurings.
Management monitors delinquent loans continuously and identifies problem loans, generally loans graded
substandard or worse, to be evaluated individually for impairment testing. The following table discloses loans by
major portfolio categories and the specific allowance for loan losses disaggregated by impairment evaluation
method as of December 31, 2010, as well as activity in the allowance for loan losses for the year ended
December 31, 2010:
Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31,
2010
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home equity
Other
residential
Installment
and other
consumer
Unallocated
Total
(Dollars in thousands)
Commercial
Allowance for loan losses:
Beginning balance
Provision (reversal)
Charge-offs
Recoveries
Ending balance
$
$
2,544
1,118
(643 )
95
3,114
Ending balance related to loans collectively
evaluated for impairment
$
2,447
Ending balance related to loans individually
evaluated for impairment
$
667
Loans outstanding:
Collectively evaluated for impairment
Individually evaluated for impairment
Total
$
$
151,351
2,485
153,836
$
$
$
$
$
$
1,006
78
(47)
---
1,037
1,037
---
141,957
633
142,590
$
$
$
$
$
$
3,000
1,134
---
---
4,134
4,134
---
383,553
---
383,553
$
$
$
$
$
$
1,832
2,395
(2,628)
95
1,694
1,691
3
68,322
9,297
77,619
$
$
$
$
$
$
586
207
(150)
---
643
618
25
86,673
259
86,932
$
$
$
$
$
$
734
4
---
---
738
645
93
69,843
148
69,991
$
$
$
$
$
$
662
471
(318)
20
835
545
290
25,592
1,287
26,879
$
$
$
$
$
Ratio of allowance for loan losses to total
loans at end of year
Allowance for loan losses to non-accrual
loans at year end
2.02 %
0.73%
1.08%
2.18%
0.74%
1.05%
3.11%
125 %
164%
NA
18%
NA
499%
231%
254 $ 10,618
5,350
(57)
(3,786)
---
210
---
197 $ 12,392
197 $ 11,314
--- $
1,078
--- $ 927,291
---
14,109
--- $ 941,400
---
---
1.32%
96%
Activity in the allowance for loan losses for each of the two years ended December 31, 2009 and 2008 follows:
(Dollars in thousands)
Allowance for loan losses:
Beginning balance
Provision
Charge-offs
Recoveries
Ending balance
2009
2008
$
9,950
5,510
(5,362)
520
$ 10,618
$
$
7,575
5,010
(2,680)
45
9,950
Total loans outstanding at end of year, before deducting allowance for loan losses
$ 917,748
$ 890,544
Ratio of allowance for loan losses to total loans at year end
Allowance for loan losses to non-accrual loans at year end
Non-accrual loans to total loans at year end
1.16%
1.12%
91.81%
148.68%
1.26%
0.75%
Page - 70
Note 5: Bank Premises and Equipment
A summary of Bank premises and equipment at December 31 follows:
(Dollars in thousands)
Leasehold improvements
Furniture and equipment
Subtotal
Accumulated depreciation and amortization
Bank premises and equipment, net
2010
$ 11,052
9,025
20,077
(11,658)
8,419
$
2009
$ 11,011
9,121
20,132
(12,089)
8,043
$
The amount of depreciation and amortization was $1.3 million, $1.4 million and $1.3 millions for the years ended
December 31, 2010, 2009 and 2008, respectively.
In the last three years, we contracted with a construction company managed and owned by a member of the
Board of Directors of the Bank and Bancorp for the construction of leasehold improvements to our two newest
branch offices. During 2010, 2009 and 2008, we paid $752 thousand, $420 thousand and $611 thousand,
respectively, for these improvements.
Note 6: Bank Owned Life Insurance
We have purchased eighty-six life insurance policies on the lives of certain officers designated by the Board of
Directors to finance employee benefit programs as of December 31, 2010. Death benefits provided under the
specific terms of these programs are estimated to be $41.3 million at December 31, 2010 and the benefits to
employees’ beneficiaries are limited to the employee’s active service period. The investment in the Bank owned
life insurance (“BOLI”) policies are reported in interest receivable and other assets at their cash surrender value of
$18.3 million and $17.6 million at December 31, 2010 and 2009, respectively. The cash surrender value includes
both the original premiums we paid in the life insurance policies and the accumulated accretion of policy income
since inception of the policies. Income of $690 thousand, $696 thousand and $640 thousand was recognized on
the life insurance policies in 2010, 2009 and 2008, respectively, and is reported in other non-interest income. The
income is net of mortality costs recognized, which totaled $113 thousand, $102 thousand and $89 thousand for
the years ended December 31, 2010, 2009 and 2008, respectively. We regularly monitor the credit ratings of our
four insurance carriers to ensure that they are in compliance with our policy.
Note 7: Deposits
Total time deposits were $200.3 million and $159.5 million at December 31, 2010 and 2009, respectively. Of
these amounts, $155.7 million and $112.2 million represented time deposits greater than $100,000 at December
31, 2010 and 2009, respectively. Interest on time deposits was $2.3 million, $2.3 million and $2.7 million in 2010,
2009 and 2008, respectively. Scheduled maturities of these deposits at December 31, 2010 are presented as
follows:
(Dollars in thousands)
Scheduled maturities of time
2011
2012
2013
2014
2015
Thereafter
Total
deposits
$ 173,765
$ 14,613
$ 2,884
$ 2,035
$ 6,958
---
$ 200,255
In 2008, we began to offer the CDARS® deposit product, short for Certificate of Deposit Account Registry Service.
Through CDARS®, we may accept deposits in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insured maximum from a depositor and place the deposits through a network to other member banks in
increments of less than the FDIC insured maximum to provide the depositor full FDIC insurance coverage. When
we receive an equal dollar amount of deposits from other member banks in exchange for the deposits we place
into the network, we record these as CDARS® deposits. At December 31, 2010 and 2009, CDARS® deposits
totaled $67.3 million and $51.8 million, respectively.
As of December 31, 2010, $31.6 million in securities held to maturity and $10.8 million in securities available for
sale were pledged as collateral for our local agency deposits.
Page - 71
The aggregate amount of deposit overdrafts that have been reclassified as loan balances were $184 thousand
and $230 thousand at December 31, 2010 and 2009, respectively. Collectability of these overdrafts is subject to
the same credit review process as the other loans.
The Bank accepts deposits from shareholders, directors and employees in the normal course of business, and the
terms are comparable to those with non-affiliated parties. The total deposits from directors and their businesses,
and executive officers were $7.0 million at both December 31, 2010 and 2009.
Note 8: Borrowings
Federal Funds Purchased– We have unsecured lines of credit totaling $77.0 million with correspondent banks for
overnight borrowings. In general, interest rates on these lines approximate the Federal funds target rate. At
December 31, 2010 and 2009, we had no borrowings outstanding under these credit facilities.
Federal Home Loan Bank Borrowings – As of December 31, 2010 and 2009, we had lines of credit with the FHLB
totaling $219.2 million and $236.2 million, respectively, based on eligible collateral, mainly a portfolio of loans. At
December 31, 2010 and 2009, we had no overnight borrowings with the FHLB.
On February 5, 2008, we entered into a ten-year borrowing agreement under the same FHLB line of credit for
$15.0 million at a fixed rate of 2.07%. Interest-only payments are required every three months until maturity.
Although the entire principal is due on February 5, 2018, the FHLB has the unconditional right to accelerate the
due date on February 5, 2011 and every three months thereafter (the “put dates”). If the FHLB exercises its right
to accelerate the due date, the FHLB will offer replacement funding at the current market rate, subject to certain
conditions. We must comply with the put date, but are not required to accept replacement funding.
On December 16, 2008, we entered into a five-year borrowing agreement under the FHLB line of credit for $20.0
million at a fixed rate of 2.54%. Interest-only payments are required every month until maturity.
On January 23, 2009, we entered into a three-year borrowing agreement under the FHLB line of credit for $20.0
million at a fixed rate of 2.29%. Interest-only payments are required every month until maturity.
At December 31, 2010, $164.2 million remained available for borrowing from the FHLB. The FHLB overnight
borrowing and the FHLB line of credit are secured by a certain loan portfolio under a blanket lien.
Federal Reserve Line of Credit – We also have a line of credit with the FRB secured by a certain residential loan
portfolio. At December 31, 2010 and December 31, 2009, we had borrowing capacity under this line totaling $40.2
and $38.0 million, respectively, and had no outstanding borrowings with the FRB.
Subordinated Debt – On September 17, 2004 we issued a fifteen-year, $5.0 million subordinated debenture
through a pooled trust preferred program, which matures on June 17, 2019. We have the right to redeem the
debenture, in whole or in part, at the redemption price at principal amounts in multiples of $1.0 million on any
interest payment date on or after June 17, 2009. The interest rate on the debenture changes quarterly and is paid
quarterly at the three-month LIBOR plus 2.48%. The rate at December 31, 2010 was 2.78%. The debenture is
subordinated to the claims of depositors and our other creditors.
Borrowings at December 31, 2010 and 2009 are summarized as follows:
(Dollars in thousands)
Overnight borrowings
FHLB fixed-rate advances
Subordinated debenture
$
Carrying
Value
----
55,000
5,000
2010
Average
Balance
2,000
55,000
5,000
$
Average
Rate
0.29% $
2.33%
2.94%
Carrying
Value
----
55,000
5,000
2009
Average
Balance
$ 10,659
53,794
5,000
Average
Rate
0.26%
2.33%
3.55%
The maximum amount outstanding at any month end for overnight borrowings was zero and $60.4 million, during
2010 and 2009, respectively.
Page - 72
Note 9: Stockholders’ Equity and Stock Option Plans
Preferred Stock
In response to stress in the credit markets and to protect and recapitalize the U.S. financial system, on October 3,
2008, the Emergency Economic Stabilization Act of 2009 (“EESA”) was signed into law. EESA includes provisions
of the United States Department of the Treasury Capital Purchase Program (the “TCPP”), which was intended to
inject liquidity into, and stabilize the financial industry. On November 19, 2008, we received preliminary approval
from the U.S. Treasury to participate in the TCPP. On December 5, 2008 Bancorp issued to the U.S. Treasury
28,000 shares of senior preferred stock with a zero par value and a $1,000 per share liquidation preference, along
with a warrant to purchase 154,242 shares of common stock at a per share exercise price of $27.23, in exchange
for aggregate consideration of $28.0 million. Dividends were to be paid quarterly in arrears on February 15, May
15, August 15 and November 15 of each year with a 5% coupon dividend rate for the first five years and 9%
thereafter. The attached warrant was immediately exercisable and expires ten years after the issuance date.
The proceeds of $28 million were allocated between the preferred stock and the warrant with $27.0 million
allocated to preferred stock and $961 thousand allocated to the warrant, based on their relative fair value at the
time of issuance. The fair value of the preferred stock was estimated using discounted cash flows with a discount
rate of 9%. The fair value of the warrant was estimated using the Black-Scholes option pricing model with the
following assumptions: 1) risk-free interest rate of 2.67% (the Treasury ten-year yield rate as of warrant issuance
date); 2) estimated life of ten years (contractual term of the warrant); 3) volatility of 29% (historical volatility based
on our stock price over the past ten years preceding the warrant issuance date); and 4) dividend yield of 2.59%
(expected annual dividend divided by stock price as of warrant issuance date). The difference between the
liquidation amount of the preferred stock and its initial carrying amount was to be accreted over the five-year
period preceding the 9% perpetual dividend, using effective yield method.
Under the American Recovery and Reinvestment Act of 2009, which allows participants in the TCPP to withdraw
from the program, we repurchased all 28,000 shares of outstanding preferred stock from the U.S. Treasury at $28
million plus accrued but unpaid dividends of $179 thousand on March 31, 2009. At the time of repurchase, we
also accelerated the remaining accretion of the preferred stock totaling $945 thousand through retained earnings,
reducing our net income available to common stockholders. The warrant remains outstanding, and was
subsequently adjusted for cash dividend increases to represent a right to purchase 154,521 shares of common
stock at $27.18 per share in accordance with Section 13(c) of the Form of Warrant to Purchase Common Stock.
Common Stock
As of December 31, 2010, Bancorp was authorized to issue fifteen million shares of common stock with no par
value.
Share-Based Awards
On May 11, 2010, our shareholders approved the 2010 Director Stock Plan to pay director fees in shares of
Bancorp common stock up to 150,000 shares. In 2010, our directors were awarded a total of 3,190 common
shares from the 2010 Director Stock plan in addition to their cash compensation.
On May 8, 2007, the 2007 Equity Plan was approved by the Bank shareholders. The 2007 Equity Plan was
subsequently adopted by Bancorp as part of the holding company formation. All new share-based awards from
the approval date forward are granted through the 2007 Equity Plan.
The 2007 Equity plan provides financial incentives for selected employees, advisors and non-employee directors.
Terms of the plan provide for the issuance of up to 500,000 shares of common stock for these employees,
advisors and non-employee directors. As of December 31, 2010, there were 352,774 shares available for future
grants under the 2007 Equity Plan. The Compensation Committee of the Board of Directors has the discretion to
determine which employees, advisors and non-employee directors will receive an award, the timing of awards, the
vesting schedule for each award, the type of award to be granted, the number of shares of Bancorp stock to be
subject to each option and restricted stock award, and any other terms and conditions. In 2010, our directors were
awarded a total of 3,030 common shares from the 2007 Equity plan in addition to their cash compensation.
Page - 73
Effective July 1, 2007, we adopted an Employee Stock Purchase Plan whereby our employees may purchase Bancorp
common shares through payroll deductions of between one percent and fifteen percent of pay in each pay period.
Shares are purchased quarterly at a five percent discount from the closing market price on the last day of the quarter.
The plan calls for 200,000 common shares to be set aside for employee purchases, and there were 196,998 shares
available for future grants under the plan as of December 31, 2010.
We also have the 1999 Stock Option Plan and the 1989 Stock Option Plan for certain full-time employees and directors
who have substantial responsibility for the successful operation of the Bank. Stock options granted pursuant to the 1989
and 1999 Stock Option Plans were subsequently adopted by Bancorp as part of the holding company formation. Stock
options under these plans now relate to shares of common stock of Bancorp. Upon approval of the 1999 Stock Option
Plan, no new awards were granted under the 1989 Stock Option Plan. Upon approval of the 2007 Equity Plan, no new
awards were granted under the 1999 Stock Option Plan.
Options are issued with exercise price equal to the fair market value of the stock at the date of grant. Options to officers
and employees granted prior to January 1, 2006 vested 20% immediately and 20% on each anniversary of the grant
date for four years. Options granted subsequent to January 1, 2006 and restricted stock vested 20% on each
anniversary of the grant date for five years. All officer and employee options expire ten years from the grant date.
Options granted to non-employee directors vest 20% immediately and 20% on each anniversary of the grant date for
four years. Director options expire seven years from the grant date.
A summary of activity for stock options for the years ended December 31, 2010, 2009 and 2008 is presented below.
Options outstanding at December 31,
2007
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31,
2008
Exercisable (vested) at December 31,
2008
Options outstanding at December 31,
2008
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31,
2009
Exercisable (vested) at December 31,
2009
Options outstanding at December 31,
2009
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31,
2010
Exercisable (vested) at December 31,
2010
Number of
Shares
Weighted
Average
Exercise Price
Aggregate
Intrinsic
Value
(in thousands)
Weighted
Average
Grant-Date
Fair Value
Average
Remaining
Contractual
Term
(in years)
$
481,975
31,651
(16,370)
(95,298)
401,958
$
23.64
28.06
24.25
14.52
26.12
$
3,593
---
123
1,361
1,278
7.98
6.83
8.24
6.59
8.16
5.47
---
---
---
5.53
275,834
23.16
1,278
8.31
4.56
401,958
36,200
(17,188)
(61,175)
359,795
26.12
22.25
30.48
14.28
27.54
1,278
373
55
826
2,016
8.16
5.31
9.31
6.49
8.10
5.53
---
---
---
5.43
245,562
26.77
1,537
8.71
4.41
359,795
29,601
(21,652)
(49,940)
317,804
27.54
32.74
31.41
17.92
29.27
2,016
67
78
782
1,828
8.10
9.01
8.31
6.70
8.39
5.43
---
---
---
5.18
225,246
29.12
1,330
8.84
4.30
Page - 74
The following table summarizes non-vested share-based awards at December 31, 2010, and changes during the
year ended December 31, 2010.
Nonvested awards at December 31, 2009
Granted
Vested
Forfeited
Nonvested awards at December 31, 2010
Options
Restricted Stock
Weighted
Average
Grant-Date
Fair Value
6.77
9.01
7.13
7.19
7.28
$
$
Number of
Shares
114,233
29,601
(39,846)
(11,430)
92,558
Weighted
Average
Grant-Date
Fair Value
24.31
33.10
24.63
27.02
27.03
$
$
Number of
Shares
16,935
6,150
(3,655)
(2,320)
17,110
As of December 31, 2010, there was $817 thousand of total unrecognized compensation expense related to non-
vested stock options and restricted stock. This cost is expected to be recognized over a weighted average period
of approximately three years. The total grant-date fair value of option shares vested during the years ended
December 31, 2010, 2009 and 2008 was $284 thousand, $375 thousand and $522 thousand, respectively. The
total grant-date fair value of restricted stock vested during 2010 and 2009 was $90 thousand and $39 thousand,
respectively.
A summary of the options outstanding and exercisable by price range as of December 31, 2010 is presented in
the following table:
Range of Exercise Prices
$10.01 - $15.00
$15.01 - $20.00
$20.01 - $25.00
$25.01 - $30.00
$30.01 - $35.00
$35.01 - $40.00
Stock Options Outstanding as of December 31, 2010
Weighted
Remaining
Average
Contractual Life
Exercise Price
(in years)
13.24
0.7
16.95
2.1
22.25
8.2
27.34
4.6
32.95
5.3
35.21
6.1
Stock
Options
Outstanding
18,322
10,419
31,190
70,945
146,620
40,308
317,804
$
$
$
$
$
$
Stock Options Exercisable as of December 31, 2010
Weighted
Average
Exercise Price
13.24
16.95
22.25
27.11
32.91
35.22
Stock Options
Exercisable
18,322
10,419
5,990
55,584
109,423
25,508
225,246
$
$
$
$
$
$
The fair value of stock options on the grant date is recorded as a stock-based compensation expense in the
statements of income over the requisite service period with a corresponding increase in common stock. Stock-
based compensation also includes compensation expense related to the issuance of non-vested restricted
common shares pursuant to the 2007 Equity Plan. The grant-date fair value of the restricted common shares,
which equals its intrinsic value on that date, is being recorded as compensation expense over the requisite
service period with a corresponding increase in common stock as the shares vest. In addition, we record excess
tax benefits on the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options
and vesting of restricted stock as an addition to common stock with a corresponding decrease in current taxes
payable.
We determine the fair value of stock options at grant date using the Black-Scholes pricing model that takes into
account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the
underlying stock, the expected dividend yield and the risk-free interest rate over the expected life of the option.
The weighted average assumptions used in the pricing model are noted in the table below. The expected term of
options granted is derived from historical data on employee exercise and post-vesting employment termination
behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the common stock.
Page - 75
Risk-free interest rate
Expected dividend yield on common stock
Expected life in years
Expected price volatility
December 31, 2010
Years ended
December 31, 2009
December 31, 2008
2.94%
1.85%
6.7
28.20%
2.25%
2.52%
6.4
28.99%
3.50%
2.00%
6.5
23.93%
For options granted after January 1, 2006, the fair value of the option is expensed on a straight-line basis over the
vesting period. Forfeitures are estimated and expense is recognized only for those shares expected to vest. The
estimated forfeiture rate over the life of the options, based on historical forfeiture experience, was 5.0% in 2010
and 7.5% in 2009 and 2008.
The Black-Scholes option valuation model requires the input of highly subjective assumptions, including the
expected life of the stock based award and stock price volatility. The assumptions listed above represent
Management’s best estimates based on historical information, but these estimates involve inherent uncertainties
and the application of Management’s judgment. As a result, if other assumptions had been used, the recorded
share-based compensation expense could have been materially different from that reflected in these financial
statements. If the actual forfeiture rate is materially different from the estimate, the share-based compensation
expense could also be materially different.
Dividends
Presented below is a summary of preferred dividends on preferred stock issued under the TCPP, as well as cash
dividends paid to common shareholders, both of which were recorded as a reduction of retained earnings.
(in thousands except per share data)
Preferred dividends
Cash dividends to common shareholders
Cash dividends per common share
Years ended December 31
2009
2010
2008
$
$
$
---
3,205
0.61
$
$
$
354
2,960
0.57
$
$
$
97
2,882
0.56
The holders of non-vested restricted common shares are entitled to dividends on the same per-share ratio as the
holders of common stock. Dividends paid on the portion of share-based awards not expected to vest are included
in stock-based compensation expense. Tax benefits on dividends paid on the portion of share-based awards
expected to vest are recorded as an increase to common stock with a corresponding decrease in current taxes
payable.
Under the California Corporations Code, payment of dividends by Bancorp is restricted to the amount of retained
earnings immediately prior to the distribution. Under this restriction, approximately $65.0 million of the retained
earnings balance was available for payment of dividends as of December 31, 2010.
Under the California Financial Code, payment of dividends by the Bank to Bancorp is restricted to the lesser of
retained earnings or the amount of undistributed net profits of the Bank from the three most recent fiscal years. As
we repurchased the preferred stock issued as part of the TCPP discussed earlier, the Bank paid a dividend of $28
million to Bancorp to fund such repurchase. Distributions from the Bank to Bancorp through 2013 will require
regulatory approval. In 2010, after approval by the DFI, the Bank paid a total of $3.0 million in dividends to
Bancorp to cover Bancorp’s estimated operational needs and cash dividends to shareholders for the next several
quarters.
On July 2, 2007, Bancorp executed a shareholder rights agreement (“Rights Agreement”) designed to discourage
takeovers that involve abusive tactics or do not provide fair value to shareholders. Refer to Exhibit 4.1 to
Registration Statement on Form 8-A12B filed with the Securities and Exchange Commission on July 2, 2007.
Page - 76
Note 10: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are recorded at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based
on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a
significant degree of judgment.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or
can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and
include management judgment and estimation which may be significant.
The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.
(in thousands)
Description of Financial Instruments
Balance at December 31, 2010:
Securities available for sale:
Mortgage-backed securities and collaterized mortgage
obligations issued by U.S. government agencies
Corporate collateralized mortgage obligations
Equity securities
Derivative financial liabilities (interest rate contracts)
Balance at December 31, 2009:
Securities available for sale
Derivative financial assets
Derivative financial liabilities
Carrying Value
$
$
$
$
$
$
$
95,258
15,870
608
2,470
97,818
35
1,624
$
$
$
$
$
$
$
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
---
---
608
---
---
---
---
$
$
$
$
$
$
$
95,258
15,870
---
2,470
97,818
35
1,624
$
$
$
$
$
$
$
---
---
---
---
---
---
---
Securities available for sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are
used to determine the fair value of securities available for sale. If quoted market prices are not available, we obtain pricing
information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based
or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves,
prepayment speeds, and credit spreads (Level 2). Level 1 securities include those traded on active markets, including U.S.
Treasury securities and equity securities (e.g. VISA Inc. common stock). Level 2 securities include U.S. agencies’ debt
securities, mortgage-backed securities and corporate collateralized mortgage obligations.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using
observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard
valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly
transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit quality in
determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for LIBOR
cash rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR swap
rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is
used as a practical expedient in the fair value measurements. Key inputs for interest rate valuations are used to project spot
rates at resets specified by each swap, as well as to discount those future cash flows to present value at the measurement
date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, the interest
rate liability position is further discounted to reflect our potential credit risk to counterparties. We have used the spread
between the Standard & Poor’s BBB rated U.S. Bank Composite rate and LIBOR, with maturity terms corresponding to the
duration of the swaps, to calculate this credit-risk-related discount of future cash flows.
Page - 77
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair
value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of
individual assets. For example, when a loan is identified as impaired, it is reported at the lower of cost or fair
value, measured based on the loan’s observable market price (Level 1), the present value of expected future cash
flows discounted at a market-based interest rate for similar loans (Level 2), or the current appraised value of the
underlying collateral securing the loan, if the loan is collateral dependent (Level 3). Securities held to maturity may
be written down to fair value (determined using the same techniques discussed above for securities available for
sale) as a result of an other-than-temporary impairment, if any.
The following table presents the carrying value of financial instruments by level within the fair value hierarchy as
of December 31, 2010 and 2009, for which a non-recurring change in fair value has been recorded.
(in thousands)
Description of Financial Instruments
At December 31, 2010:
Impaired loans carried at fair
value (c)
At December 31, 2009:
Impaired loans carried at fair
value (c)
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3) (a)
Losses for the
year ended
December 31
(b)
Carrying Value
$
8,635 $
--- $
---
$
8,635 $
4,610
$
7,620 $
--- $
406(d) $
7,214 $
4,887
(a) Represents collateral-dependent loan principal balances that had been generally written down to the
appraised value or estimated market value of the underlying collateral, net of specific valuation allowance of $936
thousand and $11 thousand at December 31, 2010 and 2009, respectively. The carrying value of loans fully
charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero.
(b) Represents net charge-offs during the period presented and the specific valuation allowance established on
loans during the period.
(c) Represents the portion of impaired loans that have been written down to their fair value.
(d) Represents impaired loan principal balances net of specific valuation allowance of $34 thousand at December
31, 2009, determined using the discounted cash flow method.
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of December 31, 2010 and 2009,
excluding financial instruments recorded at fair value on a recurring basis (summarized in a separate table). The
carrying amounts in the following table are recorded in the statement of condition under the indicated captions.
We have excluded nonfinancial assets and nonfinancial liabilities defined by the Codification (ASC 820-10-15-1A),
such as Bank premises and equipment, deferred taxes and other liabilities. In addition, we have not disclosed the
fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments
Topic 825 of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.
Page - 78
(in thousands)
Financial assets
Cash and cash equivalents
Investment securities held to maturity
Loans, net
Interest receivable
Financial liabilities
December 31, 2010
Carrying
Amounts
Fair
Value
December 31, 2009
Carrying
Amounts
Fair
Value
$
85,232
34,917
929,008
4,207
$
85,232
35,090
952,763
4,207
$ 38,660 $ 38,660
30,786
891,117
4,338
30,396
907,130
4,338
Deposits
Federal Home Loan Bank long-term borrowings
Subordinated debenture
Interest payable
1,015,739
55,000
5,000
414
1,016,401
57,090
4,994
414
944,061
55,000
5,000
317
944,469
54,058
4,146
317
Following is a description of methods and assumptions used to estimate the fair value of each class of financial
instrument not recorded at fair value but required for disclosure purposes:
Cash and Cash Equivalents – The carrying amounts of cash and cash equivalents approximate their fair value
due to the short-term nature of these instruments.
Held-to-maturity Securities - Held-to-maturity securities, which generally consist of obligations of state & political
subdivisions, are recorded at their amortized cost. Their fair value for disclosure purposes is determined using
methodologies similar to those described above for available-for-sale securities using Level 2 inputs. If Level 2
inputs are not available, we may utilize pricing models that incorporate unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3). As of
December 31, 2010, we did not hold any securities whose fair value was measured using significant
unobservable inputs.
Loans - The fair value of loans with variable interest rates approximates their current carrying value, because their
rates are regularly adjusted to current market rates. The fair value of fixed rate loans or variable loans at
negotiated interest rate floors or ceilings with remaining maturities in excess of one year is estimated by
discounting the future cash flows using current market rates at which similar loans would be made to borrowers
with similar credit worthiness and similar remaining maturities.
Interest Receivable and Payable - The interest receivable and payable balances approximate their fair value due
to the short-term nature of their settlement dates.
Deposits - The fair value of non-interest bearing deposits, interest bearing transaction accounts, savings accounts
and money market 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 Home Loan Bank Long-Term Borrowings - The fair value is estimated by discounting the future cash
flows using current rates offered by the FHLB for similar credit advances corresponding to the remaining duration
of our fixed-rate credit advances.
Subordinated Debenture - The fair value of the subordinated debenture is estimated by discounting the future
cash flows (interest payment at a rate of three-month LIBOR plus 2.48%) using current market rates at which
similar bonds would be issued with similar credit ratings as ours and similar remaining maturities. We have used
the spread of the nine-year BBB rated U.S. Bank Composite over LIBOR to calculate this credit-risk-related
discount of future cash flows.
Commitments - Loan commitments and standby letters of credit generate ongoing fees, which are recognized
over the term of the commitment period. In situations where the borrower’s credit quality has declined, we record
a reserve for these off-balance sheet commitments. Given the uncertainty in the likelihood and timing of a
commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying
value of the related unamortized loan fees plus the reserve, which is not material.
Page - 79
Note 11: Benefit Plans
In 2003, we established a Deferred Compensation Plan that allows key executive officers designated by the
Board of Directors of the Bank to defer up to 80% of their salary and 100% of their annual bonus. Amounts
deferred earn interest at a compounded rate set annually by the Board of Directors. The interest rate was set at
3.25% for both 2010 and 2009, and 7.25% for 2008. Our deferred compensation obligation of $2.8 million and
$2.7 million at December 31, 2010 and 2009, respectively, is included in interest payable and other liabilities.
Our 401(k) Defined Contribution Plan (the “401(k) Plan”) commenced in May 1990 and is available to all regular
employees at least eighteen years of age who complete ninety days of service. Under this plan employees can
defer up to 50% of their total compensation, up to the maximum amount allowed by the Internal Revenue Code.
The Bank will match 50% of each participant’s contribution up to four thousand dollars annually. Employer
contributions totaled $277 thousand, $311 thousand and $358 thousand for the years ended December 31, 2010,
2009 and 2008, respectively.
In 1999, the 401(k) Plan was amended to include an employee stock ownership component and was renamed the
Bank of Marin Employee Stock Ownership and Savings Plan (the “Plan”). Under the terms of the Plan, as
amended, the Board of Director’s determines a specific portion of the Bank’s profits to be contributed to the ESOP
each year either in common stock or in cash for the purchase of Bancorp stock to be allocated to all employees
based on a set percentage of their salaries, regardless of whether an employee is participating in the 401(k) plan
or not. For the years ended December 31, 2010, 2009 and 2008, the Bank contributed $898 thousand, $750
thousand and $749 thousand, respectively, to the ESOP by purchasing Bancorp stock in the open market.
Contributions to the Plan for both the 401(k) employer matching contribution and for the ESOP are included in
salaries and benefits expenses and vested at a rate of 20% per year over a five-year period. Generally, cash
dividends on Bancorp’s stock held by the Plan are used to purchase additional shares in the open market. All
shares of the Bancorp’s stock held by the Plan are included in the calculations of basic and diluted earnings per
share.
In January 2010, the Plan was bifurcated into a separate 401(k) Plan and a separate ESOP Plan. Same eligibility
criteria and employer contribution allocation apply under the ESOP Plan, while employees’ contributions are not
permitted. For participants who join the ESOP on or after January 1, 2010, employer contributions vest 0% in year
one, 20% in year two and 20% per year after that.
On January 1, 2011, we established a Salary Continuation Plan, the purpose of which is to provide a percentage
of salary continuation benefits to a select group of executive management upon retirement. This Plan is unfunded
and nonqualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of
1974.
Note 12: Income Taxes
The current and deferred components of the income tax provision for each of the three years ended December 31
are as follows:
(in thousands)
Current tax provision
Federal
State
Total current
Deferred tax (benefit) provision
Federal
State
Total deferred
Total income tax provision
2010
2009
2008
$
$
6,602
2,293
8,895
(503)
(221)
(724)
8,171
$
$
6,208
2,069
8,277
(341)
(158)
(499)
7,778
$
$
6,809
2,258
9,067
(902)
(287)
(1,189)
7,878
Page - 80
Income taxes related to changes in the unrealized gains and losses on available for sale securities are recorded
directly to other comprehensive income in stockholders’ equity and are not included above. These income tax
liabilities amounted to $672 thousand, $168 thousand, and $475 thousand in 2010, 2009 and 2008, respectively.
The following table shows the tax effect of our cumulative temporary differences as of December 31:
(in thousands)
Deferred tax assets:
Allowance for loan losses and off-balance sheet commitments
Depreciation
State franchise tax
Deferred compensation
Stock-based compensation
Deferred rent and other
Total gross deferred tax assets
Deferred tax liabilities:
Loan origination costs
Net unrealized gain on securities available for sale
Depreciation
Other
Total gross deferred tax liabilities
$
2010
2009
$
5,423
-
787
1,164
220
438
8,032
(275 )
(1,121 )
(63 )
(20 )
(1,479 )
4,659
216
737
1,120
177
298
7,207
(244)
(449)
-
(13)
(706)
Net deferred tax assets
$
6,553
$
6,501
Based upon the level of historical taxable income and projections for future taxable income over the periods
during which the deferred tax assets expect to be deductible, Management believes it is more likely than not we
will realize the benefit of the deferred tax assets. Accordingly, no valuation allowance has been established as of
December 31, 2010 or 2009.
The effective tax rate for 2010, 2009 and 2008 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
Stock based compensation
Tax exempt interest on municipal securities and loans
Tax exempt earnings on bank owned life insurance
Prior year tax adjustments
Other
Effective Tax Rate
2010
35.0%
6.1
0.2
(2.7)
(1.1)
-
0.1
37.6%
2009
35.0%
6.2
0.4
(2.6)
(1.2)
0.3
(0.2)
37.9%
2008
35.0%
6.2
0.7
(2.1)
(1.3)
0.9
(0.1)
39.3%
Bancorp files a consolidated return in the U.S. Federal tax jurisdiction and a combined report in the State of
California tax jurisdiction. Prior to the formation of Bancorp in 2007, the Bank filed in the U.S. Federal and
California jurisdictions on a stand-alone basis. None of the entities are subject to examination by taxing authorities
for years before 2007 for U.S. Federal or before 2006 for California.
We had no tax reserve for uncertain tax positions at December 31, 2010 and 2009. We do not anticipate providing
a reserve for uncertain tax positions in the next twelve months. We have elected to record interest and penalties
related to unrecognized tax benefits in tax expense. During the years ended December 31, 2010, 2009 and 2008,
neither the Bank nor Bancorp had an accrual for interest and penalties associated with uncertain tax positions.
Page - 81
Note 13: Commitments and Contingencies
We rent certain premises and equipment under long-term non-cancelable operating leases expiring at various dates
through the year 2024. Most of the leases contain certain renewal options and escalation clauses. At December 31,
2010, the approximate minimum future commitments payable under non-cancelable contracts for leased premises are
as follows:
(in thousands)
Operating leases
2011
2012
2013
2014
$ 2,440 $ 2,441 $ 2,432 $ 2,317 $
2015
2,387 $
Thereafter
Total
15,492 $ 27,509
Rent expense included in occupancy expense totaled $2.9 million, $2.8 million and $2.5 million in 2010, 2009 and 2008,
respectively.
We may be party to legal actions which arise from time to time as part of the normal course of our business. We
believe, after consultation with legal counsel, that we have meritorious defenses in these actions, and that litigation
contingency liability, if any, will not have a material adverse effect on our financial position, results of operations, or cash
flows.
As a member bank of Visa U.S.A., we are responsible for our proportionate share of certain litigation indemnification
obligations to Visa U.S.A. In November 2007, Visa Inc. settled an antitrust litigation with American Express Travel
Related Services (“AMEX”) for $2.1 billion. We recorded a liability of $242 thousand in the fourth quarter of 2007
representing our proportionate share related to anti-trust charges and interchange fees, including $142 thousand for the
AMEX litigation and $100 thousand estimated for other antitrust litigation. In March of 2008, we reversed our liability
because, subsequent to Visa Inc.’s IPO on March 19, 2008, it established an escrow account for $3.0 billion from which
it paid the initial amount owed under the AMEX settlement and planned to pay the required quarterly AMEX payments
and additional identified antitrust settlements as they occurred. The funding of the escrow was accomplished through a
reduction in the conversion factor of Visa Inc. Class B shares held by the member banks that are available for
conversion to Class A shares as allowed by the Retrospective Responsibility Plan outlined in the Form S-1 filed by Visa
Inc. on November 9, 2007.
On October 27, 2008 Visa Inc. announced a settlement with the other major antitrust litigant, Discover Financial
Services, Inc., for $1.9 billion, of which $1.7 billion is the responsibility of member banks. On December 19, 2008 Visa
Inc. deposited another $1.1 billion directly into the litigation escrow account to cover the settlement through a further
reduction in the conversion factor of Visa Inc. Class B shares. In September 2009, Visa’s settlement obligations were
fully satisfied to Discover. Our proportionate share of the potential exposure related to the remaining open cases (the
Attridge Litigation and other putative class actions) is not expected to be material. We do not expect any future cash
settlement payments to be required by us on the covered litigation.
As permitted or required under California law and to the maximum extent allowable under that law, we have certain
obligations to indemnify our current and former officers and directors for certain events or occurrences while the officer
or director is, or was serving, at our request in such capacity. These indemnification obligations are valid as long as the
director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required to
make under these indemnification obligations is unlimited; however, we have a director and officer insurance policy that
mitigates our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair
value of these indemnification obligations is minimal.
Note 14: Concentrations of Credit Risk
Concentration of credit risk is the risk associated with a lack of diversification, such as having substantial investments in
a few individual issuers, thereby exposing us to greater risks resulting from adverse economic, political, regulatory,
geographic, industrial or credit developments. Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash and cash equivalents, investment securities and loans.
Our cash in correspondent bank accounts, at times, may exceed FDIC insured limits. We place cash and cash
equivalents with high quality financial institutions, periodically monitor their credit worthiness and limit the amount of
credit exposure with any one institution. Concentrations of credit risk with respect to investment securities are limited to
the U.S. Government, its agencies and Government Sponsored Enterprises. Our exposure, which primarily results from
positions in securities available for sale issued by the U.S. Government, and its agencies, was $95.3 million, or 65% of
our total investment portfolio at December 31, 2010.
Page - 82
We also manage our credit exposure related to our loan portfolio to avoid the risk of undue concentration of
credits in a particular industry by reducing significant exposure to highly leveraged transactions or to any
individual customer or counterparty, and by obtaining collateral as appropriate. No individual borrower accounts
for more than 5% of loans held in the portfolio. The largest loan concentration group by industry is real estate,
which account for 77% of our loan portfolio at December 31, 2010.
Note 15: Derivative Financial Instruments and Hedging Activities
We have entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order
to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into
long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed
rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate
interest stream to a floating-rate interest stream, generally benchmarked to the one-month U.S. dollar LIBOR
index, protects us against changes in the fair value of our loans otherwise associated with fluctuating interest
rates.
The fixed-rate payment features of the interest rate swap agreements are generally structured at inception to
mirror all of the provisions of the hedged loan agreements. These interest rate swaps, designated and qualified as
fair value hedges, are carried on the balance sheet at their fair value in other assets (when the fair value is
positive) or in other liabilities (when the fair value is negative). One of our interest rate swap agreements qualifies
for shortcut hedge accounting treatment. The change in fair value of the swap using the shortcut accounting
treatment is recorded in other non-interest income, while the change in fair value of swaps using non-shortcut
accounting is recorded in interest income. The unrealized gain or loss in fair value of the hedged fixed-rate loan is
recorded as an adjustment to the hedged loan and offset in other non-interest income (for shortcut accounting
treatment) or interest income (for non-shortcut accounting treatment).
From time to time, we make firm commitments to enter into long-term fixed-rate loans with borrowers backed by
yield maintenance agreements and simultaneously enter into forward interest rate swap agreements with
correspondent banks to mitigate the change in fair value of the yield maintenance agreement. Prior to loan
funding, yield maintenance agreements with net settlement features that meet the definition of a derivative are
considered as non-designated hedges and are carried on the balance sheet at their fair value in other assets
(when the fair value is positive) or in other liabilities (when the fair value is negative). The offsetting changes in the
fair value of the forward swap and the yield maintenance agreement are recorded in interest income. In June
2007 and August 2010, previously undesignated forward swaps were designated to offset the change in fair value
of a fixed-rate loan originated in each of those periods. Since designation, the related yield maintenance
agreements are no longer considered derivatives. Their fair value at the designation date was recorded in other
assets and is amortized using the effective yield method over the life of the respective designated loans.
The net effect of the change in fair value of interest rate swaps, the amortization of the yield maintenance
agreement and the change in the fair value of the hedged loans results in an insignificant amount of hedge
ineffectiveness recognized in interest income.
Our credit exposure, if any, on interest rate swaps is limited to the net favorable value (net of any collateral
pledged) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a
liability position exceeding a certain threshold, we are required to post collateral to the counterparty in an amount
determined by the agreements (generally when our derivative liability position is greater than $100 thousand or
$1.3 million, depending upon the counterparty). Collateral levels are monitored and adjusted on a regular basis for
changes in interest rate swap values. The aggregate fair value of all derivative instruments that are in a liability
position and have collateral requirements on December 31, 2010 is $2.5 million, for which we have posted
collateral in the form of securities available for sale totaling $3.7 million.
As of December 31, 2010, we had five interest rate swap agreements, which are scheduled to mature in
September 2018, April 2019, June 2020, August 2020 and June 2022. All of our derivatives are accounted for as
fair value hedges. Our interest rate swaps are settled monthly with counterparties. Accrued interest on the swaps
totaled $64 thousand as of December 31, 2010. Information on our derivatives follows:
Page - 83
(in thousands)
Fair value hedges
Interest rate contracts notional amount
Credit risk amount
Interest rate contracts fair value (1)
Balance sheet location
Asset derivatives
Liability derivatives
December 31,
2010
December 31,
2009
December 31,
2010
December 31,
2009
--- $
---
---
Other assets
1,905 $
35
35
Other assets
23,132 $
---
2,470
Other liabilities
17,076
---
1,624
Other liabilities
(in thousands)
(Decrease) increase in value of designated interest rate
Year ended December 31,
2010
2009
2008
swaps recognized in interest income
$
(881) $
1,866 $
(2,809)
(Payment) receipt on interest rate swaps recorded in
interest income
Increase (decrease) in value of hedged loans recognized in
interest income
Increase (decrease) in value of yield maintenance
agreement recognized against interest income
Net (loss) gain on derivatives recognized in interest
(895)
(849)
(352)
575
254
(1,942)
2,841
(19)
(21)
income (2)
$
(947) $
(944) $
(341)
(1) See Note 10 for valuation methodology.
(2) Ineffectiveness of ($52) thousand, ($95) thousand and $11 thousand was recorded in interest income during
the years ended December 31, 2010, 2009 and 2008, respectively. The full change in value of swaps was
included in the assessment of hedge effectiveness.
Note 16: Regulatory Matters
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet
specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital amounts and our prompt corrective
action classification are also subject to qualitative judgments by the regulators about components, risk weightings
and other factors. Prompt corrective action provisions are not applicable to bank holding companies such as
Bancorp.
Quantitative measures established by regulation to ensure capital adequacy requires us to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk weighted assets and of Tier 1
capital to quarterly average assets.
Our capital adequacy ratios are presented in the following tables. Capital ratios are reviewed by Management on
a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our
anticipated future needs. For all periods presented, our ratios exceed the regulatory definition of well capitalized
under the regulatory framework for prompt corrective action (Bank level) and capital adequacy purposes (Bancorp
level).
Page - 84
Capital Ratios for the Bancorp:
(Dollars in thousands)
As of December 31, 2010
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
As of December 31, 2009
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Actual Ratio
Amount
$ 138,545
$ 120,375
$ 120,375
Amount
$ 124,515
$ 108,433
$ 108,433
Ratio
13.34%
11.59%
9.91%
Ratio
12.33%
10.73%
9.43%
Capital Ratios for the Bank:
(Dollars in thousands)
As of December 31, 2010
Total Capital (to risk-weighted
Actual Ratio
Ratio for Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
Ratio for Capital
Adequacy Purposes
Ratio
>8.0%
>4.0%
>4.0%
Amount
>$83,068
>$41,534
>$48,566
Amount
>$80,819
>$40,410
>$45,988
Ratio
>8.0%
>4.0%
>4.0%
Ratio to be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
assets)
$ 131,817
12.70% >$83,067
>8.0% >$103,834
>10.0%
Tier 1 Capital (to risk-weighted
assets)
$ 113,647
10.95% >$41,533
>4.0%
>$62,300
>6.0%
Tier 1 Capital (to average
assets)
$ 113,647
9.36% >$48,566
>4.0%
>$60,708
>5.0%
As of December 31, 2009
Total Capital (to risk-weighted
Amount
Ratio
Amount
Ratio
Amount
Ratio
assets)
$ 117,189
11.60% >$80,819
>8.0% >$101,024
>10.0%
Tier 1 Capital (to risk-weighted
assets)
$ 101,107
10.01% >$40,410
>4.0%
>$60,614
>6.0%
Tier 1 Capital (to average
assets)
$ 101,107
8.79% >$45,988
>4.0%
>$57,485
>5.0%
Note 17: Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our
customers. These financial instruments include commitments to extend credit in the form of loans or through
standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not necessarily represent future cash
requirements.
We are exposed to credit loss equal to the contract amount of the commitment in the event of nonperformance by
the borrower. We use the same credit policies in making commitments as we do for on-balance-sheet instruments
and we evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by us, is based on Management's credit evaluation of the borrower. Collateral held varies, but
may include accounts receivable, inventory, property, plant and equipment, and real property.
The contract amount of loan commitments and standby letters of credit not reflected on the consolidated
statement of condition was $252.7 million at December 31, 2010 at rates ranging from 1.91% to 8.25%. This
amount included $143.8 million under commercial lines of credit (these commitments are contingent upon
customers maintaining specific credit standards), $73.5 million under revolving home equity lines, $22.7 million
under undisbursed construction loans, $8.9 million under personal and other lines of credit, and a remaining $3.8
million under standby letters of credit. We have set aside an allowance for losses in the amount of $505 thousand
for these commitments, which is recorded in interest payable and other liabilities. Approximately 38% of the
commitments expire in 2011 and approximately 62% expire between 2012 and 2020.
Page - 85
Note 18: Condensed Bank of Marin Bancorp Parent Only Financial Statements
Presented below is financial information for Bank of Marin Bancorp, parent holding company only.
CONDENSED UNCONSOLIDATED STATEMENTS OF CONDITION
at December 31, 2010 and 2009
(in thousands)
Assets
Cash and due from Bank of Marin
Investment in subsidiary
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accrued expenses payable
Total liabilities
Stockholders' equity
Total liabilities and stockholders’ equity
December 31, 2010
December 31, 2009
$
$
$
$
6,688
115,192
79
121,959
39
39
121,920
121,959
$
$
$
$
7,299
101,725
73
109,097
46
46
109,051
109,097
CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2010, 2009 and 2008
(in thousands)
Income
Dividends from Bank of Marin (a)
$
Total income
Expense
Non-interest expense
Total expense
Income before income taxes and equity
in undistributed net income of
subsidiary
Income tax benefit
Income before equity in undistributed net
income of subsidiary
Equity in undistributed net income of
subsidiary
Net income
Preferred stock dividends and
accretion
Net income available to common
shareholders
$
$
December 31, 2010
December 31, 2009
December 31, 2008
3,000
3,000
$
37,750
37,750
$
713
713
2,287
300
2,587
698
698
37,052
273
37,325
10,965
(24,560)
3,250
3,250
651
651
2,599
267
2,866
9,284
13,552
$
12,765
$
12,150
---
(1,299)
(113)
13,552
$
11,466
$
12,037
(a) In 2009, the Bank made a $28.0 million dividend to Bancorp to fund Bancorp’s repurchase of preferred stock,
as well as $9.8 million dividends to cover Bancorp’s operational needs and cash dividends to shareholders.
Page - 86
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2010, 2009 and 2008
(in thousands)
December 31, 2010
December 31, 2009
December 31, 2008
13,552 $
12,765
$
12,150
(13,965)
(13,190)
(12,534)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash used
$
in operating activities:
Equity in undistributed and distributed net income of
subsidiary
Net change in operating assets and liabilities
Other assets
Other liabilities
Intercompany payable
Net cash used in operating activities
Cash Flows from Investing Activities:
Capital contribution to subsidiary
Net cash used in investing activities
Cash Flows from Financing Activities:
Repurchase of preferred stock
Proceeds from issuance of preferred stock
Proceeds from issuance of warrants
Stock options exercised and employee stock purchases
Dividends paid on common stock
Dividends received from subsidiary
Preferred stock dividend
Stock repurchased
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
(6)
13
-
(406)
(912)
(912)
---
---
---
912
(3,205)
3,000
---
---
707
(611)
7,299
7
(18)
(47)
(483)
(897)
(897)
(28,000)
---
---
897
(2,960)
37,750
(451)
---
7,236
5,856
1,443
Cash and cash equivalents at end of period
$
6,688 $
7,299
$
Supplemental schedule of non-cash financing
activities:
Accretion of preferred stock
Dividend payable to preferred stockholder
Stock issued in payment of director fees
Note 19: Subsequent Event
$
--- $
---
200
$
945
---
233
On February 18, 2011, we entered into a modified whole-bank purchase and assumption agreement without loss share with
the FDIC, the receiver of Charter Oak Bank of Napa, California, to purchase certain assets and assume certain liabilities of
Charter Oak Bank (the “P&A Agreement”). The purchase price reflected an asset discount of $19.8 million and no deposit
premium.
At December 31, 2010, Charter Oak Bank reported gross loans totaling $107.0 million and deposits totaling $105.3 million.
Loans at the former Charter Oak Bank’s book values totaling approximately $28.5 million as of the bid valuation date (October
18, 2010) were retained by the FDIC. The excluded loans mainly represent loans delinquent more than sixty days or more as
of the bid valuation date and certain types of land and construction loans. Balances are subject to change based upon the
activities between the bid valuation date and the purchase date. The assets acquired and liabilities assumed are also subject
to fair value adjustments in accordance with FASB ASC 805, Business Combinations upon finalizing the valuation process.
Page - 87
99
88
47
(150)
(29,384)
(29,384)
---
27,039
961
1,384
(2,882)
3,250
---
(2,526)
27,226
(2,308)
3,751
1,443
16
97
247
Due to the timing of the acquisition and the substantial effort required to determine the fair values of the assets
purchased and liabilities assumed, the accounting for the acquisition is not complete at the time the
accompanying consolidated financial statements are filed. Until the fair values are established, any goodwill or
bargain purchase gain to be recognized resulting from the acquisition during the first quarter of 2011 has not been
determined.
The P&A Agreement only covers designated assets and liabilities of Charter Oak Bank. Common stock of Charter
Oak Bank, certain assets and certain liabilities, such as claims against any officer, director, employee,
accountant, attorney, or any other person employed by the former Charter Oak Bank, were not purchased or
assumed by us.
End of 2010 Audited Consolidated Financial Statements
Page - 88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(A)
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions,
of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 (the “Act”)) as of December 31, 2010.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of December 31, 2010.
The term disclosure controls and procedures means controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Act
(15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Act is accumulated and communicated to our Management,
including our principal executive and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures.
These limitations include the possibility of human error, the circumvention or overriding of the controls
and procedures and reasonable resource constraints. In addition, because we have designed our system
of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future
events, our system of controls may not achieve its desired purpose under all possible future conditions.
Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute
assurance, of achieving their objectives.
(B)
Management’s Annual Report on Internal Control over Financial Reporting
Our Management’s report on Internal Control over Financial Reporting is set forth in Item 8 and is
incorporated herein by reference.
Our internal control over financial reporting is designed to provide reasonable, but not absolute,
assurance regarding the financial reporting and the preparation of financial statements in accordance with
generally accepted accounting principles. There are inherent limitations to the effectiveness of any
system of internal control over financial reporting. These limitations include the possibility of human error,
the circumvention of overriding of the system and reasonable resource constraints. Because of its
inherent limitations, our internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risks discussed in Item
1A-Risk Factors in this report.
Our registered public accounting firm has issued an audit report on our internal control over financial
reporting. See (C) below.
(C)
Attestation Report of the Registered Public Accounting Firm
The Attestation Report of the Registered Public Accounting firm required to be furnished pursuant to this
item is set forth in Item 8 and is incorporated herein by reference.
Page - 89
(D)
Changes in Internal Controls
During the quarter ended December 31, 2010, there was no significant change in our internal control over
financial reporting identified in connection with the evaluation mentioned in (B) above, that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
Page - 90
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference from our Proxy Statement for the 2011 Annual
Meeting of Shareholders. Bancorp and the Bank have adopted a Code of Ethics that applies to all staff including
the Chief Executive Officer, Chief Financial Officer and Controller. A copy of the Code of Ethics will be provided to
any person, without charge, upon written request to Corporate Secretary, Bank of Marin Bancorp, 504 Redwood
Boulevard, Suite 100, Novato, CA 94947.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our Proxy Statement for the 2011 Annual
Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from Item 5 above, Note 9 to our audited
consolidated financial statements and our Proxy Statement for the 2011 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference from our Proxy Statement for the 2011 Annual
Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference from our Proxy Statement for the 2011 Annual
Meeting of Shareholders.
Page - 91
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(A)
Documents Filed as Part of this Report
1. Financial Statements
The financial statements and supplementary data listed below are filed as part of this report under Item 8,
captioned Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm for the years ended December 31, 2010,
2009 and 2008
Management’s Report on Internal Control over Financial Reporting
Consolidated Statement of Condition as of December 31, 2010 and 2009
Consolidated Statement of income for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statement of Changes in Stockholders’ Equity for the Years Ended December 31, 2010,
2009 and 2008
Consolidated Statement of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules have been omitted, as they are inapplicable or the required
information is included in the financial statements or notes thereto.
Page - 92
(B)
Exhibits Filed
Number
Description of Exhibit
3.01 Articles of Incorporation, as amended, is incorporated by reference to Exhibit 3.01 to Bancorp’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007*.
3.02 Bylaws, as amended.
4.01 Rights Agreement dated as of July 2, 2007 is incorporated by reference to Exhibit 4.1 to Registration
Statement on Form 8-A12B filed with the Securities and Exchange Commission on July 2, 2007*.
10.01
10.02
4.02 Form of Warrant for Purchase of Shares of Common Stock, as amended, is incorporated by reference
to Exhibit 4.4 to the Post Effective Amendment to Form S-3 filed with the Securities and Exchange
Commission on April 28, 2009*.
2007 Employee Stock Purchase Plan is incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on July 24, 2007*.
1989 Stock Option Plan is incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on July 24, 2007*.
1999 Stock Option Plan is incorporated by reference to Exhibit 4.1 to Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on July 24, 2007*.
2007 Equity Plan is incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8
filed with the Securities and Exchange Commission on July 24, 2007*.
10.03
10.04
10.05 Form of Change in Control Agreement is incorporated by reference to Exhibit 10.01 to Current Report
on Form 8-K filed with the Securities and Exchange Commission on October 31, 2007*.
10.06 Form of Indemnification Agreement for Directors and Executive Officers dated August 9, 2007 is
incorporated by reference to Exhibit 10.06 to Bancorp’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2007*.
10.07 Form of Employment Agreement with Russell Colombo, Chief Executive Officer, dated January 23,
2009 is incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 26, 2009*.
2010 Director Stock Plan is incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on June 21, 2010*.
2010 Annual Individual Incentive Compensation Plan is incorporated by reference to Exhibit 99.1 to
Form 8-K filed with the Securities and Exchange Commission on October 21, 2010*.
10.08
10.09
10.10 Salary Continuation Agreement with four executive officers, Russell Colombo, Chief Executive
Officer, Christina Cook, Chief Financial Officer, Kevin Coonan, Chief Credit Officer, and Peter
Pelham, Director of Retail Banking, dated January 1, 2011 is incorporated by reference to Exhibits
10.1 (Colombo), 10.2 (Cook), 10.3 (Coonan), and 10.4 (Pelham) to Current Report on Form 8-K filed
with the Securities and Exchange Commission on January 6, 2011*.
11.01 Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements.
14.01 Code of Ethical Conduct is incorporated by reference to Exhibit 14.01 to Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 26, 2008*.
23.01 Consent of Moss Adams LLP.
31.01 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
* Previously Filed
Page - 93
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Bancorp has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Bank of Marin Bancorp
/s/ Russell A. Colombo
Russell A. Colombo
President &
Chief Executive Officer
/s/ Christina J. Cook
Christina J. Cook
Executive Vice President &
Chief Financial Officer
/s/ Larry R. Olafson
Larry R. Olafson
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Page - 94
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Dated: March 8, 2011
Members of Bank of Marin Bancorp’s
Board of Directors
/s/ Joel Sklar
Joel Sklar, M.D.
Chairman of the Board
/s/ Russell A. Colombo
Russell A. Colombo
President & Chief Executive Officer
/s/ Thomas M. Foster
Thomas M. Foster
/s/ Robert Heller
Robert Heller
/s/ Norma J. Howard
Norma J. Howard
/s/ Stuart D. Lum
Stuart D. Lum
/s Joseph D. Martino
Joseph D. Martino
/s/ William H. McDevitt, Jr.
William H. McDevitt, Jr.
/s/ Brian M. Sobel
Brian M. Sobel
/s/ J. Dietrich Stroeh
J. Dietrich Stroeh
/s/ Jan I. Yanehiro
Jan I. Yanehiro
Page - 95
EXHIBIT INDEX
Description
Exhibit
Number
3.02 Bylaws, as amended.
23.01 Consent of Moss Adams LLP.
Location
Filed herewith.
Filed herewith.
31.01 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-
Filed herewith.
14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31.02 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-
Filed herewith.
14(a) as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.01 Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of
Furnished herewith.
the Sarbanes-Oxley Act of 2002.
Page - 96
BANK OF MARIN BANCORP
EXHIBIT 3.02
BYLAWS
OF
BANK OF MARIN BANCORP
ARTICLE I
OFFICES
1.1
Principal Offices. The board of directors shall fix the location of the principal executive office of
the corporation at any place within or outside the State of California. If the principal executive office is located
outside this state, and the corporation has one or more business offices in this state, the board of directors shall
fix and designate a principal business office in the State of California.
1.2
Other Offices. The board of directors may at any time establish subordinate offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1
Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State
of California designated by the board of directors. In the absence of any such designation, shareholders' meetings
shall be held at the principal executive office of the corporation.
2.2
Annual Meeting. The annual meeting of shareholders shall be held each year on a date and at a
time designated by the board of directors. The date so designated shall be within fifteen (15) months after the last
annual meeting. At the annual meeting, directors shall be elected, and any other proper business may be
transacted.
2.3
Special Meeting. A special meeting of the shareholders may be called at any time by the board of
directors, or by the chairperson of the board, or by the president, or by one or more shareholders holding shares
in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by
any person or persons other than the board of directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or
sent by registered mail or by telegraphic or other facsimile transmission to the chairperson of the board, the
president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly
given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the meeting may give the notice.
Nothing contained in this Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4
Notice of Shareholders' Meetings. All notices of meetings of shareholders shall be sent or
otherwise given in accordance with Section 2.5 of this Article II not less than ten (10) nor more than sixty (60)
days before the date of the meeting. Shareholders entitled to notice shall be determined in accordance with
Section 2.11 of this Article II. The notice shall specify the place, date and hour of the meeting and (i) in the case of
a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting,
those matters which the board of directors, at the time of giving the notice, intends to present for action by the
shareholders. The notice of any meeting at which directors are to be elected shall include the name of any
nominee or nominees whom, at the time of the notice, management intends to present for election.
i
BANK OF MARIN BANCORP
If the action is proposed to be taken at any meeting for (i) approval of a contract or transaction in which a
director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California,
(ii) an amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of
the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of that Code, or (v) a distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature
of that proposal.
2.5
Manner of Giving Notice: Affidavit of Notice. Notice of any meeting of shareholders shall be given
either personally or by first-class or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the corporation or given by the
shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or
is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or
other written communication to the corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service marked to indicate that the United
States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports
shall be deemed to have been duly given without further mailing if these shall be available to the shareholder on
written demand of the shareholder at the principal executive office of the corporation for a period of one year from
the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary, or any transfer agent of the
corporation giving the notice, and shall be filed and maintained in the minute book of the corporation.
2.6
Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to
vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders
present at a duly called or held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.
2.7
Adjourned Meeting: Notice. Any shareholders' meeting, annual or special, whether or not a
quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at
that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted
at that meeting, except as provided in Section 2.6 of this Article II.
When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place are announced at a meeting at which the
adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is
for more than forty-five (45) days from the date set for the original meeting, in which case the board of directors
shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II. At any adjourned meeting the corporation may transact any business which might have been transacted at the
original meeting.
ii
BANK OF MARIN BANCORP
2.8
Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in
accordance with the provisions of Section 2.11 of this Article II, subject to the provisions of Sections 702 to 704,
inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a
corporation, or in joint ownership). The shareholders' vote may be by voice or by ballot; provided, however, that
any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any
matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and
refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify
the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is
present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any
matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater
number or voting by classes is required by California General Corporation Law or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to
cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the
shareholder's shares) unless the candidates' names have been placed in nomination prior to commencement of
the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention
to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may
cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or
distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder
thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected shall
be elected.
2.9
Waiver of Notice or Consent by Absent Shareholders. The transactions of any meeting of
shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by
proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or
special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those
matters specified in Section 601(f) of the California Corporations Code, the waiver of notice or consent shall state
the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when
the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the
consideration of matters not included in the notice of the meeting if that objection is expressly made at the
meeting.
2.10
Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any
annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in
writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent
shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors;
provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has
not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares
entitled to vote for the election of directors. All such consents shall be filed with the secretary of the corporation
and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's
proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective
proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written
consents of the number of shares required to authorize the proposed action have been filed with the secretary.
iii
BANK OF MARIN BANCORP
If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous
written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of
the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner
specified in Section 2.5 of this Article II. In the case of approval of (i) contracts or transactions in which a director
has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii)
indemnification of agents of the corporation, pursuant to Section 317 of that Code. (iii) a reorganization of the
corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance
with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that approval.
2.11 Record Date for Shareholder Notice, Voting, and Giving Consents.
(a)
For purposes of determining the shareholders entitled to notice of any meeting or to vote or
entitled to give written consent to corporate action without a meeting, the board of directors may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such
meeting nor more than sixty (60) days before any such action without a meeting, and in this event only
shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may
be notwithstanding any transfer of any shares on the books of the corporation after the record date, except as
otherwise provided in the California General Corporation Law.
(b)
If the board of directors does not so fix a record date:
(i) The record date for determining shareholders entitled to receive notice of and vote at a
shareholders' meeting shall be the business day next preceding the day on which notice is given,
or if notice is waived as provided in Section 2.9 of this Article II, the business day next preceding
the day on which the meeting is held.
(ii) The record date for determining shareholders entitled to give consent to corporate action in
writing without a meeting, if no prior action has been taken by the board, shall be the day on
which the first written consent is given.
(iii) The record date for determining shareholders for any other purpose shall be as set forth in
Section 8.1 of Article VIII of these bylaws.
(c)
A determination of shareholders of record entitled to receive notice of and vote at a shareholders'
meeting shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned
meeting. However, the board shall fix a new record date if the adjournment is to a date more than 45 days after
the date set for the original meeting.
(d)
Only shareholders of record on the corporation's books at the close of business on the record
date shall be entitled to any of the notice and voting rights listed in subsection (a) of this section, notwithstanding
any transfer of shares on the corporation's books after the record date, except as otherwise required by law.
2.12
Proxies. Every person entitled to vote for directors or on any other matter shall have the right to
do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with
the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in
full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a
writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or
attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the
death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy
is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date
of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of
California.
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2.13
Inspectors of Election. Before any meeting of shareholders, the board of directors may appoint
any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairperson of the meeting may, and on the request of any
shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or
more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall
determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the chairperson of the meeting may, and upon the request of any shareholder
or a shareholder's proxy shall appoint a person to fill that vacancy.
These inspectors shall:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Determine the number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of
proxies;
Receive votes, ballots or consents;
Hear and determine all challenges and questions in any way arising in connection with the right to
vote;
Count and tabulate all votes or consents;
Determine when the polls shall close;
Determine the result; and
Do any other acts that may be proper to conduct the election or vote with fairness to all
shareholders.
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BANK OF MARIN BANCORP
ARTICLE III
DIRECTORS
3. 1
Powers. Subject to the provisions of the California General Corporation Law and any limitations in
the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by
the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers
shall be exercised by or under the direction of the board of directors.
Without prejudice to these general powers, and subject to the same limitations, the directors shall have
the power to:
(a)
Change the principal executive office or the principal business office in the State of California
from one location to another; cause the corporation to be qualified to do business in any other state, territory,
dependency, or country and conduct business within or without the State of California, and designate any place
within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual
meetings.
(b)
Adopt, make, and use a corporate seal, prescribe the forms of certificates of stock; and alter the
form of the seal and certificates.
(c)
Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration
of money paid, labor done, services actually rendered, debts or securities canceled or tangible or intangible
property actually received.
(d)
Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed
and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds
of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities.
3.2
Number of Directors. The authorized number of directors shall not be less than nine (9) nor more
than seventeen (17) until changed by a duly adopted amendment to this bylaw adopted by the vote or written
consent of a majority of the outstanding shares entitled to vote. The exact number of directors shall be fixed from
time to time, within the limits specified in this Section 3.2 by a bylaw or amendment thereto or by a resolution duly
adopted by a vote of a majority of the shares entitled to vote represented at a duly held meeting at which a
quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote,
or by the two-thirds vote of the board of directors. The initial number of directors within the foregoing limits is
hereby fixed at thirteen (13).
3.3
Election and Term of Office of Directors. Directors shall be elected at each annual meeting of the
shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a
vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected
and qualified.
No reduction of the authorized number of directors shall have the effect of removing any director before
that director's term of office expires.
3.4
Vacancies. A vacancy in the board of directors shall be deemed to exist (a) if a director dies,
resigns, or is removed by the shareholders or an appropriate court, as provided in sections 303 or 304 of the
California Corporations Code; (b) if the board of directors declares vacant the office of a director who has been
convicted of a felony or declared of unsound mind by an order of court; (c) if the authorized number of directors is
increased; or (d) if at any shareholders' meeting at which one or more directors are elected, the shareholders fail
to elect the full authorized number of directors to be voted for at that meeting.
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BANK OF MARIN BANCORP
Any director may resign effective on giving written notice to the chairperson of the board, the president,
the secretary, or the board of directors, unless the notice specifies a later effective date. If the resignation is
effective at a future time, the board may elect a successor to take office when the resignation becomes effective.
Except for a vacancy caused by the removal of a director, vacancies on the board may be filled by a
majority vote of the directors then in office, whether or not they constitute a quorum, or by a sole remaining
director. A vacancy on the board caused by the removal of a director may be filled only by a vote of the
shareholders, except that a vacancy created when the board declares the office of a director vacant as provided
in clause (b) of the first paragraph of this section of the bylaws may be filled by the board of directors.
The shareholders may elect a director at any time to fill a vacancy not filled by the board of directors.
The term of office of a director elected to fill a vacancy shall run until the next annual meeting of the
shareholders, and such a director shall hold office until a successor is elected and qualified.
3.5
Place of Meetings and Meetings by Telephone. Regular meetings of the board of directors may
be held at any place within or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal
executive office of the corporation. Special meetings of the board shall be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is
no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by
conference telephone or similar communication equipment, so long as all directors participating in the meeting
can hear one another, and all such directors shall be deemed to be present in person at the meeting.
3.6
Annual Directors' Meeting. Immediately after each annual shareholders' meeting, the board of
directors shall hold a regular meeting at the same place, or at any other place that has been designated by the
board of directors, to consider matters of organization, election of officers, and other business as desired. Notice
of this meeting shall not be required unless some place other than the place of the annual shareholders' meeting
has been designated.
3.7
Other Regular Meetings. Other regular meetings of the board of directors shall be held without
call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held
without notice.
3.8
Special Meetings. Special meetings of the board of directors for any purpose or purposes may be
called at any time by the chairperson of the board or the president or the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered personally or by telephone to each
director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the
United States Mail at least four (4) days before the time of the holding of the meeting. In case the notice is
delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the
telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal
executive office of the corporation.
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3.9
Quorum. A majority of the authorized number of directors shall constitute a quorum for the
transaction of business, except to adjourn as provided in Section 3.11 of this Article III. Every act or decision done
or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of
California (as to approval of contracts or transactions in which a director has a direct or indirect material financial
interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to
indemnification of directors). A meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required
quorum for that meeting.
3.10 Waiver of Notice. Notice of a meeting, although otherwise required, need not be given to any
director who (a) either before or after the meeting signs a waiver of notice or a consent to holding the meeting
without being given notice, (b) signs an approval of the minutes of the meeting, or (c) attends the meeting without
protesting the lack of notice before or at the beginning of the meeting. Waivers of notice or consents need not
specify the purpose of the meeting. All waivers, consents, and approvals of the minutes shall be filed with the
corporate records or made a part of the minutes of the meeting.
3.11
Adjournment. A majority of the directors present, whether or not constituting a quorum, may
adjourn any meeting to another time and place.
3.12 Notice of Adjournment. Notice of the time and place of holding an adjourned meeting need not be
given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and
place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.8 of this Article
III, to the directors who were not present at the time of the adjournment.
3.13
Action Without Meeting. Any action required or permitted to be taken by the board of directors
may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board
of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board.
3.14
Fees and Compensation of Directors. Directors and members of committees may receive such
compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by
resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving
the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for
those services.
ARTICLE IV
COMMITTEES
4.1
Committees of Directors. The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each consisting of two or more directors, to
serve at the pleasure of the board. The board may designate one or more directors as alternate members of any
committees, who may replace any absent member at any meeting of the committee. Any committee, to the extent
provided in the resolution of the board, shall have all the authority of the board, except with respect to:
(a)
the approval of any action which, under the General Corporation Law of California, also requires
shareholders' approval or approval of the outstanding shares;
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(b)
(c)
(d)
(e)
(f)
(g)
BANK OF MARIN BANCORP
the filling of vacancies on the board of directors or in any committee;
the fixing of compensation of the directors for serving on the board or on any committee;
the amendment or repeal of bylaws or the adoption of new bylaws;
the amendment or repeal of any resolution of the board of directors which by its express terms is
not so amendable or reparable;
a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or
within a price range determined by the board of directors; or
the appointment of any other committees of the board of directors or the members of these
committees.
4.2
Meetings and Action of Committees. Meetings and action of committees shall be governed by,
and held and taken in accordance with, the provisions of Article III of these bylaws, Sections 3.5 (place of
meetings), 3.7 (regular meetings), 3.8 (special meetings and notice), 3.9 (quorum), 3.10 (waiver of notice), 3.11
(adjournment), 3.12 (notice of adjournment), and 3.13 (action without meeting), with such changes in the context
of those bylaws as are necessary to substitute the committee and its members for the board of directors and its
members, except that the time of regular meetings of committees may be determined either by resolution of the
board of directors or by resolution of the committee; special meetings of committees may also be called by
resolution of the board of directors; and notice of special meetings of committees shall also be given to all
alternate members, who shall have the right to attend all meetings of the committee. The board of directors may
adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.
ARTICLE V
OFFICERS
5.1
Officers. The officers of the corporation shall be a chairperson of the board, a president, a
secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors,
one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of this Article V. Any number of
offices may be held by the same person.
5. 2
Elections of Officers. The officers of the corporation, except such officers as may be appointed in
accordance with the provisions of Section 5.3 or Section 5.5 of this Article V, shall be chosen by the board of
directors and each shall serve at the pleasure of the board, subject to the rights, if any, of an officer under any
contract of employment.
5.3
Subordinate Officers. The board of directors hereby empowers the president to appoint such
other officers and employees as the business of the corporation may require, each of whom shall hold office for
such period, have such authority and perform such duties as are provided in the bylaws or as president may from
time to time determine.
5.4
Removal and Resignation of Officers. Any officer chosen by the board of directors may be
removed at any time, with or without cause or notice, by the board of directors. Subordinate officers appointed by
persons other than the board under Section 5.3 of this Article V may be removed at any time, with or without
cause or notice, by the officer who appointed such person. Officers may be employed for a specified term under a
contract of employment if authorized by the board of directors; such officers may be removed from office at any
time under this section, and shall have no claim against the corporation or individual officers or board members
because of the removal except any right to monetary compensation to which the officer may be entitled under the
contract of employment.
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BANK OF MARIN BANCORP
Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any
resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a
party.
5.5
Vacancies in Offices. A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular
appointments to that office.
5.6
Chairperson of the Board. The chairperson of the board shall, if present, preside at meetings of
the board of directors and shareholders and exercise and perform such other powers and duties as may be from
time to time assigned to him/her by the board of directors or prescribed by the bylaws.
5.7
President. The president shall be the chief executive officer of the corporation and shall, subject
to the control of the board of directors, have general supervision, direction, and control of the business and the
officers of the corporation. In the absence of the chairperson of the board, or if there be none, he/she shall
preside at all meetings of the shareholders and at all meetings of the board of directors. He/she shall have the
general powers and duties of management usually vested in the office of president of a corporation, shall have
the power to hire subordinate officers and employees of the corporation and to terminate same, and shall have
such other powers and duties as may be prescribed by the board of directors or the bylaws.
5.8
Vice Presidents. If desired, one or more vice presidents may be chosen by the board of directors
in accordance with the provisions for electing officers set forth in Section 5.2 of this Article V. In the absence or
disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if
not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and
when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice
president shall have such other powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors or the bylaws, and the president, or the chairperson of the board.
5.9
Secretary.
(a)
Minutes. The secretary shall be present at all shareholders' meetings and all board meetings and
shall take the minutes of the meeting. If the secretary is unable to be present, the secretary or the presiding officer
of the meeting shall designate another person to take the minutes of the meeting.
The secretary shall keep, or cause to be kept, at the principal executive office or such other place as
designated by the board of directors, a book of minutes of all meetings and actions of shareholders, board of
directors, and of committees of the board. The minutes of each meeting shall state the time and place the meeting
was held, whether it was regular or special; if special, how it was called or authorized; the names of directors
present at board or committee meetings; the number of shares present or represented at shareholders' meetings;
and an accurate account of the proceedings.
(b)
Record of Shareholders. The secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, a record or duplicate record of shareholders.
This record shall show the names of all shareholders and their addresses, the number and classes of shares held
by each, the number and date of share certificates issued for each shareholder, and the number and date of
cancellation of any certificates surrendered for cancellation.
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BANK OF MARIN BANCORP
(c)
Notice of Meetings. The secretary shall give notice, or cause notice to be given, of all
shareholders' meetings, board meetings, and meetings of committees of the board for which notice is required by
statue or by the bylaws. If the secretary or other person authorized by the secretary to give notice fails to act,
notice of any meeting may be given by any other officer of the corporation.
(d)
Other Duties. The secretary shall keep the seal of the corporation, if any, in safe custody. The
secretary shall have such other powers and perform other duties as prescribed by the board of directors or by the
bylaws.
5.10 Chief Financial Officer. The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the properties and business transactions
of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all monies and other valuables in the name and to the credit of the
corporation with such depositories as may be designated by the board of directors. He/she shall disburse the
funds of the corporation as may be ordered by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as chief financial officer and of the financial
condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by
the board of directors or the bylaws.
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BANK OF MARIN BANCORP
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS
EMPLOYEES, AND OTHER AGENTS
6.1
Indemnification. The corporation shall, to the maximum extent permitted by the California General
Corporation Law, have power to indemnify each of its agents against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact
any such person is or was an agent of the corporation, and shall have power to advance to each such agent
expenses incurred in defending any such proceeding to the maximum extent permitted by that law. For the
purposes of this Article, an "agent" of the corporation includes any person who is or was a director, officer,
employee or other agent of the corporation, or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, or was a
director, officer, employee, or agent of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
ARTICLE VII
RECORDS AND REPORTS
7.1
Maintenance And Inspection Of Share Register. The corporation shall keep at its principal
executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by
resolution of the board of directors, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the
outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and
addresses and share holdings during usual business hours on five days prior written demand on the corporation,
and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for
the election of directors, and their share holdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available
to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received
or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders
shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the holder's interest as a shareholder
or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in
person or by an agent or attorney, of the shareholder or holder of a voting trust certificate making the demand.
7. 2 Maintenance And Inspection Of Bylaws. The corporation shall keep at its principal executive
office, or if its principal executive office is not in the State of California, at its principal business office in this state,
the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at
all reasonable times during office hours. If the principal executive office of the corporation is outside the State of
California and the corporation has no principal business office in this state, the Secretary shall, upon the written
request of any shareholder, furnish to that shareholder a copy of the bylaws as amended to date.
7.3
Maintenance And Inspection Of Other Corporate Records. The accounting books and records
and minutes of proceedings of the shareholders and the board of directors and any committee or committees of
the board of directors shall be kept at such place or places designated by the board of directors, or, in the
absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in
written form and the accounting books and records shall be kept either in written form or in any other form
capable of being converted into written form. The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable
time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as
the holder of a voting trust certificate; provided, that any financial statements will not be available for inspection
until publicly released to shareholders. The inspection may be made in person or by an agent or attorney, and
shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each
subsidiary corporation of the corporation.
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BANK OF MARIN BANCORP
7.4
Inspection By Directors. Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind and the physical properties of the corporation and each
of its subsidiary corporations. This inspection by a director may be made in person or by an agent or attorney and
the right of inspection includes the right to copy and make extracts of documents.
7.5
Annual Report To Shareholders. As may be required by the provisions of the Corporations Code
of California, the board of directors shall cause an annual report to be sent to the shareholders at least fifteen (15)
days prior to the annual meeting of shareholders but not later than one hundred and twenty (120) days after the
close of the fiscal year.
7.6
Financial Statements. A copy of any annual financial statement and any income statement of the
corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation
as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal
executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all
reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed
to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class
of stock of the corporation makes a written request to the corporation for an income statement of the corporation
for the three-month, six month, or nine-month period of the then current fiscal year ended more than thirty (30)
days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief
financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or
mail that statement or statements to the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report
shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of
the last annual, semi-annual, or quarterly income statement which it has prepared, and a balance sheet as of the
end of that period.
The quarterly income statements and balance sheets referred to in this section shall be accompanied by
the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without audit from the books and records of
the corporation.
7.7
Annual Statement Of General Information.
(a)
Every year, during the calendar month in which the original articles of incorporation were filed
with the California Secretary of State, or during the preceding five calendar months, the corporation shall file a
statement with the Secretary of State on the prescribed form, setting forth the authorized number of directors; the
names and complete business or residence addresses of all incumbent directors; the names and complete
business or residence addresses of the chief executive officer, the secretary, and the chief financial officer; the
street address of the corporation's principal executive office or principal business office in this state; a statement
of the general type of business constituting the principal business activity of the corporation; and a designation of
the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the
Corporations Code of California. If the corporation becomes a “public company” as defined by Section 1502.1 of
the Corporations Code of California, the corporation shall file an additional statement of information as required by
that section.
(b)
Notwithstanding the provisions of paragraph (a) of this section, if there has been no change in the
information contained in the corporation's last annual statement on file in the Secretary of State's office, the
corporation may, in lieu of filing the annual statement described in paragraph (a) of this section, advise the
Secretary of State, on the appropriate form, that no changes in the required information have occurred during the
applicable period.
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BANK OF MARIN BANCORP
ARTICLE VIII
GENERAL CORPORATE MATTERS
8.1
Record Date For Purposes Other Than Notice And Voting. For purposes of determining the
shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled
to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent
without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty
(60) days before any such action, and in that case only shareholders of record on the date so fixed are entitled to
receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except
as otherwise provided in the California General Corporation Law.
If the board of directors does not so fix a record date, the record date for determining shareholders for
any such purpose shall be at the close of business on the date on which the board adopts the applicable
resolution or the sixtieth (60th) day before the date of that action, whichever is later.
8.2
Checks, Drafts, Evidences Of Indebtedness. All checks, drafts, or other orders for payment of
money, notes, or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by
resolution of the board of directors.
8.3
Corporate Contracts And Instruments: How Executed. The board of directors, except as
otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be
general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any
amount.
8.4
Certificates For Shares. A certificate or certificates for shares of the capital stock of the
corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of
directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall
state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in
the name of the corporation by the chairperson of the board or vice chairperson of the board or the president or
vice president and by the chief financial officer or an assistant treasurer or the secretary or any assistant
secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all
of the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has
signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer
agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if
that person were an officer, transfer agent, or registrar at the date of issue. The corporation may adopt a system
of issuance, recordation and transfer of its shares by electronic or other means, not involving the issuance of
certificates, provided that any such system conforms to the requirements of Section 416(b) of the California
General Corporation Law.
8.5
Lost Certificates. Except as provided in this Section 8.5, no new certificates for shares shall be
issued to replace an old certificate unless the latter is surrendered to the corporation and canceled at the same
time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen, or
destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the board may
require, including provision for indemnification of the corporation secured by a bond or other adequate security
sufficient to protect the corporation against any claim that may be made against it, including any expense or
liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement
certificate.
8.6
Shares Of Other Corporations: How Voted. Shares of other corporations standing in the name of
this corporation shall be voted by one of the following persons, listed in order of preference: (1) president, or
person designated by the president; (2) executive vice president, or person designated by the executive vice
president; (3) other person designated by the board of directors. The authority to vote shares granted by this
section includes the authority to execute a proxy in the name of the corporation for purposes of voting the shares.
xiv
BANK OF MARIN BANCORP
8.7
Construction And Definitions. Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the California General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a natural person.
8.8
Reimbursement. If all or part of the salary or other compensation paid to an employee or officer or
director of the corporation is finally determined not to be allowable as a federal or state income tax deduction, the
employee or officer or director shall repay to the corporation the amount disallowed. The board of directors shall
enforce repayment of each such amount disallowed.
ARTICLE IX
AMENDMENTS
9.1
Amendment By Board Of Directors Or Shareholders. Except as otherwise required by law or by
the articles of incorporation, these bylaws may be amended or repealed, and new bylaws may be adopted, by the
vote of two-third of the board of directors or by the holders of a majority of the outstanding shares entitled to vote.
xv
BANK OF MARIN BANCORP
EXHIBIT 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-144807, No. 333-144808, No.
333-144809, No. 333-144810, and No. 333-167639 on Form S-8 and Registration Statements No. 333-156782
and No. 333-162686 on Form S-3 of our report dated March 11, 2011, relating to the consolidated financial
statements and the effectiveness of internal control over financial reporting, appearing in this Annual Report on
Form 10-K, of Bank of Marin Bancorp for the year ended December 31, 2010.
/s/ Moss Adams LLP
Stockton, California
March 11, 2011
BANK OF MARIN BANCORP
EXHIBIT 31.01
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Russell A. Colombo, Chief Executive Officer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Bank of Marin Bancorp (the Registrant);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a -15(f) and 15d-15(f)) for the Registrant
and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the audit committee of
Registrant’s Board of Directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting, which are reasonably likely to adversely affect the Registrant’s ability to
record, process, summarize and report financial information; and
any fraud, whether or not material, that involves Management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Dated: March 8, 2011
/s/ Russell A. Colombo
Russell A. Colombo
Chief Executive Officer
BANK OF MARIN BANCORP
EXHIBIT 31.02
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Christina J. Cook, Chief Financial Officer, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Bank of Marin Bancorp (the Registrant);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and
have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
disclosed in this report any change in the Registrant’s internal control over financial reporting that
occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the audit committee of
Registrant’s Board of Directors (or persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting, which are reasonably likely to adversely affect the Registrant’s ability to
record, process, summarize and report financial information; and
any fraud, whether or not material, that involves Management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Dated: March 8, 2011
/s/ Christina J. Cook
Christina J. Cook
Chief Financial Officer
BANK OF MARIN BANCORP
EXHIBIT 32.01
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Bank of Marin Bancorp (the Registrant) for the year ended
December 31, 2010, as filed with the Securities and Exchange Commission, the undersigned hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1)
2)
such Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
the information contained in such Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of the Registrant.
Dated: March 8, 2011
Dated: March 8, 2011
/s/ Russell A. Colombo
Russell A. Colombo
Chief Executive Officer
/s/ Christina J. Cook
Christina J. Cook
Chief Financial Officer
This certification accompanies each report pursuant to section 906 of the Sarbanes Oxley Act of 2002 and shall
not, except to the extent required by the Sarbanes Oxley Act of 2002, be deemed filed by the Registrant for
purposes of section 18 of the Securities and Exchange Act of 1934, as amended.
T h i s p a g e i n t e n t i o n a l l y l e f t b l a n k .
T h i s p a g e i n t e n t i o n a l l y l e f t b l a n k .
w w w . b a n k o f m a r i n . c o m