504 redwood boulevard, suite 100
novato, california 94947
415.763.4520
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 our local communities.
per sona l ba nk ing
Developing personal relationships and providing ‘legendary service’
to our customers is our way of doing business.
– Personal Checking & Savings
– Teen Checking & Savings
– Online Banking, eStatements & Telephone Banking
– Credit Cards
– Mobile Banking & Mobile Check Deposits
business ba nk ing
Our experienced team provides ongoing business guidance and
creative financing solutions for any size business.
– Business Account Management
– Remote Deposit & Image Lockbox
– Fraud Protection Products
– Merchant Services & Credit Cards
– Mobile Banking & Mobile Check Deposits
– International Services
lending
Our expert local lenders provide flexible, customized financing
tailored to our customers’ personal or business needs.
– Home Equity Loans & Lines of Credit
– Commercial Loans & Lines of Credit
– Construction & Commercial Real Estate Loans
– Wine Industry Loans
– Asset Based Loans
w e a lth m a nagement & trust
Delivering extraordinary service, backed by integrity and
accountability, we provide professional guidance, customized
financing, and financial solutions to manage the most complex
banking needs.
– Investment Management
– Trust Services
– Retirement Benefits Plan
s a n f r a n c i s c o | m a r i n | s o n o m a | n a p a | a l a m e d a
w w w . b a n k o f m a r i n . c o m
strength
through
growth
2013 Annual Report
Corporate Information
tr a nsfer agent a nd r egistr a r
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3506
(800) 368-5948
www.rtco.com
independent auditor s
Moss Adams LLP
Stockton, CA
leg a l counsel
Stuart | Moore
San Luis Obispo, CA
nasdaq sy mbol
BMRC
a nnua l meeting
6:00 p.m., May 13, 2014
10 Avenue of the Flags
San Rafael, CA 94903
per iodic r eports
The Company’s annual report for 2013 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.
forwa r d -l ook i ng s tat e m en ts
This discussion of financial results includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, (the “1933 Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended, (the “1934 Act”). Those sections of the 1933 Act and
1934 Act provide a “safe harbor” for forward-looking statements to encourage companies to provide
prospective information about their financial performance so long as they provide meaningful,
cautionary statements identifying important factors that could cause actual results to differ
significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of Management for
future operations, products or services, and forecasts of 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 expectations. Such factors include, but are not limited to,
general economic conditions, the economic uncertainty in the United States and abroad, changes
in interest rates, deposit flows, real estate values, expected future cash flows on acquired loans and
securities, integration of acquisitions and competition; changes in accounting principles, policies or
guidelines; changes in legislation or regulation; adverse weather conditions; and other economic,
competitive, governmental, regulatory and technological factors affecting our operations, pricing,
products and services.
The events or factors that could cause results or performance to materially differ from those
expressed in our prior forward-looking statements concerning the NorCal acquisition include:
lower than expected consolidated revenues; higher than expected acquisition related costs; losses of
deposit and loan customers resulting from the acquisition; greater than expected operating costs
and/or loan losses; significant increases in competition; the inability to achieve expected cost
savings from the acquisition, or the inability to achieve those savings as soon as expected; and
unexpected costs and difficulties in adapting to technological changes and integrating systems.
These and other important factors are detailed in the Risk Factors section of the 2013 Annual Report
and Form 10-K. 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.
Financial Performance
(dollars in thousands, except per share data)
2013
2012
2011
2010
2009
At December 31,
Total assets
Total loans
Total deposits
Total stockholders’ equity
Equity-to-asset ratio
For the Year Ended December 31,
Net income
Net income per share (diluted)
Cash dividend payout ratio on common stock1
As of December 31,
Total Capital (to risk-weighted assets)
1 Calculated as dividends on common share divided by basic net income per common share.
$ 1,805,194
1,269,322
1,587,102
180,887
$ 1,434,749
1,073,952
1,253,289
151,792
$ 1,393,263
1,031,154
1,202,972
135,551
$ 1,208,150
941,400
1,015,739
121,920
$ 1,121,672
917,748
944,061
109,051
10.0%
10.6%
9.7%
10.1%
9.7%
$
14,270
2.57
27.9%
$
$
17,817
3.28
21.0%
15,564
2.89
22.1%
$
13,552
2.55
23.6%
$
12,765
2.19
25.8%
13.21%
13.71%
13.13%
13.34%
12.33%
i
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P
Bank of Marin Bancorp
1
A Message from the
President & CEO and Chairman of the Board
2013 was another excellent year for Bank of Marin and a pivotal year in our 24-year history. With the completion of
the acquisition of the Bank of Alameda, Bank of Marin grew to $1.8 billion in assets, with 21 offices in 5 counties.
This acquisition was the Bank’s first open bank acquisition (in 2011 we acquired Charter Oak in an FDIC-assisted
transaction) and reaffirmed our ability to be a strong survivor in the consolidating banking industry.
Because of our disciplined approach to banking, we weathered the financial downturn quite well and will enter
2014 with very strong capital, excellent credit quality, a growing deposit base and a diversified loan portfolio of
$1.27 billion. Both loans and deposits grew organically in 2013 and, combined with the acquired portfolio,
provided us with significant growth over 2012. We believe that these factors position Bank of Marin perfectly
for continued growth, profitability and success.
2013 was also a year of change and growth for our senior management team through a combination of promotions
and outside additions. Beth Reizman was promoted to Chief Credit Officer following the retirement of Kevin
Coonan. Beth is a perfect replacement in this critical role after 18 years in credit administration and commercial
banking with Bank of Marin. Tim Myers was named head of Commercial Banking to replace Beth, having led
the successful growth of the bank’s San Francisco commercial and industrial portfolio since 2007. His extensive
commercial banking background will be a key to our continued success in developing commercial lending
relationships throughout our markets.
Jim Burke joined us as Chief Information Officer in early 2013 from a national bank. He and his staff have been
instrumental in the successful integration of Bank of Alameda and have strengthened our operations and technology
infrastructure. In August we added Tani Girton to Bank of Marin as our Chief Financial Officer. Tani’s extensive
experience in the financial services industry, most recently as Treasurer of a major California bank, gives us added
strength and expertise in accounting, finance and treasury.
Our Board has also experienced changes and additions. Stuart Lum was elected Chairman of the Board, taking
over from Joel Sklar, who will remain on the Board and continue his 24 years (and counting) as a founding
member of the bank. Stuart has served on the Board for 14 years and brings substantial business experience and
knowledge of the bank through his past leadership roles as Audit Chair, ALCO Chair and member of the
Executive Committee. In addition, financial advisor and Alameda leader Kevin Kennedy joined the Board as a
result of the acquisition. Most recently, we welcomed James Hale to the Board. Jim is a recognized leader, investor,
and pioneer in the financial services industry and an advisor to many public and private companies.
This past year Bank of Marin also recognized the passing of three individuals—William P. (“Bill”) Murray, Jr.,
founder and chairman emeritus of the bank’s board; J.D. Sullivan, Bank of Marin’s first CEO; and Board
member Tom Foster—each of whom instilled and nurtured the three values that have made us who we are
today—relationship banking, disciplined banking fundamentals, and a strong commitment to the communities
that we serve. Their contributions, along with the hard work and dedication of all of our employees and directors
on behalf of our clients and shareholders, drive Bank of Marin’s success every day.
Thank you for your ongoing support.
Sincerely,
Russell A. Colombo
President & Chief Executive Officer
Stuart D. Lum
Chairman of the Board
2
2013 Annual Report
International Wine Accessories
cotati, c a lifor ni a
For those who savor a sophisticated wine lifestyle,
International Wine Accessories is the perfect complement.
They’re known for their custom wine cellars, distinctive
furniture and cabinets, wine coolers, and an extensive array
of barware for homes, hotels, and restaurants. A commercial
loan from Bank of Marin helped fund their latest wine
related acquisition, proving again that wine businesses and
our local team truly make the perfect pairing.
Ben Argov, Co-Owner & President
Marin Organic
point r ey es station, c a lifor ni a
Organic, sustainable, fresh produce and support for our
local farmers. Its taken root, right here, thanks in part to
Marin Organic. And that means we have more choices at
the market and at our table. Nicely enough we share the
same principles of community: leftover crops are donated to
those in need. By increasing access to fresh produce, offering
nutrition and environmental education and supporting
family farmers, we’re cultivating a vibrant, local economy.
Jeffrey Westman, Executive Director
Bank of Marin Bancorp 3
Lixit Corporation
na pa, c a lifor ni a
Employee owned, 100% made in the USA, with a loyal
labor force that includes people with disabilities, Lixit is
the largest manufacturer of small animal watering devices
in the world. With over 30 different labels, their bottles,
bowls, and small animal accessories are uniquely designed,
durable items made for pets’ best interests. We’re happy to
join Lixit in their commitment to the Napa community
and to support their current and future successes.
Linda Parks, President & Chief Executive Officer
Silverman & Light
emery v ille, c a lifor ni a
When Chuck needs a commercial loan for his growing
electrical engineering firm, or a real estate loan for his
other business entities, he goes to Bank of Marin, where he
likes working with flexible, creative and smart lenders.
Bankers who aren’t just number crunchers, but can think
out of the box. Chuck is known for designing the most
innovative lighting and electrical systems in the Bay
Area—and for demanding the most from his bank.
Chuck Silverman, Founder & Principal
4
2013 Annual Report
Experienced Leadership
boa r d of dir ector s
e x ecuti v e officer s
Stuart D. Lum
President and Chief Executive
Officer, Edgewood Pacific Inc.;
Chairman, Bank of Marin and
Bank of Marin Bancorp
Russell A. Colombo
President and Chief Executive
Officer, Bank of Marin and
Bank of Marin Bancorp
James C. Hale
General Partner, FTV Capital
Russell A. Colombo
President and Chief Executive
Officer, Bank of Marin and
Bank of Marin Bancorp
Tani Girton
Executive Vice President and
Chief Financial Officer
Robert Heller
Former Governor, U.S. Federal
Reserve Board and former
President and CEO, Visa USA
Norma J. Howard
Business Consultant
Kevin Kennedy
Kevin Kennedy, LLC
Peter Pelham
Executive Vice President and
Director of Retail Banking
Elizabeth Reizman
Executive Vice President and
Chief Credit Officer
senior m a nagement te a m
William H. McDevitt, Jr.
President, McDevitt Construction
Partners, Inc.
Michaela K. Rodeno
Former Wine Industry CEO
Joel Sklar, MD
Cardiologist and Chief Medical
Officer, Marin General Hospital
Jim Burke
Senior Vice President and
Chief Information Officer
Bob Gotelli
Senior Vice President and
Director of Human Resources
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 Multimedia
Communications, Academy of
Art University, San Francisco
Tim Myers
Senior Vice President and
Commercial Banking Manager
Nancy Rinaldi Boatright
Senior Vice President and
Corporate Secretary
2 0 1 3 A N N U A L R E P O R T
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
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
20-8859754
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
504 Redwood Boulevard, Suite 100, Novato, CA
(Address of principal executive office)
94947
(Zip Code)
Registrant’s telephone number, including area code: (415) 763-4520
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
NASDAQ Capital Market
(Title of each class)
(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
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
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.
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
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
No
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b
(2) of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b(2) of the Exchange Act.
Yes
No
As of June 30, 2013, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market
value of the 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 $210 million. For the purpose of this response, directors and officers of the
Registrant are considered the affiliates at that date.
As of February 28, 2014, there were 5,900,891 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 13, 2014 are incorporated
by reference into Part III.
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.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 and Commitments
Capital Adequacy
Liquidity
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Page-2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Note 2: Acquisition
Note 3: Investment Securities
Note 4: Loans and Allowance for Loan Losses
Note 5: Bank Premises and Equipment
Note 6: Bank Owned Life Insurance
Note 7: Deposits
Note 8: Borrowings
Note 9: Stockholders' Equity and Stock 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
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
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ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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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
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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 include descriptions of plans or objectives of Management for future operations,
products or services, and forecasts of 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 expectations. Such
factors include, but are not limited to, general economic conditions, the economic uncertainty in the United States and
abroad, changes in interest rates, deposit flows, real estate values, expected future cash flows on acquired loans and
securities, integration of acquisitions and competition; changes in accounting principles, policies or guidelines; changes
in legislation or regulation; adverse weather conditions; and other economic, competitive, governmental, regulatory
and technological factors affecting our operations, pricing, products and services.
The events or factors that could cause results or performance to materially differ from those expressed in our prior
forward-looking statements concerning the NorCal acquisition include:
•
•
•
•
•
•
•
lower than expected consolidated revenues;
higher than expected acquisition related costs;
losses of deposit and loan customers resulting from the acquisition;
greater than expected operating costs and/or loan losses;
significant increases in competition;
the inability to achieve expected cost savings from the acquisition, or the inability to achieve those savings
as soon as expected; and
unexpected costs and difficulties in adapting to technological changes and integrating systems.
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 Business Oversight or "DBO") and commenced operations in January
1990. The Bank is an insured bank under the Federal Deposit Insurance Corporation (“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 is listed at NASDAQ and 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
Page-4
Reserve Board reporting and examination requirements, and Bancorp now files 1934 Act reports with the Securities
and Exchange Commission.
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.
Most of our business is conducted through Bancorp's subsidiary, the Bank, which is headquartered in Novato, California.
As of December 31, 2013, we operated through twenty-one offices in Marin, Sonoma, San Francisco, Napa and
Alameda counties with a strong emphasis on supporting the local community. 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 real estate loans, commercial and industrial 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.
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, Automated Clearing House services (“ACH”), social security and pension checks,
fraud prevention services including Positive Pay for Checks and ACH 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, CIRRUS and NYCE networks, as well as 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-sized businesses through a third party vendor.
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 consists of Marin, San Francisco, Napa, Sonoma and Alameda counties. Our customer base
is primarily made up of business and personal banking relationships within these market areas.
As discussed in Note 2 to the Consolidated Financial Statements in Item 8 of this report, in November 2013, we
expanded our community banking footprint to Alameda County through the acquisition of $280.9 million of assets, the
Page-5
assumption of $246.4 million of liabilities, and the addition of four branch offices serving Alameda, Emeryville, and
Oakland of the former NorCal Community Bancorp ("NorCal"), parent company of Bank of Alameda (the “Acquisition”).
On February 18, 2011, we entered into a modified whole-bank purchase and assumption agreement without loss share
(the “P&A Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”), the receiver of Charter Oak Bank
of Napa, California. We purchased $107.8 million in assets and assumed $107.7 million in liabilities of the former
Charter Oak Bank to enhance our market presence in Napa.
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, 2013, approximately 62% 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, which has resulted in limited
loan growth in the past year. Larger banks are seeking to expand lending to businesses, which are traditionally
community bank customers.
In all of our five counties, we have significant competition with nationwide banks, which have much larger branch
networks nationwide, as well as several thrifts, credit unions and other independent banks. We have the largest business
core deposit market share, representing 23.3% of business core deposits in Marin County according to the Deposit
& Market Share Report from the California Banksite Corporation based upon the FDIC deposit market share data as
of June 30, 2013. A significant driver of our franchise value is the growth and stability of our checking and savings
deposits, a low cost funding source for our loan portfolio. Bank of Marin maintains the highest market share in Marin
County as a community bank, and has the third highest market share behind two national banks. We have a presence
in Sonoma County with 6% market share, and are building shares in the San Francisco, Napa and Alameda markets.
We also compete for depositors' funds with money market mutual funds and with non-bank financial institutions such
as brokerage firms and insurance companies. Among the competitive advantages held by some of these non-bank
financial institutions is their ability to finance extensive advertising and funding campaigns and allocate investments
to our markets.
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,
local leadership and local decision making. Our competitive advantages also include an emphasis on personalized
service, community involvement, philanthropic giving, local promotional activities and strong relationships with our
customers. The commitment and dedication of our directors, officers and staff have also contributed greatly to our
success in competing for business.
Employees
At December 31, 2013, we employed 281 full-time equivalent (“FTE”) staff. The actual number of employees, including
part-time employees, at year-end 2013 included five executive officers, 103 other corporate officers and 189 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” by the
North Bay Business Journal and as a "Top Corporate Philanthropist” by the San Francisco Business Times for many
years.
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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 FRB reporting and examination requirements.
Under the FRB's regulations, a bank holding company is required to serve as a source of financial and managerial
strength to its subsidiary banks.
The BHCA regulates the activities of holding companies including acquisitions, mergers and consolidations and,
together with the Gramm-Leach Bliley Act of 1999, the scope of allowable banking activities. Bancorp is also a bank
holding company within the meaning of the California Financial Code. As such, Bancorp and its subsidiaries are subject
to examination by, and may be required to file reports with, the DBO.
Bank Regulation
Banking regulations are primarily intended to protect consumers, 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 DBO. 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 DBO
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, monetary penalties, restitution,
restricting our growth or removing officers and directors.
The following discussion summarizes certain significant laws, rules and regulations affecting both Bancorp and the
Bank. The Bank addresses the many state and federal regulations it is subject to through a comprehensive compliance
program that addresses the various risks associated with these issues.
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 DBO and
the FDIC. Management anticipates that there will be sufficient earnings at the Bank level to provide dividends to
Bancorp to meet its cash requirements for 2014. 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.
On February 7, 2011, as required by the Dodd-Frank Act, the FDIC approved a rule that changed the FDIC insurance
assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity,
defined as Tier 1 capital. The new rule lowered 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
was effective beginning with the second quarter of 2011. Since we have a solid core deposit base, do not rely heavily
on borrowings and brokered deposits and maintain high asset quality, the benefit of the lower assessment rate (which
dropped by approximately half for us in 2011) significantly outweighed the effect of a wider assessment base.
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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 of 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. Our CRA performance will be
evaluated by the FDIC under the large bank requirements in the future. The FDIC's last CRA performance examination
was performed under the intermediate small bank requirements and completed on June 18, 2012 with a rating of
“Satisfactory”.
Anti Money-Laundering Regulations
A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 requires 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, requirements regarding the Customer Identification Program, 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 ,Truth-in-Lending Act, the Unfair, Deceptive
or Abusive Acts and Practices, and the Dodd-Frank 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, effective October 28, 2013, there is a new provision of
Regulation E to accommodate the new Remittance Transfers Rule requirements of the Dodd-Frank Wall Street Reform
Act concerning consumer international wires. The new rule focuses primarily on consumer protection including
mandatory disclosures of wire transfer fees, error resolution procedures, and cancellation rights.
Restriction on Transactions between Bank's 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
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transactions between the Bank and Bancorp with FRB interpretations in an effort to simplify compliance with Sections
23A and 23B.
Capital Requirements
The FRB 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 dividends
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.
In December 2010, the Basel Committee on Bank Supervision finalized a set of international guidelines for determining
regulatory capital known as “Basel III.” These guidelines were developed to address many of the weaknesses in the
banking industry that contributed to the past financial crisis, including excessive leverage, inadequate and low-quality
capital and insufficient liquidity buffers. In July 2013, the FRB, the FDIC and the Office of the Comptroller of the Currency,
finalized a rule to implement Basel III. The rule is subject to a phase-in period beginning January 2015, and all the
changes should be implemented by January 2019. The guidelines, among other things, increase minimum capital
requirements of bank holding companies, including increasing the Tier 1 capital to risk-weighted assets ratio to 6%,
introducing a new requirement to maintain a minimum ratio of common equity Tier 1 capital to risk-weighted assets of
4.5%, and in 2019, when fully phased in, a capital conservation buffer of an additional 2.5% of risk-weighted assets.
In addition, there have been several updates to the way risk-weighted assets are assessed. The three changes that
will affect the Bank most significantly are: the movement of past due exposures from 100% to 150% risk weight; the
movement of off-balance sheet items with an original maturity of one year or less from 0% to 20% risk weight; and
the risk weighting of mortgage-backed securities using the gross-up approach instead of the ratings-based approach.
We have modeled our ratios under the finalized rules and we do not expect that we will be required to raise additional
capital as a result of their implementation.
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 and, among other things:
•
•
•
•
•
required executive certification of financial presentations;
increased requirements for board audit committees and their members;
enhanced disclosure of controls and procedures and internal control over financial reporting;
enhanced controls over, and reporting of, insider trading; and
increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
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 purchase senior preferred shares from the largest nine financial institutions in the nation
and 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 issued a warrant
to the U.S. Treasury to acquire 156,134 shares of our common stock (as adjusted with newly declared dividends). The
warrant was auctioned by the U.S. Treasury and purchased by two institutional investors during November 2011 and
remains outstanding. See Note 9 to the Consolidated Financial Statements in Item 8 of this report for discussion
regarding the warrant.
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 are restrictions on executive compensation and corporate expenditure
limits for recipients of TCPP funds and a provision for repurchase of preferred stock at liquidation amount without
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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 Act, a landmark financial reform bill comprised of
voluminous 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 Dodd-Frank Act includes other key
provisions as follows:
(1) Establishes a new Financial Stability Oversight Council to monitor systemic financial risks. The FRB is 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 non-bank financial companies to limit the risk they might
pose to the economy and other large interconnected companies. The FRB can also take direct control of troubled
financial companies that are considered systemically significant.
The Dodd-Frank Act restricts the amount of trust preferred securities (“TruPS”) that may be considered as Tier 1 Capital.
For bank holding companies below $15 billion in total assets, TruPS issued before May 19, 2010 are grandfathered,
so their status as Tier 1 capital does not change.
On November 29, 2013, we acquired NorCal and assumed ownership of NorCal Community Bancorp Trusts I and II,
respectively (the "Trusts"), which were formed by NorCal for the sole purpose of issuing TruPS. Since the TruPS
assumed from the NorCal acquisition were issued prior to May 2010 and they do not exceed 25% of the sum of all our
other core capital elements, they are included in our Tier I capital.
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 TruPS issued before May 19, 2010. However, going forward,
TruPS will be disallowed as Tier 1 capital.
(2) 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) Establishes a new independent Federal regulatory body for consumer protection within the Federal Reserve System
known as the Consumer Financial Protection Bureau ("CFPB"), which assumes responsibility for most consumer
protection laws (except the Community Reinvestment Act). It is also in charge of setting appropriate consumer banking
fees and caps. The Office of Comptroller of the Currency continues to have authority to preempt state banking and
consumer protection laws if these laws "prevent or significantly" interfere with the business of banking.
(4) Affects changes in the FDIC assessment as discussed in section “FDIC Insurance Assessments” above.
(5) 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.
(6) Authorizes the FRB to regulate interchange fees on debit card and certain general-use prepaid card transactions
paid to issuing banks with assets in excess of $10 billion to ensure that they are “reasonable and proportional” to the
cost of processing individual transactions and to prohibit networks and issuers from requiring transactions to be
processed on a single payment network. The FRB issued its final rule on June 29, 2011.
Available Information
On our Internet web site, www.bankofmarin.com, we post the following filings as soon as reasonably practical after
they are filed with or furnished to the Securities and Exchange Commission: Annual Report to Shareholders, 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
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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 Bancorp
504 Redwood Boulevard, 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 in 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, focused on, or 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.
Earnings are Significantly Influenced by General Business and Economic Conditions
We are operating in an uncertain economic environment. While there are signs of economic conditions improving, the
recovery in the labor market is not complete and the unemployment and underemployment rates are still well above
levels typically associated with economic strength. Weak business and consumer spending, the U.S. budget deficit
and uncertainty in the economies of Europe and emerging markets have the potential to hamper economic recovery.
The economic environment is impacted by political uncertainty and changes in fiscal and monetary policy, and the
long-term effects of expiring tax cuts and mandatory reductions in federal spending, could adversely affect our business.
Economic conditions have led to prolonged low interest rates, particularly medium and longer-term rates, which may
have a long-term impact on the composition of our earning assets and our net interest margin. Among other things,
a period of prolonged lower rates may cause prepayments to increase as our customers seek to refinance existing
loans, resulting in a decrease in the weighted average yield of our earning assets and variability in our net interest
income. Furthermore, financial institutions continue to be affected by the tepid recovery of the real estate market and
a stricter regulatory environment. While our market areas have not experienced the same degree of challenge in
unemployment as other areas 1, 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 or that the credit worthiness
of our borrowers will not deteriorate.
Continued weakness 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 ways:
Low cost or non-interest bearing deposits may decrease
• Demand for our products and services may decline
•
• Collateral for our loans, especially real estate, may decline further in value
Loan delinquencies, problem assets and foreclosures may increase.
•
As the economy is still vulnerable, businesses are wary about capital expenditures or expansion of working capital
and consumers are de-leveraging by reducing their debt levels. Hence, we have noticed a low level of loan demand
due to an unfavorable economic climate and intensified competition for credit-worthy borrowers, all of which could
impact our ability to generate profitable loans.
____________________________________________________________________________________________
1 Based on the latest available labor market information from the California Employment Development Department. Preliminary
December 2013 results show that the unemployment rate in Marin County was the lowest in California at 4.2%. The unemployment
rates in San Francisco, Sonoma, Napa and Alameda County are 4.8%, 5.7%, 5.9% and 6.3%, compared to the state of California
at 8.3%.
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Banks and Bank Holding Companies 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. Legislation is regularly introduced in the U.S. Congress and the California Legislature which would impact
our operating environment in perhaps substantial and unpredictable ways. The nature and extent of future legislative
and regulatory changes affecting us is unpredictable at this time.
The historic disruptions in the financial marketplace over the past several years have prompted the Obama
administration to reform financial market regulation. This 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 non-conformance
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.
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 rules under the Dodd-Frank Act change banking statutes
and the operating environment of Bancorp and the Bank in substantial and unpredictable ways, and could continue to
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 continue to invest
significant Management attention and resources to make any necessary changes related to the Dodd-Frank Act and
any regulations promulgated thereunder. The ultimate effect that the changes will have on the financial condition or
results of operations of Bancorp or the Bank is uncertain at this time.
The broader impact of recently enacted legislation and related measures undertaken to alleviate the aftermaths of the
credit crisis is also unknown. The capital and credit markets experienced volatility and disruption at unprecedented
levels in the last credit crisis. In some cases, the markets have produced downward pressure on credit availability for
certain issuers without regard to those issuers' underlying financial strength. If similar disruptions 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 the Basel III capital framework discussed on page 9 under "Capital Requirements", there is a Basel III
liquidity framework that requires banks and bank holding companies to measure their liquidity against specific liquidity
tests, such as the liquidity coverage ratio (“LCR”). The LCR is designed to ensure that the banking entity maintains
an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-
day time horizon under an acute liquidity stress scenario. The LCR at 60% is required to be satisfied on January 1,
2015, with a phase-in period ending January 1, 2019. The other test, referred to as the net stable funding ratio (“NSFR”),
is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-
year time horizon. The Basel III liquidity framework contemplates that the NSFR will be subject to an observation
period through mid-2016 and, subject to any revisions resulting from the analysis conducted and data collected during
the observation period, implemented as a minimum standard by January 1, 2018. These new standards are subject
to further rulemaking and their terms may well change before implementation. The federal banking agencies are
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expected to propose rules implementing the Basel III liquidity framework and have not determined to what extent they
will apply to U.S. banks that are not large, internationally active banks.
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 service areas. Some of our non-bank competitors may not
be subject to the same extensive regulations as we are, giving them 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. Further, loan demand may 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 or impact our ability to generate profitable loans.
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 business segment and the mass-affluent segment, which offer 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 alternative investments, we can lose a
relatively inexpensive source of funds, thus increasing our funding costs.
We also compete with nation-wide and regional banks much larger than our size, which may be able to benefit from
economies of scale through their wider branch networks, national advertising campaigns and sophisticated technology
infrastructures. In 2012, a local community bank in Marin County was acquired by a reputable regional bank seeking
to expand their footprint in our primary market.
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. Increasing debt without capital
would further increase our leverage, reduce our borrowing capacity and increase our reliance on non-core funds and
counterparties' credit availability, while a public offering may have a dilutive effect on earnings per share and share
ownership.
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
have non-compete 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 difficulty of promptly finding qualified replacement personnel.
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 adverse changes in our lending area occur or 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 to volatility in those markets. Approximately 86% of our loans were secured by real estate at December
31, 2013, of which 64% were secured by commercial real estate and the remaining 22% by residential real estate.
Real estate valuations are impacted by demand, and demand is driven by factors such as employment; when
unemployment rates rise, demand drops. The unemployment rate has been elevated since 2009. Most of the properties
that secure our loans are located within Marin, San Francisco, Sonoma, Napa and Alameda Counties, and we have
seen some improvement in real estate sales volume and home prices in 2013.
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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 general, 2013 office, industrial and retail vacancy
rates have fallen in Marin, Sonoma and Napa Counties based on the latest available real estate information from
Keegan & Coppin Company, Inc. In addition, commercial vacancy rates have fallen in the Bay Area, especially in the
east bay and San Francisco. There can be no assurance that the companies or properties securing our loans will
generate sufficient cash flows to allow 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 such as us, 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. We have regular conversations with regulators to avoid
unexpected regulatory risk.
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, which is also subject to other weather
or disasters, such as severe rainstorms, wildfire or flood. These events 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, earthquakes or wildfires and thereby
the recoverability of loans could be impaired. A number of factors can affect 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.
Growth May Produce Unfavorable Outcomes
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.
Our growth strategy also includes merger and acquisition possibilities that either enhance our market presence or have
potential for improved profitability through financial management, economies of scale or expanded services. We may
be exposed to difficulties in combining the operations of acquired institutions into our own operations, which may
prevent us from achieving the expected benefits from our acquisition activities. As discussed in Note 2 to the
Consolidated Financial Statements in Item 8 of this report, on November 29, 2013, we completed the merger of NorCal
Community Bancorp ("NorCal"), parent company of Bank of Alameda, ("the Acquisition"). Our earnings, financial
condition and prospects after the merger will depend in part on our ability to integrate the operations and management
of NorCal while continuing to implement other aspects of our business plan. Inherent uncertainties exist in integrating
the operations of an acquired institution and there is no assurance that we will be able to do so successfully. Among
the issues that we could face are:
•
•
•
•
•
•
unexpected problems with operations, personnel, technology or credit;
loss of customers and employees of the acquiree;
difficulty in working with the acquiree's employees and customers;
the assimilation of the acquiree's operations, culture and personnel;
instituting and maintaining uniform standards, controls, procedures and policies; and
litigation risk not discovered during the due diligence period.
Page-15
Undiscovered factors as a result of an acquisition could bring liabilities against us, our management and the
management of the institutions we acquire. These factors could contribute to our not achieving the expected benefits
from our acquisitions within desired time frames, if at all. Further, although we anticipate cost savings as a result of
the merger, we may not be able to fully realize those savings. Any cost savings that are realized may be offset by
losses in revenues or other charges to earnings.
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 "incurred loss model"). 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 or cash flows from acquired loans do not perform as expected, we will need to
record additional provision for loan losses.
In December 2012, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards
Update, Financial Instruments: Credit Losses, which establishes a new impairment framework also known as the
"current expected credit loss model." In contrast to the incurred loss model currently used by financial entities like us,
the current expected credit loss model requires an allowance be recognized based on the expected credit losses (i.e.
all contractual cash flows that the entity does not expect to collect from financial assets or commitments to extend
credit). It requires the consideration of more forward-looking information than is permitted under current U.S. generally
accepted accounting principles. In addition to relevant information about past events and current conditions, such as
borrowers’ current creditworthiness, quantitative and qualitative factors specific to borrowers, and the economic
environment in which the entity operates, the new model requires consideration of reasonable and supportable forecasts
that affect the expected collectability of the financial assets’ remaining contractual cash flows, and evaluation of the
forecasted direction of the economic cycle, as well as time value of money. This proposed impairment framework is
expected to have wide reaching implications to financial institutions such as us. The allowance for loan losses is likely
to increase due to a larger volume of financial assets that fall within the scope of the proposed model, resulting in an
adverse impact on net income, volatility in earnings and higher capital requirements. The full effect of the implementation
of this new model is unknown until the proposed guidance is finalized.
Interest Rate Risk is Inherent in Our Business
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 Federal Reserve Bank ("FRB"), which regulates the supply of money and credit in the United States.
Changes in monetary policy, including changes in interest rates, can influence not only the interest we receive on loans
and securities and interest we pay on deposits and borrowings, but can 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 securities
and loan portfolios. Our portfolio of securities will generally decline in value if market interest rates increase, and
increase in value if market interest rates decline. Our mortgage-backed security ("MBS") portfolio is also subject to
prepayment risk when interest rates are low and extension risk when rates rise.
Page-16
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 FRB (“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%. Based
on statements after the December 2013 FOMC meeting, they expect to keep interest rates near zero for at least as
long as the unemployment rate remains above 6.5%. The FRB continues purchasing MBS, although at a reduced
pace beginning in February 2014. The FRB's sizable and still-increasing holdings of longer-term securities will continue
to place downward pressure on longer-term interest rates, and hence 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 and 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, the prolonged low interest rate environment could have an adverse effect on our financial
condition and results of operations. Our 2014 net interest margin may compress due to continued repricing on loans
and securities. 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.
In the current environment of historically low interest rates, the net interest margin compression has become a major
concern. If interest rates rise by more than 100 basis points, we anticipate that net interest margin 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 does not also rise. This creates a leveraged paradox of an
improving economy (leading to higher interest rates), but lowers 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.
Accounting Estimates and Risk Management Processes Rely On Analytical and Forecasting Models
The processes we use to estimate probable loan losses and to measure the fair value of financial instruments, as well
as the processes used to estimate the effects of changing interest rates and other market measures on our financial
condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect
assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even
if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in
their design or their implementation. If the models we use for interest rate risk and asset-liability management are
inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market
measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan losses
may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments
are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect
what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or
forecasting models could have a material adverse effect on our business, financial condition and results of operations.
Financial Institutions 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 meet customers'
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 as efficiently
as national banks or be successful in marketing these products and services to retain and compete for customers.
Failure to keep pace with technological change affecting the financial services industry could have a material adverse
impact on the long-term success of our business and, in turn, our financial condition and results of operations.
The Bank outsources core processing to Fidelity Information Services, a leading financial services solution provider,
which allows us access to competitive technology offerings without having to directly invest in development.
Page-17
Cyber Security is a Growing Risk for Financial Institutions
Our business requires the secure handling of sensitive client information. We also rely heavily on communications
and information systems to conduct our business. Cyber incidents include intentional attacks and unintentional events
that may present unauthorized access to digital systems that disrupt operations, corrupt data, release sensitive
information or cause denial-of-service on our websites. We store, process and transmit account information in
connection with lending and deposit relationships, including funds transfer and online banking. A breach of cyber-
security systems of the Bank, 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 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 process debit card transactions initiated by our customers at merchant locations around the world. When a merchant
is impacted by a cyber breach, we are exposed to the risk of financial losses due to fraudulent card activity, as well as
increases in associated operational expense.
We Rely on Third-Party Vendors for Important Aspects of Our Operation
We depend on the accuracy and completeness of information and systems provided by certain key vendors, including
but not limited to data processing, payroll processing, technology support, investment safekeeping and accounting.
Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the
event of an interruption of an information system, an undetected error, a cyber breach, or in the event of a natural
disaster whereby certain vendors are unable to maintain business continuity.
Failure of Correspondent Banks and Counterparties May Affect Liquidity
In the past few years, the financial services industry in general was materially and adversely affected by the credit
crisis. We have witnessed failure of banks in the industry in recent years. 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 in item 8 in this Form 10-K). 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.
Deterioration of Credit Quality or Insolvency of Insurance Companies May Impede our Ability to Recover
Losses
The financial crisis led certain major insurance companies to be downgraded by rating agencies. We have property,
casualty and financial institution risk coverage underwritten by several insurance companies, who may not avoid
insolvency risk inherent in the insurance industry. In addition, some of our investments in obligations of state and
political subdivisions are insured by 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.
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”). Since 2008, both FNMA and FHLMC have been under a U.S. Government
Page-18
conservatorship which purchases MBS issued by them. As a result, the MBS issued by FNMA and FHLMC have
experienced an increase in fair value and our MBS portfolio has benefited from this government support. However,
on August 17, 2012, the U.S. Department of the Treasury announced plans to accelerate the wind down of FNMA and
FHLMC and incrementally shrink the government's housing-finance footprint by, among other things, reducing FNMA
and FHLMC's investment portfolios at an annual rate of 15 percent and sweeping every dollar of profit that each firm
earns to the U.S. Treasury quarterly.
Beginning in February 2014, the FRB's monthly MBS purchase was reduced to $30 billion from $35 billion. When the
U.S. Government starts selling FNMA and FHLMC MBS, when the government support is phased-out or completely
withdrawn, or if either 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 may decline.
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. State and political subdivisions are expected to undergo further financial stress due to the reduced federal
funding. While we generally 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 or continue
their payments on these debentures.
The Value Of Goodwill and Other Intangible Assets May Decline In The Future
As of December 31, 2013, we had goodwill totaling $6.4 million and a core deposit intangible asset totaling $4.5 million
from the NorCal acquisition. A significant decline in expected future cash flows, a significant adverse change in the
business climate, slower growth rates or a significant and sustained decline in the price of our common stock could
necessitate taking charges in the future related to the impairment of goodwill or other intangible assets. If we were to
conclude that a future write-down of goodwill or other intangible assets is necessary, we would record the appropriate
charge, which could have a material adverse effect on our business, financial condition and results of operations.
Non-performing Assets Take Significant Time To Resolve And Adversely Affect Results Of Operations And
Financial Condition.
The Bank's non-performing assets have historically been maintained at a manageable level. While we have significantly
reduced non-performing assets, non-performing assets may adversely affect our net income in various ways in the
future. Until economic improvement continues in a sustainable fashion, we might incur losses relating to non-performing
assets if their collateral values deteriorate. We do not record interest income on non-accrual loans, which adversely
affects our income and increases our loan administration costs. When we take collateral in foreclosures and similar
proceedings, we are required to mark the related loan to the fair value of the collateral, which may result in a loss.
While we have managed our problem assets through workouts, restructurings and other proactive credit management,
decreases in the value of the assets, underlying collateral, or 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 non-performing assets requires significant commitments
of time from Management, which can detract from other responsibilities. There can be no assurance that we will not
experience further increases in non-performing assets in the future.
Unexpected Early Termination of Interest Rate Swap Agreements May Impact 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.
Page-19
We May Take Filing Positions or Follow Tax Strategies That May Be Subject to Challenge
We provide for current and deferred taxes in our consolidated financial statements based on our results of operations,
business activities and business combinations, legal structure and federal and state legislation and regulations. We
may take filing positions or follow tax strategies that are subject to interpretation of tax statutes. Our net income may
be reduced if a federal, state or local authority assessed charges for taxes that have not been provided for in our
consolidated financial statements. Taxing authorities could change applicable tax laws, challenge filing positions or
assess taxes and interest charges. If taxing authorities take any of these actions, our business, results of operations
or financial condition could be adversely and significantly affected.
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, service subordinated debt, and cover operational expenses of the holding company. 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
and pay interest on the subordinated debentures. As a result, it could have an adverse effect on Bancorp's stock price
and investment value.
Under federal law, capital distributions from the Bank would become prohibited, with limited exceptions, if the Bank
were categorized as "undercapitalized" under applicable FRB or FDIC regulations. In addition, as a California bank,
the Bank is subject to state law restrictions on the payment of dividends. For further information on the distribution
limit from the Bank to Bancorp, see the section captioned “Bank Regulation” in Item 1 above and “Dividends” in Note
9 to the Consolidated Financial Statements in Item 8 of this report.
The Trading Volume of Bancorp's Common Stock is Less than That of Other, Larger Financial Services
Companies
Our common stock is listed on the NASDAQ 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.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 PROPERTIES
We lease our corporate headquarters building, which houses substantial loan production, operations and administration
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, Tiburon, Greenbrae, Petaluma, Santa Rosa, Sonoma, Napa,
San Francisco, Alameda, Emeryville, and Oakland. We consider our properties to be suitable and adequate for our
needs. For additional information on properties, see Notes 5 and 13 to the Consolidated Financial Statements included
in Item 8 of this report.
ITEM 3 LEGAL PROCEEDINGS
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
contingent liability, if any, will not have a material adverse effect on our financial position, results of operations, or cash
flows.
Page-20
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 report.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
Page-21
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, 2014,
5,900,891 shares of Bancorp's common stock, no par value, were outstanding and held by approximately 2,400 holders
of record and beneficial owners. The following table sets forth, for the periods indicated, the range of high and low
intra-day sales prices of Bancorp's common stock.
Calendar
Quarter
1st Quarter $
2nd Quarter $
3rd Quarter $
4th Quarter $
2013
High
41.45 $
40.75 $
45.96 $
46.21 $
Low
36.89 $
37.75 $
38.45 $
40.00 $
2012
High
40.44 $
39.38 $
44.02 $
44.09 $
Low
34.56
35.23
35.72
34.50
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 $
2013
Per Share
Dollars
971,000 $
0.18 $
979,000 $
0.18 $
982,000 $
0.18 $
0.19 $ 1,038,000 $
2012
Per Share
0.17 $
0.17 $
0.18 $
0.18 $
Dollars
908,000
911,000
965,000
967,000
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.
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 2013.
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. For further information,
see Note 9 to the Consolidated Financial Statements, under the heading “Shareholder Rights Plan” in Item 8 of this
report.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information as of December 31, 2013, with respect to equity compensation plans. All
plans have been approved by the shareholders.
(A)
Shares to be issued
upon exercise of
outstanding options
(B)
Weighted average
exercise price of
outstanding options
(C)
Shares available for future
issuance (Excluding shares
in column A)
Equity compensation plans
approved by shareholders
220,456 1 $
32.74
408,643 2
1 Represents shares of common stock issuable upon exercise of outstanding options under 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 Stock Plan.
Page-22
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, 2013 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, 2008 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.
Indexed Five Year Total Return
300
250
200
150
100
50
)
%
(
s
e
c
i
r
P
d
e
x
e
d
n
I
0
2008
2009
2010
2011
2012
2013
Bank of Marin
Peer Group1
Russell 2000
BMRC
Peer Group1
Russell 2000
2008
100
100
100
2009
139
83
127
2010
152
85
161
2011
166
71
155
2012
169
90
180
2013
199
129
250
1BMRC Peer Group represents public California banks with assets between $1 billion to $5 billion as of
December 31, 2013: WABC, WIBC, MCHB, CYHT, HAFC, TCBK, FMCB, EXSR, PFBC, PPBI, BBNK, HTBK,
BSRR, CUNB, AMBZ, RCBC, HEOP, CVCY. 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-23
ITEM 6
SELECTED FINANCIAL DATA
2013
(dollars in thousands, except per share data)
2012
2011
2010
2009
2012/2013
% change
At December 31,
Total assets
Total loans
Total deposits
$ 1,805,194
$ 1,434,749
$ 1,393,263
$ 1,208,150
$ 1,121,672
1,269,322
1,073,952
1,031,154
941,400
1,587,102
1,253,289
1,202,972
1,015,739
917,748
944,061
109,051
Total stockholders' equity
180,887
151,792
135,551
121,920
Equity-to-asset ratio
10.0%
10.6%
9.7%
10.1%
9.7%
For year ended December 31,
Net interest income
$
58,775
$
63,190
$
63,819
$
54,909
$
52,567
Provision for loan losses
Non-interest income
Non-interest expense1
Net income1
540
8,066
44,092
14,270
2,900
7,112
38,694
17,817
7,050
6,269
38,283
15,564
5,350
5,521
33,357
13,552
5,510
5,182
31,696
12,765
25.8 %
18.2 %
26.6 %
19.2 %
(5.7)%
(7.0)%
(81.4)%
13.4 %
14.0 %
(19.9)%
Net income per share (diluted)
2.57
3.28
2.89
2.55
2.19
(21.6)%
Tax-equivalent net interest
margin
Cash dividend payout ratio on
common stock 2
4.20%
4.74%
5.13%
4.95%
5.17%
(11.4)%
27.9%
21.0%
22.1%
23.6%
25.8%
32.9 %
1 2013 amount included $3.7 million in one-time expenses related to the NorCal acquisition and 2011 amount included $1.0 million one-time
expenses related to the Charter Oak Bank acquisition.
2 Calculated as dividends on common share divided by basic net income per common share.
Page-24
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2013 and 2012 and results of operations for each
of the years in the three-year period ended December 31, 2013 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
On November 29, 2013, we closed the acquisition of NorCal Community Bancorp (“NorCal”), parent company of Bank
of Alameda, (“the Acquisition”), adding $173.8 million in loans, $241.0 million in deposits and $53.7 million in investment
securities to Bank of Marin. The acquired assets and assumed liabilities were recorded at fair value at closing, subject
to change for up to one year after the Acquisition as additional information relative to Acquisition-date fair values
becomes available.
2013 earnings totaled $14.3 million and include $3.7 million in one-time expenses related to the Acquisition, compared
to $17.8 million of earnings in 2012. Diluted earnings of $2.57 per share for the year ended December 31, 2013
includes a negative impact of $0.43 per share related to one-time acquisition-related expenses and compared to $3.28
per share in the same period of 2012.
In addition to closing the Acquisition, we ended the year with organic growth in core deposits and loans. Deposits
totaled $1.6 billion at December 31, 2013, compared to $1.3 billion at December 31, 2012. Based on the December
31, 2013 balance, the increase in deposits includes $246 million acquired from NorCal and $88 million in organic
growth. Non-interest bearing deposits, including the Acquisition, represent 40.8% of total deposits. Loans totaled $1.3
billion at December 31, 2013, compared to $1.1 billion at December 31, 2012. Based on the December 31, 2013
balance, the growth in loans reflects $172.3 million in loans acquired from Norcal and $23.1 million in organic growth.
Credit quality continues to be very strong and improving. Non-accrual loans totaled $11.7 million at December 31,
2013 compared to $17.7 million at December 31, 2012, and as a percent of total loans declined to 0.92% compared
to 1.64% a year ago. The decrease in non-accrual loans primarily reflects one commercial real estate loan that paid
off in 2013 and pay downs on various commercial real estate and commercial loans, partially offset by one delinquent
land development loan that went on to non-accrual status in 2013. Net recoveries for the year ended December 31,
2013 totaled $23 thousand, compared to net charge-offs of $3.9 million in the prior year.
The provision for loan losses totaled $540 thousand in 2013, compared to $2.9 million in the prior year. The ratio of
loan loss reserve to loans decreased from 1.27% at December 31, 2012 to 1.12% at December 31, 2013. The decrease
compared to the prior year primarily relates to a lower level of newly identified non-accrual loans, and the impact of
newly acquired loans from the NorCal acquisition that were marked down to fair value and therefore did not require a
corresponding allowance. The ratio of loan loss reserve to loans excluding the impact of the loans from the Acquisition
would have been 1.30% at December 31, 2013.
As forecasted, the capital ratios have stayed strong after the Acquisition. The total risk-based capital ratio for Bancorp
totaled 13.2% at December 31, 2013 compared to 13.7% at December 31, 2012. The ratio declined due to the addition
of $10.9 million in goodwill and intangibles related to the Acquisition, which are excluded from regulatory capital. The
risk-based capital ratio continues to be well above regulatory requirements for a well-capitalized institution.
Net interest income totaled $58.8 million and $63.2 million in 2013 and 2012, respectively. The tax-equivalent net
interest margin was 4.20% in 2013 compared to 4.74% in 2012. The decrease is primarily due to lower yields on
investments and new loans owing to the persistent low interest rate environment, rate concessions on existing loans
Page-25
and a lower level of income recognition on loans from our 2011 Charter Oak acquisition. As a result of the prolonged
low interest rate environment and the low loan demands we expect little relief from this downward margin compression
in 2014. As the loan portfolio acquired from Bank of Alameda is considered more credit-worthy than the one from
Charter Oak Bank and the purchase discount was not as steep, we do not expect as significant a boost to our net
interest margin from the purchase discount accretion going forward, as compared to the favorable impact of accretion
on loans from Charter Oak Bank in the first few years after acquisition.
If interest rates increase, we anticipate that net interest income will rise. It may take several upward market rate
movements for the variable rate loans at floors to move above the floor rates. Please see Item 7A, Quantitative and
Qualitative Disclosure about Market Risk for more information about the effect of interest rate increases on our net
interest income.
Non-interest income totaled $8.1 million in the year ended 2013 compared to $7.1 million in the same period of 2012.
The year-to-date increase of $954 thousand, or 13.4% from the prior year primarily reflects higher dividend income
from the Federal Home Loan Bank of San Francisco, higher Wealth Management and Trust Services fees and higher
BOLI income due to a death benefit in the first quarter of 2013.
Non-interest expense totaled $44.1 million and $38.7 million in 2013 and 2012, respectively. The increase in 2013
primarily reflects one-time acquisition-related expenses totaling $3.7 million and higher staffing costs as we continue
to grow. We expect to incur approximately $800 thousand additional one-time expenses related to the NorCal acquisition
as we continue to integrate in the beginning of 2014, with the majority relating to data processing and personnel costs.
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, Acquired
Loans, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes and Fair Value
Measurements.
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 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 ALLL is based on estimates,
and ultimate losses may vary from current estimates. Our Asset/Liability Management Committee (“ALCO”) reviews
the adequacy of the ALLL at least quarterly. 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 1) specific allowances for individually identified impaired loans ("ASC 310-10") and
2) general allowances for pools of loans ("ASC 450-20"), which incorporate changing qualitative and environmental
factors (e.g., portfolio growth and trends, credit concentrations, economic and regulatory factors, etc.).
The first component, specific allowances, result 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 in accordance with the contractual terms. These loans are evaluated for impairment individually
by Management. Management considers an originated loan to be impaired when it is probable we will be unable to
collect all amounts due according to the contractual terms of the loan agreement. For allowance established on
acquired loans, refer to Acquired Loans discussed below. When the fair value of the impaired loan is less than the
recorded investment in the loan, the difference is recorded as impairment through the establishment of a specific
Page-26
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 effective interest rate at origination (for originated loans), based
on the loan's observable market price, or based on the fair value of the collateral if the loan is collateral dependent or
if foreclosure is imminent. 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.
The second component is an estimate of the probable inherent losses in each loan pool with similar characteristics.
Beginning with the quarter-ended September 30, 2013, Management refined the methodology for estimating general
allowances in order to provide a more comprehensive evaluation of the potential risk of loss in our loan portfolio. This
analysis encompasses our entire loan portfolio and excludes acquired loans where the discount has not been fully
accreted. For allowance established on acquired loans, see below under Acquired Loans.
Under our allowance model, loans are evaluated on a pool basis by loan segment which is further delineated by Federal
regulatory reporting codes ("call codes"). Each segment is assigned an expected loss factor which is primarily based
on a twelve quarter look-back at our historical losses for that particular segment, as well as a number of other factors.
The model determines loan loss reserves based on objective and subjective factors. Objective factors include a rolling
historical loss rate using a twelve quarter look-back, changes in the volume and nature of the loan portfolio, changes
in credit quality metrics (past due loans, non-accrual loans, net charge-offs), and the existence of credit concentrations.
Subjective factors include changes in the overall economic environment, legal and regulatory conditions, lending
management and other relevant staff, uncertainties related to acquisitions, as well as the quality of our loan review
process. The total amount allocated is determined by applying loss multipliers to outstanding loans by call code.
For further information regarding our ALLL methodology, including a change in methodology in 2013, see Note 4 to
the Consolidated Financial Statements in Item 8 of this report.
Acquired Loans
From time to time, we acquire loans through business acquisitions. Acquired loans are recorded at their estimated
fair values at acquisition date in accordance with ASC 805 Business Combinations, factoring in credit losses expected
to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded for
acquired loans as of the acquisition date.
The process of estimating fair values of the acquired loans, including the estimate of losses that are expected to be
incurred over the estimated remaining lives of the loans at acquisition date and the ongoing updates to Management's
expectation of future cash flows, requires significant subjective judgments and assumptions, particularly considering
the economic environment. The economic environment and the lack of market liquidity and transparency are factors
that have influenced, and may continue to affect, these assumptions and estimates.
We estimated the fair value of acquired loans at the acquisition date based on a discounted cash flow methodology
that considered factors including the type of loan and related collateral, risk classification, fixed or variable interest
rate, term of loan, whether or not the loan was amortizing, and current discount rates. Loans , except for purchased
credit-impaired loans or "PCI loans", were grouped together according to similar characteristics and were treated in
the aggregate when applying various valuation techniques. The estimate of expected cash flows incorporates our best
estimate of current key assumptions, such as property values, default rates, loss severity and prepayment speeds.
The discount rates used for loans were based on market rates for new originations of comparable loans, where available,
and include adjustments for liquidity factors.
To the extent comparable market rates are not readily available, a discount rate was derived based on the assumptions
of market participants' cost of funds, servicing costs and return requirements for comparable risk assets. In either
case, the discount rate does not include a factor for credit losses, as that has been considered in estimating the cash
flows. The initial estimate of cash flows to be collected was derived from assumptions such as default rates, loss
severities and prepayment speeds.
We acquired some loans from business combinations with evidence of credit quality deterioration subsequent to their
origination and for which it was probable, at acquisition, that we would be unable to collect all contractually required
Page-27
payments (PCI loans). These loans are evaluated on an individual basis. Management has applied significant
subjective judgment in determining which loans are PCI loans. Evidence of credit quality deterioration as of the purchase
date may include data such as past due and nonaccrual status, risk grades and charge-off history. Revolving credit
agreements (e.g., home equity lines of credit and revolving commercial loans) where the borrower had revolving rights
at acquisition date are not considered PCI loans because the timing and amount of cash flows cannot be reasonably
estimated.
The accounting guidance for PCI loans provides that the difference between the contractually required payments and
the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the
nonaccretable difference and is not recorded. Furthermore, the difference between the expected cash flows and the
fair value at acquisition date is accreted into interest income at a level yield of return over the remaining term of the
loan, provided that the timing and amount of future cash flows is reasonably estimable.
The initial estimate of cash flows expected to be collected is updated each quarter and requires the continued usage
of key assumptions and estimates similar to the initial estimate of fair value. Given the current economic environment,
we apply judgment to develop our estimate of cash flows for PCI loans given the impact of collateral value changes,
loan workout plans, changing probability of default, loss severities and prepayment speeds.
For purposes of accounting for the PCI loans from past business combinations, we elected not to apply the pooling
method but to account for these loans individually. Disposals of loans, which may include sales of loans to third parties,
receipt of payments in full by the borrower, or foreclosure of the collateral, result in removal of the loan from the PCI
loan portfolio at its carrying amount.
All PCI loans that were classified as non-accrual loans prior to the acquisition were no longer classified as non-accrual
if we believed that we would fully collect the new carrying value of these loans at acquisition. Subsequent to the
acquisition, specific allowances are established to PCI loans that have experienced credit deterioration. The amount
of cash flows expected to be collected and, accordingly, the adequacy of the allowance for loan losses are particularly
sensitive to changes in loan credit quality. When there is doubt as to the timing and amount of future cash flows to be
collected, PCI loans are classified as non-accrual loans. It is important to note that judgment is required to classify
PCI loans as accruing or non-accrual, and is dependent on having a reasonable expectation about the timing and
amount of cash flows expected to be collected. If we have probable and significant increases in cash flows expected
to be collected on PCI loans, we first reverse any previously established specific allowance for loan loss and then
increase interest income as a prospective yield adjustment over the remaining life of the loans. The impact of changes
in variable interest rates is recognized prospectively as adjustments to interest income.
For acquired loans not considered PCI loans, we recognize the entire fair value discount accretion based on the
acquired loan's contractual cash flows using an effective interest rate method for term loans, and on a straight line
basis to interest income for revolving lines, as the timing and amount of cash flows under revolving lines are not
predictable. Subsequent to acquisition, if the probable and estimable losses for non-PCI loans exceed the amount of
the remaining unaccreted discount, the excess is established as an allowance for loan losses.
For further information regarding our acquired loans, see Note 2 and Note 4 to our Consolidated Financial Statements
in Item 8 of this Form 10-K.
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, the quality of any credit enhancement and the value of any underlying collateral.
For each security in an unrealized loss position, we assess whether we intend to sell the security or if 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
Page-28
credit losses. If we intend to sell the security or it is more likely than not we will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date is recognized in earnings.
For impaired securities that are not intended for sale and will not be required to be sold prior to recovery of our amortized
cost basis, we determine if the impairment has a credit loss component. For held-to-maturity securities, if there is no
credit loss, no further action is required. For both held-to-maturity and available-for-sale securities, if the amount or
timing of cash flows expected to be collected are less than those at the last reporting date, an other-than-temporary
impairment shall be considered to have occurred and the credit loss component is recognized in earnings as the present
value of the change in expected future cash flows. In determining the present value of the expected cash flows we
discount the expected cash flows at the effective interest rate implicit in the security at the date of purchase. The
remaining difference between the security's fair value and the amortized basis is deemed to be 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.
Accounting for Income Taxes
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 we recognize deferred tax assets
and liabilities related to expected future tax consequences. 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 and all available evidence, that the position will be sustained upon examination, including the resolution through
protests, appeals or litigation processes. For tax positions that meet the more-likely-than-not threshold, we measure
the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with
the taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured
as described previously is recognized as a liability for unrecognized tax benefits, along with any related interest and
penalties. Interest and penalties related to unrecognized tax benefits are recognized as a component of tax expenses.
In deciding whether or not our tax positions taken meet the more-likely-than-not recognition threshold, we must make
judgments and interpretations about the application of inherently complex state and federal tax laws. To the extent
tax authorities disagree with tax positions taken by us, our effective tax rates could be materially affected in the period
of settlement with the taxing authorities. Revision of our estimate of accrued income taxes also may result from our
own income tax planning, which may affect our effective tax rates and our results of operations for any given quarter.
Page-29
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
and derivatives 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 purchased loans recorded at acquisition date,
certain impaired loans held for investment, other real estate owned 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.
When we develop our fair value measurement process, we maximize the use of observable inputs. Whenever there
is no readily available market data, we use our 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.
RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following table:
(dollars in thousands, except per share data)
2013
2012
2011
For years ended December 31,
For the period:
Net income
Net income per share
Basic
Diluted
Return on average equity
Return on average assets
Common stock dividend payout ratio
Average shareholders’ equity to average total
assets
Efficiency ratio
Tax equivalent net interest margin
At period end:
Book value per common share
Total assets
Total loans
Total deposits
Loan-to-deposit ratio
Total risk-based capital ratio - Bancorp
$
$
$
$
$
$
$
14,270
2.62
2.57
8.86 %
0.96 %
27.82 %
10.78 %
65.97 %
4.20 %
30.78
1,805,194
1,269,322
1,587,102
$
$
$
$
$
$
$
17,817
3.34
3.28
12.36 %
1.24 %
21.06 %
10.05 %
55.04 %
4.74 %
28.17
1,434,749
1,073,952
1,253,289
$
$
$
$
$
$
$
15,564
2.94
2.89
12.01 %
1.16 %
22.11 %
9.69 %
54.62 %
5.13 %
25.40
1,393,263
1,031,154
1,202,972
79.98 %
13.2 %
85.69 %
13.7 %
85.72 %
13.1 %
Page-30
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS
Table 1 sets forth the quarterly results of operations for 2013 and 2012:
Table 1
Summarized Statement of Income
(dollars in thousands; unaudited)
Dec. 31
Sept. 30
Jun. 30
Mar. 31
Dec. 31
Sept. 30
Jun. 30
Mar. 31
2013 Quarters Ended
2012 Quarters Ended
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Net income available to common stockholders
Net income per common share
Basic
Diluted
$
16,129 $
14,471 $
14,730 $
15,230
$
16,298 $
15,598 $
16,937 $
16,933
497
429
425
434
507
681
656
732
15,632
14,042
14,305
14,796
15,791
14,917
16,281
16,201
150
(480)
1,100
(230)
700
2,100
100
—
15,482
14,522
13,205
15,026
15,091
12,817
16,181
16,201
2,063
1,953
1,944
13,871
10,107
10,419
3,674
1,329
6,368
2,364
4,730
1,675
2,345 $
4,004 $
3,055 $
2,345 $
4,004 $
3,055 $
0.42 $
0.74 $
0.56 $
0.41 $
0.72 $
0.55 $
$
$
$
$
2,106
9,695
7,437
2,571
4,866
4,866
0.90
0.89
$
$
$
$
1,816
9,582
7,325
2,623
1,801
9,592
5,026
1,802
1,800
9,685
8,296
3,345
4,702 $
3,224 $
4,951 $
4,702 $
3,224 $
4,951 $
0.88 $
0.60 $
0.93 $
0.86 $
0.59 $
0.91 $
1,695
9,835
8,061
3,121
4,940
4,940
0.93
0.91
Page-31
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.
The following table, 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 periods
presented. The table also indicates net interest income, net interest margin and net interest rate spread for each period
presented.
Page-32
Table 2 Average Statements of Condition and Analysis of Net Interest Income
Year ended
Year ended
Year ended
December 31, 2013
December 31, 2012
December 31, 2011
Interest
Interest
Interest
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/
(dollars in thousands; unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
Rate
Assets
Interest-bearing due from banks 1
Investment securities 2, 3
Loans 1, 3, 4
Total interest-earning assets 1
$
47,401 $
120
0.25% $
80,643 $
214
0.26% $
87,365 $
222
0.25%
272,767
6,648
2.44%
234,014
6,829
2.92%
175,571
6,049
3.45%
1,092,885
55,157
4.98%
1,023,165
59,991
5.77%
984,211
63,914
6.40%
1,413,053
61,925
4.32%
1,337,822
67,034
4.93%
1,247,147
70,185
5.55%
Cash and non-interest-bearing due from
banks
Bank premises and equipment, net
Interest receivable and other assets, net
32,903
9,214
38,993
51,301
9,183
36,155
46,673
9,136
34,183
Total assets
$ 1,494,163
$ 1,434,461
$ 1,337,139
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
$
97,336 $
Savings accounts
Money market accounts
CDARS® time accounts
Other time accounts
FHLB borrowings and overnight borrowings 1
100,185
437,441
5,416
140,334
19,054
0.10% $
125,316 $
151
0.12%
52
35
0.05% $
152,778 $
0.03%
86,670
419
0.10%
436,281
8
0.15%
30,016
151
88
689
83
0.10%
0.16%
0.28%
914
322
0.65%
1.67%
144,106
1,068
0.74%
16,205
3,552
345
152
2.09%
6
4.21%
69,792
98
0.14%
405,726
1,286
0.32%
39,514
151,866
49,722
237
0.60%
1,314
2,062
0.87%
4.15% 5
5,000
147
2.90%
Subordinated debentures
407
35
8.57%
Total interest-bearing liabilities
800,173
1,785
0.22%
869,608
2,576
0.30%
846,936
5,295
0.63%
Demand accounts
Interest payable and other liabilities
Stockholders' equity
518,986
13,970
161,034
406,861
13,881
144,111
347,682
12,983
129,538
Total liabilities & stockholders' equity
$ 1,494,163
$ 1,434,461
$ 1,337,139
Tax-equivalent net interest income/margin 1
$ 60,140
4.20%
$ 64,458
4.74%
$ 64,890
5.13%
Reported net interest income/margin 1
Tax-equivalent net interest rate spread
$ 58,775
4.10%
$ 63,190
4.65%
$ 63,819
5.05%
4.10%
4.63%
4.92%
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. Investment security interest is earned on 30/360 basis monthly.
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-accrual loans. The amortized portion of net loan origination fees is included in interest income on
loans, representing an adjustment to the yield.
5 Amount includes a $924 thousand prepayment penalty incurred on the payoff of a FHLB borrowing in 2011.
6 Amount includes $42 thousand accelerated amortization of debt issuance costs in the third quarter of 2012.
2013 compared with 2012:
The tax-equivalent net interest margin was 4.20% in 2013, compared to 4.74% in 2012. The decrease of fifty-four
basis points was primarily due to a lower yield on interest-earning assets, mainly relating to new loans yielding lower
rates, a lower level of accretion on purchased loans, downward repricing on existing loans and lower yields on investment
securities. These decreases were partially offset by a shift in the mix of interest-earning assets from lower-yielding
interest-bearing due from banks towards higher-yielding loans and securities, as well as the downward repricing of
deposits and the payoff of the subordinated debenture on September 17, 2012. The net interest spread decreased
fifty-three basis points over the same period for the same reasons.
The average yield on interest-earning assets decreased sixty-one basis points in 2013 compared to 2012 due to the
reasons listed above. The loan portfolio as a percentage of average interest-earning assets, increased to 77.3% in
2013, from 76.5% in 2012. The investment securities were 19.3% and 17.5% of average interest-earning assets in
2013 and 2012, respectively. Total average interest-earning assets increased $75.2 million, or 5.6%, in 2013 compared
to 2012.
Page-33
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 Fed Funds rate reached a historic low with a range of 0% to 0.25% where it remained as of December 31,
2013. The accommodative monetary policy measures taken by the FRB in recent years, including three rounds of
quantitative easing, has led to a prolonged low interest rate environment. As a result, we have experienced downward
pricing pressure on our interest-earning assets that negatively impacted our net interest margin and yields on our
earning assets, and we expect little relief from this downward pricing pressure in 2014.
Our net interest margin fluctuations due to acquired loans were as follows:
Years ended December 31,
2013
2012
2011
Dollar
Amount
$
$
$
725
1,163
469
Basis point
impact to net
interest
margin
Basis point
impact to net
interest
margin
Basis point
impact to net
interest
margin
Dollar
Amount
Dollar
Amount
5 bps
8 bps
3 bps
$
$
$
1,641
789
1,714
12 bps
6 bps
13 bps
$
$
$
1,418
2,857
1,879
11 bps
23 bps
15 bps
(dollars in thousands; unaudited)
Accretion on PCI loans
Accretion on non-PCI loans
Gains on pay-offs of PCI loans
2012 Compared with 2011:
The tax-equivalent net interest margin was 4.74% in 2012, compared to 5.13% in 2011. The decrease of thirty-nine
basis points was primarily due to a lower yield on interest-earning assets, mainly relating to a lower level of accretion
on purchased loans. This was partially offset by the reduction in the cost of interest-bearing liabilities discussed below.
The net interest spread decreased twenty-nine basis points over the same period for the same reasons.
The average yield on interest-earning assets decreased sixty-two basis points in 2012 compared to 2011. The yield
on the loan portfolio decreased sixty-three basis points primarily due to the lower level of accretion and gains on payoffs
on purchased loans, the downward repricing and rate concessions on existing loans and securities, as well as new
loans and securities boarded at lower rates. The loan portfolio as a percentage of average interest earning assets,
decreased to 76.5% at December 31, 2012, from 78.9% at December 31, 2011. The overall yield on total investment
securities decreased fifty-three basis points, primarily due to lower yields on recently purchased securities in this low
interest rate environment, as well as the accelerated amortization of purchase premiums.
The rate on interest-bearing liabilities decreased thirty-three basis points for the year ended December 31, 2012
compared to 2011, primarily due to: 1) the absence of a $924 thousand prepayment penalty on early payoff of an FHLB
borrowing in September 2011, which negatively impacted the 2011 net interest margin by seven basis points; 2) maturity
of another higher costing FHLB borrowing in January 2012; and 3) lower offering rates on deposits.
Page-34
Table 3
Analysis of Changes in Net Interest Income
The following table analyzes the change in net interest income due to: 1) Volume-changes caused by increases or
decreases in the average asset and liability balances; and 2) Yield/Rate-changes in average yields on earning assets
and average rates on interest-bearing liabilities.
(dollars in thousands)
Volume
Yield/Rate
Total 1
Volume
Yield/Rate
Total
2013 compared to 2012
2012 compared to 2011
Assets
Interest-bearing due from banks
$
(85) $
(9)
$
(94)
$
(17) $
9
$
Investment securities 2
Loans 2
Total interest-earning assets
Liabilities
Interest-bearing transaction accounts
Savings accounts
Money market accounts
CDARS® time deposits
Other time accounts
FHLB borrowings and overnight borrowings
Subordinated debentures
Total interest-bearing liabilities
1,037
3,852
4,804
(44)
12
2
(48)
(27)
55
(198)
(248)
(1,218)
(8,686)
(9,913)
(55)
(65)
(272)
(27)
(127)
(78)
81
(543)
(181)
(4,834)
(5,109)
(99)
(53)
(270)
(75)
(154)
(23)
(117)
(791)
1,705
2,186
3,874
27
17
48
(26)
(58)
(700)
(67)
(759)
(925)
(6,109)
(7,025)
(27)
(27)
(645)
(128)
(188)
(1,017) 3
72
(8)
780
(3,923)
(3,151)
—
(10)
(597)
(154)
(246)
(1,717)
5
(1,960)
(2,719)
Tax-equivalent net interest income
$
5,052 $
(9,370)
$
(4,318)
$
4,633 $
(5,065)
$
(432)
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.
3 Amount includes a $924 thousand prepayment penalty in 2011 discussed in Note 8 of the consolidated financial statements of the 2012 Annual
Report.
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 by loss
recoveries and through the provision for loan losses charged to expense. For further discussion, see the section
captioned “Critical Accounting Policies.”
Our provision for loan losses totaled $540 thousand in 2013, compared to $2.9 million in 2012 and $7.1 million in 2011.
The decrease compared to the prior year primarily relates to a lower level of newly identified problem loans that have
significant credit exposure. The 2011 provision for loan losses included $2.3 million related to loans acquired from
Charter Oak Bank. The allowance for loan losses of $14.2 million totaled 1.12% of loans at December 31, 2013,
compared to 1.27% at December 31, 2012. The decrease from the prior year primarily relates to loans acquired from
Bank of Alameda marked down to fair value without allowances established and a continued low level of newly identified
non-accrual loans. The ratio of loan loss reserve to loans excluding the impact of the acquired loans from the NorCal
acquisition would have been 1.30% at December 31, 2013. Net recoveries in 2013 totaled $23 thousand compared
to net charge-offs totaling $3.9 million in the prior year. See the section captioned “Allowance for Loan Losses” below
for further analysis of the provision for loan losses.
Page-35
Non-interest Income
The table below details the components of non-interest income.
Years ended
December 31,
(dollars in thousands; unaudited)
2013
2012
2011
2013 compared to 2012
2012 compared to 2011
Amount
Percent
Amount
Percent
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Service charges on deposit
accounts
Wealth Management and Trust
Services
Debit card interchange fees
Merchant interchange fees
Earnings on Bank-owned life
insurance
(Loss) on sale of securities
Other income
Total non-interest income
$
2013 Compared with 2012:
$
2,062 $
2,130 $
1,836 $
(68)
(3.2)% $
294
16.0 %
2,162
1,104
822
1,964
1,015
739
954
(1)
963
8,066 $
762
(34)
536
7,112 $
1,834
845
353
752
—
649
6,269 $
198
89
83
192
33
427
954
10.1 %
8.8 %
11.2 %
25.2 %
(97.1)%
79.7 %
13.4 % $
130
170
386
10
(34)
(113)
843
7.1 %
20.1 %
109.3 %
1.3 %
NM
(17.4)%
13.4 %
The increase in Wealth Management and Trust Services ("WMTS") income in 2013 compared to 2012 is due to the
acquisition of new assets and market value appreciation of existing assets under management. The increase is also
due to significant non-recurring fees earned for estate and probate administration services performed in the first quarter
of 2013. Assets under management totaled approximately $335.9 million at December 31, 2013 and $285.4 million
at December 31, 2012.
Debit card interchange fees increased in 2013 when compared to the prior year primarily due to an increase in the
volume of debit card usage. The increase in merchant interchange fees is primarily due to the addition of a new vendor.
Bank-owned life insurance (“BOLI”) income increased in 2013 compared to 2012 due to a $228 thousand benefit
realized on the death of an insured employee in the first quarter of 2013.
Other income increased when compared to the prior year primarily due to higher dividend income from the FHLB and
higher credit card referral fees.
2012 Compared with 2011:
The increase in service charge income on deposit accounts in 2012 compared to 2011 was due to higher business
analysis fee income, reflecting a higher number of deposit accounts and a decrease in the earnings rate credit effective
early in 2012.
The increase in WMTS income was primarily due to the acquisition of new accounts and customer relationships, as
well as the appreciation of existing assets under management. As of December 31, 2012 and 2011, assets under
management totaled approximately $285.4 million and $251.4 million, respectively.
The increase in debit card interchange fees was primarily attributable to a steady increase in volume of debit card
usage, as well as an increase in new accounts.
The increase in merchant interchange fees was primarily due to a change in January 2012, whereby merchant
interchange-related expenses were recorded in other expense rather than net of fees. In addition, merchant interchange
fees increased due to higher merchant sales volume in 2012.
The slight increase in BOLI income in 2012 compared to 2011 was primarily due to additional income earned on $364
thousand in new policies purchased in February 2012.
Page-36
The decrease in other income in 2012 compared to 2011 reflects the pre-tax bargain purchase gain of $147 thousand
from the 2011 acquisition of Charter Oak Bank.
Non-interest Expense
The table below details the components of non-interest expense. Our efficiency ratio (the ratio of non-interest expense
divided by the sum of non-interest income and net interest income) totaled 65.97%, 55.04% and 54.62% in 2013, 2012
and 2011, respectively.
Years ended
December 31,
2013 compared to 2012
2012 compared to 2011
Amount
Percent
Amount
Percent
(dollars in thousands; unaudited)
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
FDIC insurance
Data processing
Professional services
Other non-interest expense
Advertising
2013
$21,974 $
4,347
1,395
921
5,334
2,985
2012
21,139 $20,211 $
2011
4,230
1,355
917
2,514
2,340
4,002
1,293
1,000
2,690
2,499
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
835
117
40
4
4.0 % $
2.8 %
3.0 %
0.4 %
2,820
645
112.2 %
27.6 %
928
228
62
(83)
(176)
(159)
4.6 %
5.7 %
4.8 %
(8.3)%
(6.5)%
(6.4)%
490
541
589
(51)
(9.4)%
(48)
(8.1)%
Impairment and amortization of core
deposit intangible
Other expense
Total other non-interest expense
69
6,577
7,136
Total non-interest expense
$44,092 $
—
5,658
6,199
69
725
919
5,274
937
6,588
38,694 $38,283 $ 5,398
NM
16.2 %
15.1 %
14.0 % $
(725)
384
(389)
411
(100)%
7.3 %
(5.9)%
1.1 %
2013 Compared with 2012:
The increase in salaries and benefit expenses was mainly due to higher salaries and commissions and associated
payroll taxes, as well as annual merit increases and the addition to FTE staff. These expenses were partially offset
by higher capitalized and deferred loan origination costs, as our standard loan origination costs have been revised
effective January 1, 2013 and applied to 2013 loan originations. The number of average FTE totaled 242 in 2013 and
233 in 2012.
The increase in data processing expenses in 2013 primarily reflects one-time acquisition-related expenses totaling
$2.8 million in the fourth quarter, mainly relating to NorCal's core processing system contract termination and de-
conversion fees.
Professional service expenses in 2013 increased when compared to 2012. This is primarily due to $660 thousand of
professional and legal fees related to the NorCal acquisition.
The decrease in advertising expenses in 2013 was primarily due to a higher volume of production-related expenses
associated with customer testimonials and marketing campaigns that took place in 2012.
The increase in other expenses when compared to 2012 primarily reflects an increase in recruitment fees, merchant
card expenses and a higher provision for losses on off-balance sheet commitments, as well as increases in education
and training and director expenses.
2012 Compared with 2011:
The increase in salaries and benefit expenses primarily reflects higher personnel costs associated with merit increases,
new hires, higher incentive bonuses, as well as higher employee benefits. The number of average FTE totaled 233
in 2012 and 226 in 2011.
Page-37
The increase in occupancy and equipment expenses is primarily due to higher rent and common area maintenance
expenses related to the expansion of our headquarters, the relocation of our San Francisco and Tiburon branches and
a full year rent for our new branch in Sonoma.
The increase in depreciation and amortization expenses in 2012 compared to the prior year is mainly due to the addition
of the Sonoma branch in late 2011.
The decrease in FDIC insurance in 2012 compared to 2011 primarily reflects the revision to the FDIC insurance
assessment base. In February 2011, 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. While the new rule expanded the assessment base, it lowered
assessment rates to between 2.5 and 9 basis points on the broader base for banks in the lowest risk category. The
change was effective for the second quarter of 2011. 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 significantly outweighed the effect of
a wider assessment base.
The decrease in data processing expenses primarily reflects the re-negotiation and execution of a new contract with
our current data processing vendor that resulted in a reduction of our ongoing data processing expenses effective July
1, 2012, as well as the reduction in one-time expenses associated with the Charter Oak acquisition in 2011.
Professional service expenses in 2012 decreased when compared to 2011. This is primarily due to $451 thousand of
professional costs associated with the Acquisition in 2011 that did not recur in 2012, partially offset by an increase in
internal audit fees in 2012, as well as the consulting costs related to the data processing contract re-negotiation.
Advertising expenses decreased in 2012, primarily due to higher 2011 franchise expansion-related expenses.
We recorded a core deposit intangible asset of $725 thousand for the acquisition of Charter Oak Bank in 2011, of which
$683 thousand was written-off in the fourth quarter of 2011 and $42 thousand was amortized during 2011. The write-
off was primarily due to higher than anticipated runoff of the acquired deposits and a significant decline in alternative
funding costs in the later half of 2011.
The increase in other expenses is primarily due to increases in merchant interchange-related expenses due to the
reclassification to expense from income as discussed in the Non-Interest Income section above, as well as higher
expenses relating to recruitment. The increases were partially offset by the 2011 write-off of certain facility and network
fixed assets purchased from the FDIC related to the Acquisition settlement of Charter Oak Bank that did not recur in
2012.
Page-38
Provision for Income Taxes
The provision for income taxes totaled $7.9 million at an effective tax rate of 35.7% in 2013, compared to $10.9 million
at an effective tax rate of 37.9% in 2012 and $9.2 million at an effective tax rate of 37.1% in 2011. The decrease in
both the provision for income taxes and the effective tax rate from the prior year is primarily due to a lower amount of
pre-tax income and higher amounts of tax-exempt earnings on investment securities, bank-owned life insurance and
loans. 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 fluctuations in the effective rate from period to period based on the relationship of net
permanent differences to income before tax.
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.
We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax
jurisdiction. We are no longer subject to tax examinations by taxing authorities for years beginning before 2010 for
U.S. Federal or before 2009 for California. There were no ongoing federal income tax examinations at the issuance
of this report.
The State of California is currently examining 2011 and 2012 corporate income tax returns. At the time of issuance of
this report, no assessments have been proposed by the California Franchise Tax Board in connection with the
examination. Although timing of the resolution or closure of the examination is uncertain, we do not anticipate a need
to establish a reserve for uncertain tax positions in the next 12 months. At December 31, 2013 and 2012, neither the
Bank nor Bancorp had accruals for interest and penalties related to unrecognized tax benefits.
FINANCIAL CONDITION
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 liquidity and the desire to attain a reasonable investment yield balanced with risk exposure. Table 6 shows the
composition of the debt securities portfolio by expected maturity at December 31, 2013 and 2012. 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. We estimate and update expected maturity dates regularly based on
current and historical prepayment speeds. The weighted average maturity of the portfolio at December 31, 2013 was
approximately four years.
Page-39
Table 6 Investment Securities
(dollars in thousands; unaudited)
Type and Maturity Grouping
Held-to-maturity
State and municipal
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Total
Corporate bonds
Due within 1 year
Due after 1 but within 5 years
Total
Total held-to-maturity
Available-for-sale
MBS/CMOs issued by 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
Debentures of government
sponsored agencies
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Total
Privately issued CMOs
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Due after 10 years
Total
State and municipal
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Total
Corporate bonds
Due within 1 year
Due after 1 but within 5 years
Due after 5 but within 10 years
Total
Total available-for-sale
Total
December 31, 2013
December 31, 2012
Principal Amortized
Cost1
Amount
Fair
Value
Weighted
Average
Yield2
Principal Amortized
Cost1
Amount
Weighted
Average
Yield2
Fair
Value
$
13,475 $ 13,588 $ 13,655
51,116
50,228
48,285
16,658
16,565
15,615
—
—
—
81,429
80,381
77,375
2.50% $
3.22
4.95
—
3.45
5,755 $
5,823 $
57,415
28,185
750
92,105
60,435
29,918
746
96,922
5,824
61,065
31,638
823
99,350
0.85%
2.63
5.37
6.92
3.39
1,435
39,986
41,421
118,796
1,435
40,679
42,114
122,495
1,430
40,999
42,429
123,858
544
144,029
43,264
—
187,837
546
146,480
44,264
—
191,290
549
146,517
43,538
—
190,604
2,000
9,500
10,000
21,500
—
7,966
3,218
—
11,184
2,980
11,300
1,365
15,645
2,019
9,826
10,000
21,845
—
7,599
3,050
—
10,649
3,001
11,626
1,321
15,948
2,019
9,889
9,404
21,312
—
7,835
3,039
—
10,874
3,000
11,505
1,266
15,771
0.50
1.68
1.64
2.81
2.88
2.44
2.47
—
2.45
0.17
1.57
1.49
1.40
—
3.45
2.20
—
3.09
1.82
2.34
2.90
2.29
—
41,421
41,421
133,526
—
42,530
42,530
139,452
—
42,881
42,881
142,231
4,731
50,393
42,787
8,038
105,949
4,807
51,740
43,941
8,399
108,887
4,828
53,209
45,205
8,555
111,797
—
10,000
10,000
20,000
4,120
11,709
2,830
3,314
21,973
—
—
—
—
—
10,462
10,000
20,462
4,142
11,409
2,559
2,961
21,071
—
—
—
—
—
10,690
9,899
20,589
4,198
11,472
2,794
3,112
21,576
—
—
—
—
500
3,000
2,000
5,500
241,666
502
2,993
1,942
5,437
243,998
$ 360,462 $ 367,653 $ 367,856
502
2,999
1,925
5,426
245,158
—
0.56
—
0.92
—
2.38
—
1.42
153,962
2.35
2.50% $ 281,448 $ 289,872 $ 296,193
—
—
—
—
150,420
—
—
—
—
147,922
—
1.68
1.68
2.86
2.58
2.32
2.56
3.19
2.49
—
1.51
1.49
1.50
3.28
3.68
1.59
2.64
3.18
—
—
—
—
—
—
—
—
2.46
2.65%
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.
Page-40
The carrying amount of our investment securities portfolio, consisting primarily of mortgage-backed securities (“MBS”)
issued or sponsored by the U.S. government agencies, state and municipal securities and corporate bonds, increased
$73.1 million or 24.9% during 2013 due to $50.9 million of securities acquired from Bank of Alameda that remained
outstanding at December 31, 2013 and a conscious effort to utilize our excess liquidity from deposit inflows that has
not been deployed to lending. U.S. government agency MBS or CMO securities, which make up 52.0% and 38.1% of
the portfolio at December 31, 2013 and 2012 respectively, increased $78.9 million in 2013, as we purchased $86.4
million of MBS pass-through securities. State and municipal securities, which represented 26.2% and 33.0% of the
portfolio at December 31, 2013 and 2012 respectively, decreased $769 thousand. See the discussion in the section
captioned “Securities May Lose Value due to Credit Quality of the Issuers” in Item 1A Risk Factors above.
At December 31, 2013, we had invested $99.4 million in residential mortgage, $20.8 million in commercial mortgage
pass-through securities, $67.6 million in CMOs issued by FNMA, FHLMC, or Government National Mortgage
Association ("GNMA") and $10.9 million in privately issued 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, which account for
approximately 1.7% of our total security portfolio, relate to privately issued CMOs. See Note 3 to the Consolidated
Financial Statements in Item 8 and Item 1A, Risk Factors, for more information on investment securities.
At December 31, 2013, distribution of our investment in obligations of state and political subdivisions was as
follows:
December 31, 2013
% of
state and municipal
(in thousands; unaudited)
Amortized Cost
Fair Value
securities
Within California:
General obligation bonds
$
Revenue bonds
Tax allocation bonds
Total in California
Outside California:
General obligation bonds
Revenue bonds
Total Outside California
23,765 $
19,721
9,114
52,600
30,490
13,239
43,729
23,858
19,672
8,902
52,432
31,819
12,949
44,768
24.6%
20.5%
9.5%
54.6%
31.7%
13.7%
45.4%
Total obligations of state and political
subdivisions
$
96,329 $
97,200
100.0%
The portion of the portfolio outside the state of California is distributed among 18 states. The largest concentrations
are in Illinois (8.2%), Ohio (4.8%) and Michigan (3.6%). Revenue bonds, both within and outside California, primarily
consisted of bonds relating to essential services (such as roads and utilities) and school district bonds.
Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment
and ongoing monitoring. Key considerations include:
• The soundness of a municipality’s budgetary position and stability of its tax revenues;
• Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer;
Local demographics/economics including unemployment data, largest local employers, income indices
•
and home values;
• For revenue bonds, the source and strength of revenue for municipal authorities including obligor’s
financial condition and reserve levels, annual debt service and debt coverage ratio, and credit
enhancement (such as insurer’s strength);
• Credit ratings by major credit rating agencies.
Page-41
There are six California tax allocation bonds totaling $3.1 million in amortized cost and $3.0 million in fair value for
which Moody’s credit ratings diverge from the internal assessment. In June 2012, Moody’s Investor Service downgraded
to Ba1 all uninsured California redevelopment agency tax allocation bonds (“RDA”s) that were rated Baa3 or higher.
The downgrade to Ba1 was prompted by the increased risk of default resulting from the state's dissolution of all
redevelopment agencies. The downgrade was based on the potential risk that new laws governing "successor" agencies
(Assembly bills 26 and 1484) might further reduce credit quality, and uncertainty as to whether there was sufficient
information available to assess the credit quality of tax allocation bonds. In 2013, certain ratings of RDAs were withdrawn
by Moody’s. Internal research shows the dispute between the California State Department of Finance and certain
successor agencies regarding funds on hand required for payment of debt service, has been successfully resolved in
the successor agencies’ favor by the State Superior Court. In addition, the California State Department of Finance is
in the process of approving refinancing requests from the successor agencies. Debt coverage ratios and assessed
property value trends indicate that Moody’s rating downgrade/withdrawal is not necessarily reflective of the issuers’
credit profiles.
In addition, bonds issued by Commonwealth of Puerto Rico totaling $2.2 million in both amortized cost and fair value
are rated Baa1 by Moody’s. Since the bonds have been called at par values, they are deemed to pose negligible credit
risk.
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 upon the termination of Visa
Inc.'s covered litigation escrow account pending the final resolution of the Visa Inc. covered litigation. The fair value
of the Class B common stock we own was $1.6 million as of December 31, 2013 based on the Class A as-converted
rate of 0.4206.
Loans
Table 7 Loans Outstanding by Type at December 31
(dollars in thousands; unaudited)
Commercial loans
Real estate
Commercial owner-occupied
Commercial investor
Construction
Home equity
Other residential 1
Installment and other consumer loans
Total loans
Allowance for loan losses
Total net loans
2013
183,291 $
2012
176,431 $
2011
175,790 $
2010
153,836 $
2009
164,643
$
241,113
625,019
31,577
98,469
72,634
17,219
1,269,322
(14,224)
1,255,098 $
196,406
509,006
30,665
93,237
49,432
18,775
1,073,952
(13,661)
1,060,291 $
174,705
446,425
51,957
98,043
61,502
22,732
1,031,154
(14,639)
1,016,515 $
$
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
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.
$18.1 million of the 2013 commercial loan growth resulted from loans purchased in the Acquisition. The increase from
the Acquisition was offset by the resolution or reduction of several large problem loans as well as pay-downs. As a
result, commercial loans increased $6.9 million in 2013, compared to an increase of $641 thousand in 2012. Although
line of credit commitments increased by $21.0 million in 2013, reduced utilization by our commercial borrowers resulted
in essentially no corresponding growth in loans outstanding.
Commercial real estate loans increased $160.7 million in 2013 and $84.3 million in 2012. Of the commercial real
estate loans at December 31, 2013, 72% are non-owner occupied and 28% are owner occupied. $106.3 million of the
2013 commercial real estate loans represented loans purchased in the Acquisition. Our commercial real estate loan
Page-42
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. Originated loans are subject to our conservative credit underwriting standards and
both the acquired and originated loans are actively managed. The following table summarizes our commercial real
estate loan portfolio by the geographic location in which the property is located as of December 31, 2013 and 2012:
Table 8 Commercial Real Estate Loans Outstanding by Geographic Location
(dollars in thousands; unaudited)
Marin
$
Sonoma
San Francisco
Alameda
Contra Costa
Napa
Sacramento
Other
Total
$
December 31, 2013
December 31, 2012
Amount
% of Commercial
real estate loans
Amount
% of Commercial
real estate loans
306,574
137,776
103,142
109,262
27,785
62,071
18,153
101,369
866,132
35.4% $
15.9
11.9
12.6
3.2
7.2
2.1
11.7
269,946
126,852
93,689
42,989
9,542
55,391
9,787
97,216
100.0% $
705,412
38.3%
18.0
13.3
6.1
1.4
7.8
1.4
13.7
100.0%
Construction loans increased $912 thousand in 2013 and decreased $21.3 million in 2012. We acquired $5.7 million
of construction loans from Bank of Alameda in 2013, partially offset by payoffs of construction loans through the normal
course of business, as well as $2.9 million in pay downs of problem land loans. Although the Bank's construction loan
commitments increased $19.0 million in 2013, a number of the projects are in their initial stages and therefore had
minimal draws as of December 31, 2013. The decrease in 2012 was primarily due to a slow-down in construction
activity, the successful completion and sell-through of construction development projects booked in previous years,
as well as a conscious effort to reduce our concentration in construction loans. Table 9 below shows an analysis of
construction loans by type and location.
Page-43
Table 9 Construction Loans Outstanding by Type and Geographic Location
(dollars in thousands; unaudited)
December 31, 2013
December 31, 2012
Construction loans by type
1-4 Single family residential
Apartments and multifamily
Commercial real estate
Land - improved
Land - unimproved
Residence - secondary
Tenants-in-common development
$
Amount
13,148
1,555
5,004
10,355
1,515
—
—
% of
Construction
Loans
Amount
41.7% $
5,824
% of
Construction
Loans
19.0%
4.9
15.8
32.8
4.8
—
—
—
6,112
16,840
1,889
—
—
—
19.9
54.9
6.2
—
—
Total
$
31,577
100.0% $
30,665
100.0%
Construction loans by geographic
location
Marin
Sonoma
San Francisco
Alameda
Contra Costa
Napa
Riverside
Other
Total
Amount
6,502
3,754
13,803
2,404
17
92
3,528
1,477
31,577
$
$
% of
Construction
Loans
20.6% $
11.9
43.7
7.6
0.1
0.3
11.2
4.6
% of
Construction
Loans
8.2%
12.9
56.5
2.4
—
0.6
17.0
2.4
Amount
2,533
3,959
17,311
735
—
169
5,230
728
100.0% $
30,665
100.0%
Home equity lines of credit increased $5.2 million to $98.5 million and other residential real estate loans increased
$23.2 million to $72.6 million in 2013, primarily due to loans purchased in the Acquisition.
Approximately 86% and 85% of our outstanding loans are secured by real estate at December 31, 2013 and 2012,
respectively. At December 31, 2013, approximately 2% of our commercial real estate loans, 16% of our construction
loans and 4% of our residential real estate loans contain an interest-only feature as part of the loan terms. Approximately
49% of the interest-only commercial real estate loans and all of the interest-only construction and 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, 2013, approximately $9.9 million of our loans
have interest reserves, all 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, 2013, 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 that the mix of variable-rate loans to fixed-rate loans in 2013 remains consistent when compared
to 2012. The mix of loans acquired from Bank of Alameda includes 16% variable-rate loans, compared to 9% of our
originated loans. 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). Most 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.
Page-44
Table 10 Loan Portfolio Maturity Distribution and Interest Rate Sensitivity
December 31, 2013
December 31, 2012
(dollars in thousands)
Due within 1 year
Fixed
Rate
Variable
Rate
Total
Percent
Fixed
Rate
Variable
Rate
Total
Percent
$ 117,808
$ 82,476
$ 200,284
15.8% $128,496
$ 76,213
$ 204,709
19.1%
Due after 1 but within 5 years
245,429
Due after 5 years
782,600
31,372
9,637
276,801
792,237
21.8
62.4
201,833
641,755
25,655
—
227,488
641,755
21.2
59.7
Total
Percentage
$1,145,837
$123,485
$1,269,322
100.0% $972,084
$101,868
$1,073,952
100.0%
90.3%
9.7%
100.0%
90.5%
9.5%
100.0%
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 probable 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 $14.2 million allowance for loan losses at December 31, 2013 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 specific allowances for individually identified impaired loans and general allowances
for pools of loans, which incorporate changing qualitative and environmental factors (e.g., portfolio growth and trends,
credit concentrations, economic and regulatory factors, etc.).
The first component, specific allowances, results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. PCI loans are considered impaired when they experience
credit deterioration, i.e. the amount of cash flows expected to be collected decreases. For loans determined to be
impaired, the extent of the impairment is measured 1) based on the present value of expected future cash flows
discounted at the loan's effective interest rate at origination for originated loans (or discounted at the effective yield for
PCI loans); 2) based on the loan's observable market price; or 3) 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 and evaluate quarterly. Impaired loan balances decreased from $30.3 million at December
31, 2012 to $25.7 million at December 31, 2013. The decrease is primarily the result of one non-accrual commercial
real estate loan that paid off and one non-accrual commercial loan that paid down in 2013. The specific allowance
decreased from $2.4 million at December 31, 2012 to $2.0 million at December 31, 2013. The decrease in the specific
allowance primarily relates to two commercial real estate loans that paid off in 2013.
The second component, the general allowance, is an estimate of the probable inherent losses in each loan pool stratified
by major segments or loans with similar characteristics in our loan portfolio. The total amount allocated for the second
component is determined by applying loss estimation factors to outstanding loan types. At December 31, 2013 and
2012, the allowance allocated for the second component by categories of credits totaled $12.2 million and $11.3 million,
respectively. As discussed in Note 1 and Note 4 to the consolidated financial statements, starting on September 30,
2013, Management refined the methodology for estimating general allowances in order to provide a more
comprehensive evaluation of the potential credit risk inherent in our loan portfolio. Based on objective factors of
historical charge-off experience, the allocated allowance amounted to $3.1 million at December 31, 2013. In addition,
$8.7 million of allowance was allocated based on qualitative factors such as: changes in the volume and nature of the
loan portfolio, changes in credit quality metrics (past due loans, non-accrual loans, net charge-offs), and the existence
of credit concentrations. Subjective factors include changes in the overall economic environment, legal and regulatory
conditions, lending management and other relevant staff, uncertainties related to acquisitions, as well as the quality
Page-45
of our loan review process. The total amount allocated is determined by applying loan loss reserves based on these
objective and subjective factors to outstanding loans by call codes.
Table 11 shows the allocation of the allowance by loan type as well as the percentage of total loans in each of the
same loan types.
Table 11 Allocation of Allowance for Loan Losses
December
31, 2013
December
31, 2012
December
31, 2011
December
31, 2010
December
31, 2009
Loans as
Loans as
Loans as
Loans as
Loans as
Allowance
percent
Allowance
percent
Allowance
percent
Allowance
percent
Allowance
percent
balance
of total
balance
of total
balance
of total
balance
of total
balance
of total
allocation
$ 3,056
loans
allocation
14.4 % $ 4,100
loans
allocation
16.4 % $ 4,334
loans
allocation
17.1 % $ 3,114
loans
allocation
16.3 % $ 2,544
loans
17.9 %
2,012
6,196
633
875
317
629
506
19.0
49.2
2.5
7.8
5.7
1.4
N/A
$ 14,224
1,313
4,372
611
1,264
551
1,231
219
$ 13,661
18.3
47.4
2.9
8.7
4.6
1.7
N/A
1,305
3,710
1,505
1,444
940
1,182
219
16.9
43.3
5.0
9.5
6.0
2.2
N/A
1,037
4,134
1,694
643
738
835
197
15.2
40.7
8.3
9.2
7.4
2.9
N/A
1,006
3,000
1,832
586
734
662
254
15.9
36.3
9.9
9.2
7.6
3.2
N/A
$ 14,639
$ 12,392
$ 10,618
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
(dollars in thousands; unaudited)
Commercial loans
Real Estate
Commercial, owner-occupied
Commercial, investor
Construction
Home Equity
Other residential
Installment and other consumer
Unallocated allowance
Total allowance for loan losses
Total percent
The allowance for loan losses as a percentage of loans totaled 1.12% at December 31, 2013, compared to 1.27% at
December 31, 2012. The decrease in the allowance for loan losses as a percentage of loans primarily relates to loans
acquired from Bank of Alameda marked down to fair value without allowances established and a continued low level
of newly identified non-accrual loans. The ratio of loan loss reserve to loans excluding the impact of the acquired loans
from the NorCal acquisition would have been 1.30% at December 31, 2013.
Table 12 shows the activity in the allowance for loan losses for each of the years in the five-year period ended December
31, 2013. Net recoveries totaled $23 thousand in 2013, compared to net charge-offs of $3.9 million in 2012. Charge-
offs in 2012 primarily relate to $2.2 million of charge-offs related to one commercial real estate borrowing relationship
based on an updated appraisal of the collateral. The 2011 net charge-offs stemmed primarily from unsecured
commercial loans, as well as commercial loans secured by real estate where the property values declined. The
percentage of net charge-offs to average loans was 0.00% in 2013, compared to 0.38% in 2012 and 0.49% in 2011,
reflecting the factors discussed above.
Page-46
Table 12 Allowance for Loan Losses at December 31
(dollars in thousands)
Beginning balance
Provision for loan losses
Loans charged off
Commercial
Real Estate
Commercial
Construction
Home equity
Other residential
Installment and other consumer
Total
Loan loss recoveries
Commercial
Real Estate
Commercial
Construction
Home equity
Other residential
Installment and other consumer
Total
Net loans recovered (charged-off)
Ending balance
2013
2012
2011
2010
$
13,661
$
14,639
$
12,392
$
10,618
$
540
2,900
7,050
5,350
2009
9,950
5,510
(672)
(892)
(3,306)
(643)
(1,552)
(156)
(62)
(176)
—
(88)
(2,595)
(373)
(382)
(196)
(122)
(113)
(473)
(554)
—
(456)
(47)
(9)
(2,628)
(3,046)
(150)
—
(318)
(1,154)
(4,560)
(4,902)
(3,786)
1,021
124
1
10
—
21
1,177
23
541
5
122
12
—
2
682
57
4
9
13
—
16
99
95
—
95
—
—
20
210
(3,878)
(4,803)
(3,576)
(4,842)
$
14,224
$
13,661
$
14,639
$
12,392
$
10,618
(96)
—
(659)
(5,362)
52
—
397
—
—
71
520
Total loans outstanding at end of year, before deducting allowance for
loan losses
$1,269,322
$ 1,073,952
$ 1,031,154
$ 941,400
$ 917,748
Average total loans outstanding during year
$1,092,885
$ 1,023,165
$ 984,211
$ 929,755
$ 910,456
Ratio of allowance for loan losses to total loans at end of year
1.12 %
1.27%
1.42%
1.32%
1.16%
Net charge-offs to average loans
— %
0.38%
0.49%
0.38%
0.53%
Ratio of allowance for loan losses to net (recoveries) charge-offs
(61,843.5)%
352.3%
304.8%
346.5%
219.3%
Non-performing assets for each of the past five years are presented below. The decrease in non-accrual loans from
2012 to 2013 primarily reflects one commercial real estate loan that paid off in 2013 and pay downs on various
commercial real estate and commercial loans, partially offset by one delinquent land development loan that went on
to non-accrual status in 2013. The increase in non-accrual loans from 2011 to 2012 primarily reflects: 1) one borrowing
relationship where the collateral was in the process of gradual liquidation and 2) a commercial real estate loan that
was written down to the appraised value of the collateral in 2012. The increase in impaired loans from 2011 to 2012
was also due to new troubled debt restructurings in 2012. The ratio of allowance for loan losses to non-accrual loans
increased from 77.4% at December 31, 2012 to 121.8% at December 31, 2013.
Page-47
Table 13
Non-performing Assets at December 31
(dollars in thousands)
Non-accrual loans:
Commercial
Real Estate
Commercial, owner-occupied
Commercial, investor
Construction
Home equity line of credit
Other residential
Installment and other consumer
Total non-accrual loans
Other real estate owned
Repossessed personal properties
Total non-performing assets
Accruing restructured loans:
Commercial
Real Estate
Commercial, owner-occupied
Commercial, investor
Construction
Home Equity
Other residential
Installment and other consumer
Total accruing restructured loans
Accreting impaired PCI loans:
Commercial real estate 1
Commercial 1
Total accreting impaired PCI loans
2013
2012
2011
2010
2009
$
1,187
$
4,893
$
2,955
$
2,486
$
910
1,403
2,807
5,218
234
660
169
1,403
6,843
2,239
545
1,196
533
2,033
741
3,014
766
1,942
519
632
—
9,297
—
148
362
3,722
—
6,520
100
—
313
11,678
17,652
11,970
12,925
11,565
461
—
—
35
—
25
—
135
—
96
$
12,139
$
17,687
$
11,995
$
13,060
$
11,661
$
4,514
$
4,577
$
2,741
$
— $
534
2,930
1,516
272
1,403
1,693
—
—
1,929
648
2,116
1,515
12,862
10,785
1,155
—
1,155
1,866
—
1,866
—
—
290
279
1,464
1,552
6,326
1,710
139
1,849
—
—
—
259
—
925
1,184
—
—
—
49
—
—
—
—
—
566
615
—
—
—
Total impaired loans
$
25,695
$
30,303
$
20,145
$
14,109
$
12,180
Allowance for loan losses to non-accrual loans at period end
121.8%
77.4%
122.3%
95.9%
91.8%
Non-accrual loans to total loans
0.92%
1.64%
1.16%
1.37%
1.26%
1 The expected cash flows on these PCI loans declined post-Acquisition, yet continue to accrete interest based on the revised expected cash flows.
Troubled debt restructured loans, whose contractual terms have been restructured in a manner which grants a
concession to a borrower experiencing financial difficulties, totaled $20.6 million and $18.3 million as of December 31,
2013 and 2012, respectively. For more information, refer to Note 4 under “Troubled Debt Restructuring”.
Page-48
Other Assets
BOLI totaled $27.8 million at December 31, 2013, compared to $22.7 million at December 31, 2012, and is recorded
in other assets. The increase in BOLI primarily relates to $3.2 million in BOLI policies acquired from the NorCal
acquisition and $1.4 million in BOLI policies purchased in 2013.
Other assets also included net deferred tax assets of $13.9 million and $6.7 million at December 31, 2013 and
2012, respectively. These deferred tax assets consist primarily of tax benefits expected to be realized in future
periods related to temporary differences of net operating loss carryforwards, allowance for loan losses, fair value
adjustments on acquired loans, deferred compensation, and accrued but unpaid expenses. The increase in
deferred tax assets primarily relates to $5.1 million in deferred assets associated with net operating loss
carryforwards from the NorCal acquisition and $3.2 million in deferred asset related to fair value adjustments on
acquired loans. Management believes these deferred tax 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. Therefore, no
valuation allowance has been established as of December 31, 2013 or 2012.
In addition, we held $7.8 million and $6.0 million of FHLB stock recorded at cost in other assets at December 31, 2013
and 2012, respectively. The FHLB paid $258.5 thousand and $52 thousand in cash dividends in 2013 and 2012,
respectively. On February 20, 2014, FHLB declared a cash dividend for the fourth quarter of 2013 at an annualized
dividend rate of 6.67%. Other assets as of December 31, 2013 also included goodwill of $6.4 million and a core deposit
intangible asset, net of amortization, totaling $4.5 million from the NorCal acquisition.
Deposits
Deposits, which are used to fund our interest earning assets, increased $333.8 million, or 26.6%, in 2013. The increase
in deposits over the prior year reflects $245.5 million in acquired deposits from Bank of Alameda outstanding at
December 31, 2013, as well as organic growth in many deposit categories, except for CDARS®, which we have been
de-emphasizing. No individual customer accounted for more than 5% of deposits. The shift in balances from interest
bearing transaction to non-interest bearing transaction accounts is primarily due to an inflow of non-interest bearing
deposits and a strategic product change which discontinued interest on one type of consumer account in the first
quarter of 2013, resulting in a reclassification of the accounts from interest-bearing transaction to non-interest bearing
accounts totaling $85.1 million at December 31, 2013.
Table 14 shows the relative composition of our average deposits for the years 2013, 2012 and 2011.
Table 14 Distribution of Average Deposits
(dollars in thousands; unaudited)
Non-interest bearing
Interest bearing transaction
Savings
Money market
CDARS®
Other Time deposits
Less than $100,000
$100,000 or more
Total other time deposits
Total Average Deposits
Years ended December 31,
2013
2012
2011
$
Amount
518,986
97,336
100,185
437,441
5,416
Percent
39.9% $
7.5
7.7
33.7
0.4
Amount
406,861
152,778
86,670
436,281
30,016
Amount
Percent
32.4% $ 347,682
125,316
12.1
69,792
6.9
405,726
34.7
39,514
2.4
38,089
102,245
140,334
$ 1,299,698
2.9
7.9
10.8
50,533
93,573
144,106
100.0% $ 1,256,712
4.0
7.5
11.5
46,686
105,180
151,866
100.0% $1,139,896
Percent
30.5%
11.0
6.1
35.6
3.5
4.1
9.2
13.3
100.0%
Page-49
Table 15 below shows the maturity groupings for time deposits of $100,000 or more, including CDARS® deposits at
December 31, 2013, 2012 and 2011.
Table 15 Maturities of Time Deposits of $100,000 or more at December 31
(dollars in thousands; unaudited)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Borrowings
$
December 31,
2013
22,485 $
19,022
22,578
47,584
2012
33,783 $
17,557
20,708
42,636
$ 111,669 $ 114,684 $
2011
66,999
23,704
28,913
31,982
151,598
As of December 31, 2013, we had $416.3 million in secured lines of credit with FHLB, $24.4 million with Federal
Reserve Bank of San Francisco (“FRBSF”) and $87.0 million in unsecured lines with correspondent banks to cover
any short or long-term borrowing needs. As of December 31, 2013, we had one FHLB fixed-rate advance outstanding
totaling $15 million, leaving $401.3 million available borrowing capacity with FHLB. The FRBSF and correspondent
bank lines were not utilized at December 31, 2013. For additional information, see Note 8 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
As part of the NorCal acquisition, we assumed two subordinated debentures due to the NorCal Community Bancorp
grantor trusts at fair values totaling $5.0 million at acquisition date and contractual values totaling $8.2 million. For
additional information on our subordinated debentures, see Note 8 to the Consolidated Financial Statements in Item
8 of this Form 10-K.
Deferred Compensation Obligations
We maintain a non-qualified, 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 for up
to fifteen years commencing upon retirement, death, disability or termination of employment. The participating employee
may elect to receive payments over periods not to exceed fifteen years. At December 31, 2013 and 2012, our aggregate
payment obligations under this plan totaled $2.8 million and $2.7 million, respectively.
We established a Salary Continuation Plan on January 1, 2011. The plan was to provide a percentage of salary
continuation benefits to a select group of executive Management upon retirement at age sixty-five and reduced benefits
upon early retirement. At December 31, 2013 and 2012, our liability under the Salary Continuation Plan was $493
thousand and $326 thousand, respectively, and is recorded in interest payable and other liabilities. This Plan is unfunded
and non-qualified for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974.
For additional information, see Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
Page-50
Off Balance Sheet Arrangements and Commitments
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 of this Form 10-K.
The following is a summary of our contractual commitments as of December 31, 2013.
Table 16 Contractual Commitments at December 31, 2013
(in thousands; unaudited)
Operating leases
Federal Home Loan Bank borrowings
Subordinated debentures
Total
<1 year
1-3 years
4-5 years
>5 years
3,524 $
7,229 $
7,389 $
10,078 $
---
—
---
—
15,000
—
—
8,248
3,524 $
7,229 $
22,389 $
10,078 $
$
$
Total
28,220
15,000
8,248
51,468
Payments due by period
The contractual amount of loan commitments not reflected on the consolidated statement of condition was $336.9
million and $250.8 million at December 31, 2013 and 2012, 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. As we believe the possibility of potential
claims to be remote and any amounts under the indemnifications would be covered by the insurance policy, we have
not recorded an indemnification obligation.
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 decreased from 13.6% at December 31, 2012 to 12.6%
at December 31, 2013, primarily due to growth in total risk-weighted assets, driven mainly by increases in the loan
portfolio and investment securities from the Acquisition, partially offset by the accumulation of net income of the Bank
in 2013 of $15.2 million. Bancorp's total risk-based capital ratio decreased from 13.7% at December 31, 2012 to 13.2%
at December 31, 2013, primarily due to an increase in risk-weighted assets associated with the Acquisition, partially
offset by the accumulation of net income of $14.3 million in 2013 (net of $4.0 million in dividends paid to stockholders)
and the assumption of subordinated debentures from NorCal that qualify as Tier one capital.
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 to purchase 156,134 shares of our common stock remains
outstanding. The warrant, if exercised, would provide us $4.2 million additional Tier one capital.
Page-51
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 pay-downs, Federal funds purchases, FHLB advances, and other borrowings. Our primary uses of funds are the
origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificate of deposits,
repayment of borrowings and dividends to common stockholders.
We attract and retain 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. We have secured borrowing capacity through the FHLB and FRB
that can be drawn upon. Management anticipates our current strong liquidity position and core deposit base will provide
adequate liquidity to fund our operations. If we were to rely on Federal funds purchased or FHLB advances in the
future, adequate collateral has been posted for such funding requirements.
As presented in the accompanying consolidated statements of cash flows, the sources of liquidity vary between periods.
Our cash and cash equivalents at December 31, 2013 totaled $103.8 million, an increase of $75.4 million from December
31, 2012. The primary uses of funds were $86.4 million in investment securities purchases, $23.1 million of loan
originations, net of principal collections, and $1.4 million in bank owned life insurance. The primary sources of funds
during 2013 included a $92.8 million increase in net deposits, $59.3 million in pay-downs, maturities and sales of
investment securities, $15.8 million cash acquired, net of cash paid, from the Acquisition, and $21.2 million in net cash
provided by operating activities.
At December 31, 2013, our cash and cash equivalents and unpledged available-for-sale securities with estimated
maturities within one year totaled $111.2 million. The remainder of the unpledged available-for-sale securities portfolio
of $221.2 million provides additional liquidity. These liquid assets equaled 18.4% of our assets at December 31, 2013,
compared to 12.7% at December 31, 2012.
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 well capitalized equity position, 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 $87.0 million with correspondent banks. Further, we have pledged a certain
residential loan portfolio to secure our borrowing capacity with the FRB, which totaled $24.4 million at December 31,
2013. As of December 31, 2013, 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 unencumbered financial assets) in the amount of $416.3 million, of which $401.3 million was
available at December 31, 2013. 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 statements of condition, totaled $336.9
million at December 31, 2013 at varying rates. This amount included $173.9 million under commercial lines of credit
(these commitments are contingent upon customers maintaining specific credit standards), $104.8 million under
revolving home equity lines, $33.4 million under undisbursed construction loans, $13.0 million under standby letters
of credit and a remaining $11.7 million under personal and other lines of credit. These commitments, to the extent
Page-52
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 $100.4 million of time deposits will mature. We expect these funds to be
replaced with new deposits.
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
without advance regulatory approval 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. The primary uses of funds for Bancorp are
shareholder dividends and ordinary operating expenses. Bancorp held $8.7 million of cash at December 31, 2013.
These funds are deemed sufficient to cover Bancorp's operational needs and cash dividends to shareholders for the
next twelve months. 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.
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
Market risk is defined as the risk of loss arising from an adverse change in the market value of financial instruments
caused by fluctuations in market prices or rates. Our most significant form of market risk is interest rate risk. The risk
is inherent in our investment, borrowing, lending and deposit gathering 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.
Sensitivity of net interest income (“NII”) and capital to interest rate changes results from differences in the maturity or
repricing of asset and liability portfolios. To mitigate interest rate risk, the structure of the Consolidated Statement of
Condition is managed with the objective of correlating the movements of interest rates on loans and investments with
those of deposits and borrowings. The asset and liability policy sets limits on the acceptable amount of change to NII
and capital in changing interest rate environments. We use simulation models to forecast NII.
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 Item 8 of
this Form 10-K.
Exposure to interest rate risk is reviewed at least quarterly by the ALCO and the Board of Directors. Simulation models
are used to measure interest rate risk and to develop ways 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.
Since 2008, there have been no changes in the Federal funds target rate, which has been kept at an historic low level
of 0-0.25%. The Bank currently has low interest rate risk and is asset sensitive (net interest margin positioned to
increase if rates go up). The Bank is more asset sensitive than at December 31, 2012, primarily because interest-
rate-sensitive short-term liquidity increased. If market rates rise, we expect asset sensitivity to increase as most of
our loans with interest rates on floors will start to float again as loans reprice and net interest income increases. We
have mitigated our interest rate sensitivity to a certain extent through the procurement of a fixed-rate borrowing from
the FHLB and interest rate swaps.
Based on our most recent simulation, Net Interest Income is positioned to increase by 4% in year 1 given an immediate
200 basis points increase in interest rates. For modeling purposes, the likelihood of a decrease in interest rates beyond
25 basis points as of December 31, 2013 was considered to be remote given prevailing low interest rate levels. The
Bank's net interest margin is expected to decline somewhat in a flat rate environment as maturing/repricing loans and
securities are reinvested at today's lower rates. In addition, market rates for loans have been falling under pressure
from competition. The interest rate risk is within policy guidelines established by ALCO and the Board of Directors.
Page-53
The following table estimates the impact of interest rate changes as measured against a flat rate scenario.
Table 17 Effect of Interest Rate Change on Net Interest Income at December 31, 2013
Changes in Interest Rates (in basis points)
up 400
up 300
up 200
up 100
Estimated Change in
NII (as percent of NII)
8.1%
6.0%
4.1%
2.3%
As stated previously in the section captioned "Supervision and Regulation" in Item 1 Business of this report, the Dodd-
Frank Act repealed the federal prohibitions on the payment of interest on business demand deposits, thereby permitting
depository institutions to pay interest on business transactions and other accounts beginning July 21, 2011. We have
not incurred significant interest expense on business transaction accounts since the legislation took 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 in the future, we would become less asset sensitive than the model currently indicates.
Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The bank runs a
combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk. As with any simulation
model or other method of measuring interest rate risk, certain limitations are inherent in the process. For example,
although certain of 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. Further, the actual rates and timing of
prepayments on loans and investment securities could vary significantly from the assumptions applied in the various
scenarios. Lastly, 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.
Page-54
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, 2013 and 2012, and the related consolidated statements of comprehensive income,
changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. We
also have audited the Company's internal control over financial reporting as of December 31, 2013, based on criteria
established in Internal Control - Integrated Framework (1992) 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, 2013 and 2012, and the
consolidated results of their operations and their cash flows each of the three years in the period ended December 31,
2013, 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, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
Stockton, California
March 14, 2014
Page-55
504 Redwood Blvd, Suite 100
Novato, CA 94947
March 14, 2014
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, 2013. The assessment was based on criteria for effective internal control over financial
reporting described in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, Management believes that, as of December 31,
2013, 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 2013.
Management's assessment of the effectiveness of Bancorp's internal control over financial reporting as of December 31,
2013 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/ Tani Girton
Tani Girton, EVP and Chief Financial Officer
Page-56
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
at December 31, 2013 and 2012
At December 31,
2013
2012
$
103,773
$
28,349
$
$
122,495
243,998
366,493
1,255,098
9,110
70,720
1,805,194
139,452
153,962
293,414
1,060,291
9,344
43,351
1,434,749
$
648,191
389,722
137,748
118,770
520,525
400
161,468
1,587,102
15,000
4,969
17,236
1,624,307
169,647
93,404
443,742
15,718
141,056
1,253,289
15,000
—
14,668
1,282,957
—
—
80,095
101,464
(672)
180,887
1,805,194
58,573
91,164
2,055
151,792
1,434,749
$
(in thousands, except share data)
Assets
Cash and due from banks
Investment securities
Held to maturity, at amortized cost
Available for sale (at fair value; amortized cost $245,158 and
$150,420 at December 31, 2013 and 2012, respectively)
Total investment securities
Loans, net of allowance for loan losses of $14,224 and $13,661 at
December 31, 2013 and 2012, respectively
Bank premises and equipment, net
Interest receivable and other assets
Total assets
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing
Interest bearing
Transaction accounts
Savings accounts
Money market accounts
CDARS® time accounts
Other time accounts
Total deposits
Federal Home Loan Bank ("FHLB") borrowings
Subordinated debentures
Interest payable and other liabilities
Total liabilities
Stockholders' Equity
Preferred stock, no par value,
Authorized - 5,000,000 shares, none issued
Common stock, no par value,
Authorized - 15,000,000 shares;
Issued and outstanding - 5,877,524 and 5,389,210 at
December 31, 2013 and 2012, respectively
Retained earnings
Accumulated other comprehensive (loss) income, net
Total stockholders' equity
Total liabilities and stockholders' equity
$
The accompanying notes are an integral part of these consolidated financial statements.
Page-57
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the fiscal years ended December 31, 2013, 2012 and 2011
(in thousands, except per share amounts)
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 FHLB and overnight borrowings
Interest on subordinated debentures
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
Debit card interchange fees
Merchant interchange fees
Earnings on Bank-owned life insurance
Loss on sale of securities
Other income
Total non-interest income
Non-interest expense
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
Federal Deposit Insurance Corporation insurance
Data processing
Professional services
Other expense
Total non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
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
Comprehensive income
Net income
Other comprehensive (loss) income
Change in net unrealized gain on available for sale securities
Reclassification adjustment for loss on sale of securities included in net income
Net change in unrealized gain on available for sale securities, before tax
Deferred tax (benefit) expense
Other comprehensive (loss) income, net of tax
Comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
Page-58
2013
Years ended December 31,
2012
2011
$
54,408
$
59,403
$
63,479
2,573
2,214
1,245
120
60,560
52
35
419
8
914
322
35
1,785
58,775
540
58,235
2,062
2,162
1,104
822
954
(1)
963
8,066
21,974
4,347
1,395
921
5,334
2,985
7,136
44,092
22,209
7,939
14,270
2.62
2.57
5,457
5,558
0.73
14,270
(4,720)
18
(4,702)
(1,975)
(2,727)
11,543
$
$
$
$
$
$
3,195
1,789
1,165
214
65,766
151
88
689
83
1,068
345
152
2,576
63,190
2,900
60,290
2,130
1,964
1,015
739
762
(34)
536
7,112
21,139
4,230
1,355
917
2,514
2,340
6,199
38,694
28,708
10,891
17,817
3.34
3.28
5,341
5,438
0.70
17,817
752
34
786
330
456
18,273
$
$
$
$
$
$
3,478
1,299
636
222
69,114
151
98
1,286
237
1,314
2,062
147
5,295
63,819
7,050
56,769
1,836
1,834
845
353
752
—
649
6,269
20,211
4,002
1,293
1,000
2,690
2,499
6,588
38,283
24,755
9,191
15,564
2.94
2.89
5,302
5,384
0.65
15,564
90
—
90
37
53
15,617
$
$
$
$
$
$
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the fiscal years ended December 31, 2013, 2012 and 2011
(dollars in thousands)
Balance at December 31, 2010
Net income
Other 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, 2011
Net income
Other 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 purchased by directors under director stock plan
Stock issued in payment of director fees
Balance at December 31, 2012
Net income
Other comprehensive loss
Stock options exercised
Excess tax benefit - stock-based compensation
Stock issued under employee stock purchase plan
Restricted stock granted
Restricted stock forfeited
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock
Stock purchased by directors under director
stock plan
Stock issued in payment of director fees
Stock issued to NorCal Community
Bancorp shareholders
Balance at December 31, 2013
Common Stock
Retained
Earnings
Shares
Amount
5,290,082 $ 55,383 $ 64,991 $
—
—
34,913
—
982
5,675
(315)
—
—
—
5,590
—
—
741
120
33
—
—
234
143
—
200
5,336,927 $ 56,854 $ 77,098 $
15,564
—
—
—
—
—
—
—
—
(3,457)
—
—
—
37,563
—
700
9,030
(380)
—
—
—
100
5,270
—
—
1,041
42
25
—
—
206
202
—
4
199
5,389,210 $ 58,573 $ 91,164 $
17,817
—
—
—
—
—
—
—
—
(3,751)
—
—
—
—
71,237
—
870
11,850
(3,998)
—
—
—
160
5,619
—
—
2,218
125
34
—
—
175
228
—
6
222
14,270
—
—
—
—
—
—
—
—
(3,970)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
Page-59
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
1,546
—
53
Total
$121,920
15,564
53
741
120
33
—
—
234
143
(3,457)
200
$135,551
17,817
456
1,041
42
25
—
—
206
202
(3,751)
4
199
$151,792
14,270
(2,727)
2,218
125
34
—
—
175
228
(3,970)
6
222
—
—
—
—
—
—
—
—
1,599
—
456
—
—
—
—
—
—
—
—
—
—
2,055
—
(2,727)
—
—
—
—
—
—
—
—
—
—
402,576
18,514
5,877,524 $ 80,095 $101,464 $
—
—
18,514
(672) $180,887
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended December 31, 2013, 2012 and 2011
(in thousands)
Cash Flows from Operating Activities:
2013
Years ended December 31,
2012
2011
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
14,270
$
17,817
$
15,564
Provision for loan losses
Compensation expense--common stock for director fees
Stock-based compensation expense
Excess tax benefits from exercised stock options
Amortization and impairment write-off of core deposit intangible
Amortization of investment security premiums, net of accretion of discounts
Accretion of discount on acquired loans
Accretion of discount on subordinated debentures
Decrease in deferred loan origination fees, net
Net loss on sale of security transactions
Depreciation and amortization
Loss on disposal of premises and equipment
Bargain purchase gain on acquisition, net of tax
(Gain) loss on sale of repossessed assets
Earnings on bank owned life insurance policies
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:
Proceeds from sale of premises and equipment
Purchase of securities held to maturity
Purchase of securities available for sale
Proceeds from sale of securities available for sale
Proceeds from sale of securities held to maturity
Proceeds from paydowns/maturities of securities held to maturity
Proceeds from paydowns/maturities of securities available for sale
Loans originated and principal collected, net
Purchase of bank owned life insurance policies
Purchase of premises and equipment
Proceeds from sale of repossessed assets
Cash acquired from acquisitions, net of cash paid
(Purchase) redemption of Federal Home Loan Bank stock
Cash paid for low income housing investment
Net cash used in investing activities
Cash Flows from Financing Activities:
Net increase in deposits
Proceeds from stock options exercised
Repayment of Federal Home Loan Bank borrowings
Repayment of subordinated debenture
Cash dividends paid on common stock
Stock issued under employee and director stock purchase plans
Excess tax benefits from exercised stock options
Net cash provided by financing activities
Net (decrease) increase 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 in interest
Cash paid in income taxes
Supplemental disclosure of non-cash investing and financing activities:
Change in unrealized gain on available-for- sale securities
Loans transferred to repossessed assets
Stock issued in payment of director fees
Acquisitions:
Fair value of assets acquired
Fair value of liabilities assumed
Stock issued to NorCal Community Bancorp shareholders
The accompanying notes are an integral part of these consolidated financial statements.
Page-60
540
215
403
(96)
69
3,004
(1,871)
19
(793)
1
1,395
—
—
(43)
(954)
(694)
28
338
299
5,071
6,931
21,201
—
—
(86,372)
7,973
6,442
8,570
36,332
(23,087)
(1,421)
(958)
270
15,785
(420)
(62)
(36,948)
92,787
2,218
—
—
(3,970)
40
96
91,171
75,424
28,349
103,773
1,740
9,239
$
$
(4,702) $
$
192
$
222
280,917
$
246,384
$
18,514 $
2,900
209
408
(29)
—
2,332
(2,430)
—
(831)
34
1,355
20
—
14
(762)
(435)
(156)
331
555
(526)
2,989
20,806
—
(87,290)
(73,405)
2,186
—
6,458
51,899
(43,169)
(364)
(1,221)
41
—
—
—
(144,865)
50,317
1,041
(20,000)
(5,000)
(3,751)
29
29
22,665
(101,394)
129,743
28,349
2,732
11,421
786
65
199
$
$
$
$
$
7,050
200
377
(99)
725
1,385
(4,275)
—
(1,200)
—
1,293
117
(85)
(10)
(752)
(431)
(33)
236
1,051
1,268
6,817
22,381
18
(26,804)
(92,686)
—
—
1,755
68,251
(25,182)
(2,500)
(2,472)
421
44,042
219
—
(34,938)
93,152
741
(33,500)
—
(3,457)
33
99
57,068
44,511
85,232
129,743
5,328
9,159
90
301
200
— $
— $
— $
107,763
107,678
—
$
$
$
$
$
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Introductory Explanation
References in this report to “Bancorp” mean the Bank of Marin Bancorp as the parent holding company for Bank of
Marin, the wholly-owned subsidiary (the “Bank”). References to “we,” “our,” “us” mean the holding company and the
Bank that are consolidated for financial reporting purposes.
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 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.
On November 29, 2013, we completed the merger of NorCal Community Bancorp ("NorCal"), parent company of Bank
of Alameda, to enhance our market presence (the “Acquisition”). On the date of acquisition, Bancorp assumed
ownership of NorCal Community Bancorp Trusts I and II, respectively (the "Trusts"), which were formed for the sole
purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trusts (variable
interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the
subordinated debentures are shown as a liability on our consolidated statements of condition. Bancorp's investment
in the common stock of the Trusts is accounted for under the equity method and is included in interest receivable and
other assets on the consolidated statements of condition.
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, Sonoma, Napa,
San Francisco and Alameda counties. Besides the headquarters office in Novato, CA, the Bank operates ten branches
in Marin County, one in Napa County, one in San Francisco, five in Sonoma County and four in Alameda County. Our
accounting and reporting policies conform to generally accepted accounting principles, general practice, and regulatory
guidance 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 nor trading are classified as
available-for-sale and are reported at fair value. Unrealized gains and losses for available-for-sale securities, 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, the quality of any credit enhancement and the value of any underlying
collateral.
Page-61
For each security in an unrealized loss position, we assess whether we intend to sell the security or if 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. If we intend to sell the security or it is more likely than not we will be required to sell the security before
recovery of its amortized cost basis less any current-period credit loss, the entire difference between the investment’s
amortized cost basis and its fair value at the balance sheet date is recognized in earnings.
For impaired securities that are not intended for sale and will not be required to be sold prior to recovery of our amortized
cost basis, we determine if the impairment has a credit loss component. For held-to-maturity securities, if there is no
credit loss, no further action is required. For both held-to-maturity and available-for-sale securities, if the amount or
timing of cash flows expected to be collected are less than those at the last reporting date, an other-than-temporary
impairment shall be considered to have occurred and the credit loss component is recognized in earnings as the present
value of the change in expected future cash flows. In determining the present value of the expected cash flows we
discount the expected cash flows at the effective interest rate implicit in the security at the date of purchase. The
remaining difference between the security's fair value and the amortized basis is deemed to be 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.
Originated Loans are reported at the principal amount outstanding net of deferred fees, charge-offs and the allowance
for loan losses (“ALLL”). 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 loans types excluding overdraft accounts, we generally make a charge-off determination
at or before 90 days past due. A collateral-dependent loan is partially charged down to the fair value of collateral
securing it if: (1) it is deemed uncollectable; or (2) it has been classified as a loss by either our internal loan review
process or external examiners. A non-collateral-dependent loan is partially charged down to its net realizable value
under the same circumstances. Additionally, unless the obligation is both well-secured and in the process of collection,
any closed-end loan that exceeds 120 days past due and any open-end loan that exceeds 180 days past due is
charged-off. For overdraft accounts, we generally charge them off when they exceeds 60 days past due.
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 ALLL is based on estimates,
and ultimate losses may vary from current estimates. Our Asset/Liability Management Committee (“ALCO”) reviews
Page-62
the adequacy of the ALLL at least quarterly. 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 1) specific allowances for individually identified impaired loans ("ASC 310-10") and
2) general allowances for pools of loans ("ASC 450-20"), which incorporate changing qualitative and environmental
factors (e.g., portfolio growth and trends, credit concentrations, economic and regulatory factors, etc.).
The first component, specific allowances, result 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 in accordance with the contractual terms. These loans are evaluated for impairment individually
by Management. Management considers an originated loan to be impaired when it is probable we will be unable to
collect all amounts due according to the contractual terms of the loan agreement. For allowance established on
acquired loans, refer to Acquired Loans discussed below. When the fair value of the impaired loan is less than the
recorded investment in the loan, the difference is recorded as impairment through the establishment of a 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 effective interest rate at origination (for originated loans), based
on the loan's observable market price, or based on the fair value of the collateral if the loan is collateral dependent or
if foreclosure is imminent. 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.
The second component is an estimate of the probable inherent losses in each loan pool with similar characteristics.
Beginning with the quarter-ended September 30, 2013, Management refined the methodology for estimating general
allowances in order to provide a more comprehensive evaluation of the potential risk of loss in our loan portfolio. This
analysis encompasses our entire loan portfolio and excludes acquired loans where the discount has not been fully
accreted. For allowance established on acquired loans, see below under Acquired Loans.
Under our allowance model, loans are evaluated on a pool basis by loan segment which is further delineated by Federal
regulatory reporting codes ("call codes"). Each segment is assigned an expected loss factor which is based on a
number of objective and subjective factors. Objective factors include a rolling historical loss rate using a twelve quarter
look-back, changes in the volume and nature of the loan portfolio, changes in credit quality metrics (past due loans,
non-accrual loans, net charge-offs), and the existence of credit concentrations. Subjective factors include changes in
the overall economic environment, legal and regulatory conditions, lending management and other relevant staff,
uncertainties related to acquisitions, as well as the quality of our loan review process. The total amount allocated is
determined by applying loss multipliers to outstanding loans by call code.
For further information regarding our ALLL methodology, including a change in methodology in 2013, see Note 4.
Acquired Loans: From time to time, we acquire loans through business acquisitions. Acquired loans are recorded at
their estimated fair values at acquisition date in accordance with ASC 805 Business Combinations, factoring in credit
losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over
or recorded for acquired loans as of the acquisition date.
The process of estimating fair values of the acquired loans, including the estimate of losses that are expected to be
incurred over the estimated remaining lives of the loans at acquisition date and the ongoing updates to Management's
expectation of future cash flows, requires significant subjective judgments and assumptions, particularly considering
the economic environment. The economic environment and the lack of market liquidity and transparency are factors
that have influenced, and may continue to affect, these assumptions and estimates.
We estimated the fair value of acquired loans at the acquisition date based on a discounted cash flow methodology
that considered factors including the type of loan and related collateral, risk classification, fixed or variable interest
rate, term of loan, whether or not the loan was amortizing, and current discount rates. Loans, except for purchased
credit-impaired loans or "PCI loans", were grouped together according to similar characteristics and were treated in
the aggregate when applying various valuation techniques. The estimate of expected cash flows incorporates our best
estimate of key assumptions, such as property values, default rates, loss severity and prepayment speeds. The discount
Page-63
rates used for loans were based on current market rates for new originations of comparable loans, where available,
and include adjustments for liquidity concerns.
To the extent comparable market rates are not readily available, a discount rate was derived based on the assumptions
of market participants' cost of funds, servicing costs and return requirements for comparable risk assets. In either
case, the discount rate does not include a factor for credit losses, as that has been considered in estimating the cash
flows. The initial estimate of cash flows to be collected was derived from assumptions such as default rates, loss
severities and prepayment speeds.
We acquired some loans from business combinations with evidence of credit quality deterioration subsequent to their
origination and for which it was probable, at acquisition, that we would be unable to collect all contractually required
payments (PCI loans). These loans are evaluated on an individual basis. Management has applied significant subjective
judgment in determining which loans are PCI loans. Evidence of credit quality deterioration as of the purchase date
may include data such as past due and nonaccrual status, risk grades and recent loan-to-value percentages. Revolving
credit agreements (e.g., home equity lines of credit and revolving commercial loans) where the borrower had revolving
privileges at acquisition date are not considered PCI loans because the timing and amount of cash flows cannot be
reasonably estimated.
The accounting guidance for PCI loans provides that the difference between the contractually required payments and
the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the
nonaccretable difference and is not recorded. Furthermore, the difference between the expected cash flows and the
fair value at acquisition date is accreted into interest income at a level yield of return over the remaining term of the
loan, provided that the timing and amount of future cash flows is reasonably estimable.
The initial estimate of cash flows expected to be collected is updated each quarter and requires the continued usage
of key assumptions and estimates similar to the initial estimate of fair value. Given the current economic environment,
we apply judgment to develop our estimate of cash flows for PCI loans given the impact of real estate value changes,
changing probability of default, loss severities and prepayment speeds.
For purposes of accounting for the PCI loans from past business combinations, we elected not to apply the pooling
method but to account for these loans individually. Disposals of loans, which may include sales of loans to third parties,
receipt of payments in full by the borrower, or foreclosure of the collateral, result in removal of the loan from the PCI
loan portfolio at its carrying amount.
All PCI loans that were classified as non-accrual loans prior to the acquisition were no longer classified as non-accrual
if we believed that we would fully collect the new carrying value of these loans at acquisition. Subsequent to the
acquisition, specific allowances are established for PCI loans that have experienced subsequent credit deterioration.
The amount of cash flows expected to be collected and, accordingly, the adequacy of the allowance for loan losses
are particularly sensitive to changes in loan credit quality. When there is doubt as to the timing and amount of future
cash flows to be collected, PCI loans are classified as non-accrual loans. It is important to note that judgment is required
to classify PCI loans as accruing or non-accrual, and is dependent on having a reasonable expectation about the timing
and amount of cash flows expected to be collected. If we have probable and significant increases in cash flows
expected to be collected on PCI loans, we first reverse any previously established specific allowance for loan loss and
then increase interest income as a prospective yield adjustment over the remaining life of the loans. The impact of
changes in variable interest rates is recognized prospectively as adjustments to interest income.
For acquired loans not considered PCI loans, we recognize the entire fair value discount accretion based on the
acquired loan's contractual cash flows using an effective interest rate method for term loans, and on a straight line
basis to interest income for revolving lines, as the timing and amount of cash flows under revolving lines are not
predictable. Subsequent to acquisition, if the probable and estimable losses for non-PCI loans exceed the amount of
the remaining unaccreted discount, the excess is established as an allowance for loan losses.
For further information regarding our acquired loans, see Note 2 and Note 4.
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
Page-64
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, 2013.
Premises and Equipment consist of leasehold improvements, furniture, fixtures, software and equipment and are stated
at cost, less accumulated depreciation and amortization, which are calculated on a straight-line basis. 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.
Other Real Estate Owned ("OREO"): OREO is comprised of property acquired through foreclosure or acceptance of
deeds-in-lieu of foreclosure. OREO is recorded at fair value less estimated costs to sell, establishing a new cost basis,
and are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Losses recognized
at the time of acquiring property in full or partial satisfaction of debt are charged against the allowance for loan losses.
Fair value is generally based on an independent appraisal of the property. Revenues and expenses associated with
OREO, and subsequent adjustments to the fair value of the property and to the estimated costs of disposal, are realized
and reported as a component of non-interest expense when incurred.
Employee Stock Ownership Plan (“ESOP”): We recognize compensation cost of the ESOP contribution when funds
become committed for the purchase of Bancorp's common shares into the ESOP in the year in which the employees
render service entitling them to the contribution. If we contribute stock, the compensation cost is the fair value of the
shares when they are committed to be released, i.e. when the number of shares becomes known. During 2013 and
2012, the Bank only made cash contributions 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, unvested restricted stock and stock warrant, and 3) weighted average diluted shares. Basic earnings per share
(“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during
each period, excluding unvested restricted stock. Diluted EPS are calculated using the weighted average diluted shares.
The number of potential common shares included in quarterly diluted EPS is computed using the average market
prices during the three months included in the reporting period under the treasury stock method. The number of potential
common shares included in year-to-date diluted EPS is a year-to-date weighted average of potential common shares
included in each quarterly diluted EPS computation. We have two forms 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 shareholders and they both share equally in undistributed earnings.
Page-65
(in thousands, except per share data)
Weighted average basic shares outstanding
Add: Potential common shares related to stock options
Potential common shares related to unvested restricted stock
awards
Potential common shares related to warrants
2013
5,457
44
4
53
2012
5,341
47
5
45
2011
5,302
41
4
37
Weighted average diluted shares outstanding
5,558
5,438
5,384
Net income
Basic EPS
Diluted EPS
$
$
$
14,270 $
17,817 $
15,564
2.62 $
2.57 $
3.34 $
3.28 $
2.94
2.89
Weighted average anti-dilutive shares not included in the
calculation of diluted EPS
49
50
70
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 comprehensive 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 on a straight-line basis over the requisite service period, which is generally the vesting
period. The stock-based compensation expense excludes stock grants to directors as compensation for their services,
which are recognized as director expenses separately based on the grant-date value of the stock. See Note 9 for
further discussion.
We determine 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 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 the consolidated 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. Fair value of restricted stock is based on the stock price on grant
date.
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 consolidated statements of condition 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 value. The unrealized gain or loss resulting from the change in fair 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.
The eight remaining 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 consolidated statements
of condition 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
Page-66
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, 2013, 2012, and 2011, advertising
costs totaled $490 thousand, $541 thousand, and $589 thousand, respectively.
Comprehensive Income for Bancorp includes net income reported on the statements of comprehensive income and
changes in the fair value of investment securities available-for-sale, net of related taxes, reported on the statements
of comprehensive income and 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 $2.2 million, $2.0 million and $1.8 million
in 2013, 2012 and 2011, respectively, which are included in non-interest income in the statements of comprehensive
income. Non-interest expenses applicable to WMTS totaled $1.5 million, $1.4 million and $1.3 million in 2013, 2012
and 2011, respectively. Income tax applicable to WMTS totaled $220 thousand, $200 thousand and $184 thousand in
2013, 2012 and 2011, respectively, which resulted in after-tax income of $394 thousand, $327 thousand and $312
thousand in those respective periods. The revenues of the community banking segment are reflected in all other income
lines in the consolidated statements 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 ALLL, other-than-temporary impairment of investment securities, estimated cash flows on
PCI loans, accounting for income taxes and fair value measurements (including fair values of acquired assets and
assumed liabilities at acquisition dates) as discussed in the Notes herein.
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2011-11 Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities. The ASU enhances
disclosures in order to improve the comparability of offsetting (netting) assets and liabilities reported in accordance
with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRS”)
by requiring entities to disclose both gross information and net information about both instruments and transactions
eligible for offset in the statements of condition and instruments and transactions subject to an agreement similar to a
master netting arrangement.
In January 2013, the FASB issued ASU No. 2013-01 Balance Sheet (Topic 210) Clarifying the Scope of Disclosures
about Offsetting Assets and Liabilities, which clarifies that ordinary trade receivables and receivables are not in the
scope of ASU 2011-11. It further clarifies that the scope of ASU No. 2011-11 applies to derivatives, repurchase
agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that
are either offset in accordance with specific criteria contained in FASB Accounting Standards Codification® or subject
to a master netting arrangement or similar agreement. Both ASU 2011-11 and ASU 2013-01 are effective for annual
periods beginning on or after January 1, 2013, and interim periods within those annual periods. We adopted these
ASUs in the first quarter of 2013. This ASU affects presentation only and therefore there is no financial statement
impact on our financial condition or results of operations. See Note 15.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires entities to present separately by
component reclassifications out of accumulated other comprehensive income. An entity is required to disclose in the
notes of the financial statements or parenthetically on the face of the financial statements the effect of significant items
reclassified out of accumulated other comprehensive income on the respective line items of net income, but only if the
item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. ASU 2013-02 is effective
for fiscal years, and interim periods beginning on or after December 15, 2012 for public entities. We adopted this ASU
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in the first quarter of 2013. This ASU affects presentation only and therefore there is no financial statement impact on
our financial condition or results of operations. See the consolidated statements of comprehensive income.
In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405) Obligations Resulting from Joint and
Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The ASU
requires an entity to measure obligations resulting from joint and several liability arrangements for which the total
amount of the obligation is fixed at the reporting date. Entities are required to record the amount the entity agreed to
pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to
pay on behalf of its co-obligors at the reporting date. Examples of obligations within the scope of this guidance include
debt arrangements, other contractual obligations, settled litigation and judicial rulings. ASU 2013-04 is effective
retrospectively to all periods presented for fiscal years and interim periods beginning after December 15, 2013 for
public entities. We do not expect this ASU to have a significant impact on our financial condition or results of operations.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds
Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedging Accounting Purposes.
The ASU provides for the inclusion of the Fed Funds Effective Swap Rate or also referred to as the Overnight Index
Swap Rate ("OIS") as a U.S. benchmark interest rate for hedge accounting purposes, in addition to direct Treasury
obligations of the U.S. government ("UST") and London Interbank Offered Rate ("LIBOR"). The ASU is a result of the
financial crisis in 2008, as the exposure to and the demand for hedging the Fund Funds rate have increased significantly.
ASU 2013-10 is effective prospectively for qualifying new or re-designated hedging relationships entered into on or
after July 17, 2013. We do not expect this ASU to have a significant impact on our financial condition or results of
operations.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax
Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU
requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the
financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward except as follows. To the extent that a net operating loss carryforward, a similar tax loss, or
a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result
from the disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend
to use, the deferred tax asset for such purposes, then the unrecognized tax benefit should be presented as a liability.
ASU 2013-11 is effective prospectively for fiscal years, and interim periods beginning after December 15, 2013 for
public entities. We do not expect this ASU to have a significant impact on our financial condition or results of operations.
In January 2014, the FASB issued ASU No. 2014-01, Investments-Equity and Joint Ventures (Topic 323) Accounting
for Investments in Qualified Affordable Projects. This ASU permits entities to make an accounting policy election to
account for their investments in qualified affordable housing projects using the proportional amortization method if
certain conditions are met. Under the proportional amortization method, the initial cost of the investment is amortized
in proportion to the tax credits and other tax benefits received and the net investment performance is recognized in
the income statement as part of income tax expense (benefit). We plan on adopting this ASU starting in 2014 and elect
to account for all low income housing investments using the proportional amortization method instead of cost method.
The change in accounting policy will not have a significant impact on our financial condition or results of operations.
In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic
310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.
Current accounting literature on troubled debt restructurings include guidance on when a creditor obtains one or more
collateral assets in satisfaction of all or part of the receivable. The accounting literature indicates that a creditor should
reclassify a collateralized mortgage loan such that the loan should be de-recognized and the collateral asset recognized
when it is determined that there has been in substance a repossession or foreclosure by the creditor. However, in
substance a repossession or foreclosure and physical possession are not currently defined and there is diversity about
when a creditor should de-recognize the loan receivable and recognize the real estate property. This ASU clarifies
when an in substance repossession or foreclosure occurs. ASU 2014-04 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2014 for public entities. We do not expect this ASU
to have a significant impact on our financial condition or results of operations.
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Note 2: Acquisition
On February 18, 2011, we entered into a modified whole-bank purchase and assumption agreement without loss share
(the “P&A Agreement”) with the Federal Deposit Insurance Corporation (the “FDIC”), the receiver of Charter Oak Bank
of Napa, California. We purchased $107.8 million in assets and assumed $107.7 million in liabilities from the former
Charter Oak Bank to enhance our market presence. The P&A Agreement only covered 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. We recorded an $85 thousand bargain purchase gain which represents the
excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.
On November 29, 2013, we completed the merger of NorCal, parent company of Bank of Alameda, to enhance our
market presence. The merger added 173.8 million in loans, $241.0 million in deposits and $53.7 million in investment
securities to Bank of Marin as well as four branch offices serving Alameda, Emeryville, and Oakland. The assets
acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition
date in accordance with ASC 805, Business Combinations. These fair value estimates are subject to change for up
to one year after the acquisition date as additional information relative to acquisition date fair values becomes available.
The acquisition was treated as a "reorganization" within the definition of section 368(a) of the Internal Revenue Code
and is generally considered tax-free for U.S. federal income tax purposes.
Page-69
The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the NorCal
Acquisition:
Acquisition Date
(November 29, 2013)
$
$
$
$
$
31,804
53,731
173,759
4,572
4,114
6,435
203
6,299
280,917
69,123
57,337
10,835
81,464
22,267
241,026
4,950
408
246,384
34,533
(Dollars in thousands)
Assets:
Cash and cash equivalents
Investment securities
Loans
Core deposit intangible
Deferred tax asset
Goodwill
Bank premises and equipment
Other assets
Total assets acquired
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Transaction accounts
Savings accounts
Money market accounts
Other time accounts
Total deposits
Subordinated debentures
Other liabilities
Total liabilities assumed
Merger consideration (cash payment of $16.019 million and $18.514 million in stock)
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The following table presents the net assets acquired from NorCal and the estimated fair value adjustments:
(Dollars in thousands)
Book value of net assets acquired from NorCal
Fair value adjustments:
Loans
Subordinated debentures
Core deposit intangible asset
Time deposits
Total purchase accounting adjustments
Deferred tax liabilities (tax effect of purchase accounting adjustments at 42.05%)
Fair value of net assets acquired from NorCal
Merger consideration
Less: fair value of net assets acquired
Goodwill
Acquisition Date
(November 29, 2013)
25,552
$
(3,462)
3,298
4,572
(14)
4,394
(1,848)
28,098
34,533
(28,098)
6,435
$
$
$
$
Goodwill represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the
fair values of liabilities assumed. It arises mainly from expected synergies from combined operations of NorCal and
Bank of Marin. It is evaluated for impairment annually. We determined that the fair value of our Community Banking
segment exceeded its carrying amount and no impairment on goodwill was recorded in 2013. The goodwill is not
expected to be deductible for tax purposes. The following is a description of the methods used to determine the fair
values of significant assets and liabilities at acquisition date presented above.
Loans
The fair values for acquired loans were developed based upon the present values of the expected cash flows utilizing
market-derived discount rates. Expected cash flows for each acquired loan were projected based on contractual cash
flows adjusted for expected prepayment, expected default (i.e. probability of default and loss severity), and principal
recovery.
Prepayment rates were applied to the principal outstanding based on the type of loan, where appropriate. Prepayments
were based on a constant prepayment rate (“CPR”) applied across the life of a loan. We used annual CPRs between
0 percent and 5 percent, depending on the characteristics of the loan pool (e.g. construction, commercial real estate,
etc.).
Non-credit-impaired loans with similar characteristics were grouped together and were treated in the aggregate when
applying the discount rate on the expected cash flows. Aggregation factors considered included the type of loan and
related collateral, risk classification, fixed or variable interest rate, term of loan and whether or not the loan was
amortizing. The discount rates used for the similar groups of loans were based on current market rates for new
originations of comparable loans, where available, and include adjustments for credit and liquidity factors. To the extent
comparable market rates are not readily available, a discount rate was derived based on the assumptions of a market
participant's cost of funds, servicing costs, and return requirements for comparable risk assets. Purchased credit-
impaired loans were valued on an individual basis. See Note 4 for additional information.
Subordinated Debentures
The discounted cash flow method was used to establish the fair value of the subordinated debentures. In determining
the fair value, cash flows were projected through the remaining term of the issuances. As the issuances are variable
rate, to determine the cash flows, future interest payments were determined based on forward rates plus the stated
margin.
Page-71
The cash flows were then discounted to their present values. Each payment was discounted at a spot rate that was
determined based on the yields and terms of comparable issuances. We recognized the effects of illiquidity associated
with size and the lack of marketability of the securities through the inclusion of an additional premium.
Core Deposit Intangible
The core deposit intangible represents estimated future benefits of acquired deposits and is booked separately from
the liability in other assets. The value of the core deposit intangible asset was determined using a discounted cash
flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as checking,
savings and money market accounts) and alternative funding sources. It is calculated as the present value of the
difference in cash flows between maintaining the existing deposits (interest and net maintenance costs) and the
cost of an equal amount of funds from an alternative source having a similar term as the deposit base. It is amortized
on an accelerated basis over an estimated ten-year life. The core deposit intangible asset is evaluated periodically for
impairment, and no impairment loss was recognized in 2013.
We recorded a core deposit intangible asset of $4.6 million at Acquisition, of which $69 thousand was amortized in
2013. At December 31, 2013, the future estimated amortization expense is as follows:
(in thousands)
2014
2015
2016
2017
2018 Thereafter
Total
Core deposit intangible amortization
$
771 $
619 $
533 $
472 $
413 $
1,695 $ 4,503
Deposits
The fair values used for the retail DDA and NOW deposits were equal to the amounts payable on demand at the
acquisition date. The fair values for time deposits were estimated using a discounted cash flow calculation that applied
interest rates offered by market participants as of the acquisition date on time deposits with similar maturity terms as
the discount rates.
Pro Forma Results of Operations
The contribution of the acquired operations of the former NorCal Community Bancorp to our results of operations for
the period November 29 to December 31, 2013 is as follows: interest income of $1.1 million, interest expense of $68
thousand, non-interest income of $95 thousand, non-interest expense of $1.1 million and income before income taxes
of $109 thousand. These amounts include acquisition-related costs, accretion of the discount on the acquired loans,
amortization of the fair value mark on time deposits, core deposit intangible amortization, and subordinated debentures
amortization. NorCal Community Bancorp's results of operations prior to the acquisition date are not included in our
operating results for 2013.
The following table presents NorCal Community Bancorp's revenue (interest income and non-interest income) and
earnings included in our consolidated statement of comprehensive income for the year ended December 31, 2013,
and the revenue and earnings of the combined entity had the acquisition date been January 1, 2012. This pro forma
information does not necessarily reflect the results of operations that would have resulted had the acquisition been
completed at the beginning of the periods presented, nor is it indicative of the results of operations in future periods.
Page-72
Pro Forma Revenue and Earnings
(in thousands; unaudited)
NorCal Community
Bancorp Only
Combined
Revenue
Earnings
Revenue
Earnings
Actual from November 29, 2013 to December 31, 2013
$
1,239 $
70
$
6,984 $
963
2013 supplemental pro forma from January 1, 2013 to December 31, 2013
12,199
315
68,626
14,270
2013 supplemental pro forma from January 1, 2013 to December 31, 20131
2012 supplemental pro forma from January 1, 2012 to December 31, 20121
12,199
12,433
1,506
(2,841)
68,626
85,310
17,866
13,731
1 2013 supplemental pro forma earnings were adjusted to exclude $3.7 million of one-time acquisition related expenses booked at Bank of
Marin Bancorp and $1.9 million of one-time acquisition related expenses booked at NorCal Community Bancorp in 2013. 2012
supplemental pro forma earnings were adjusted to include these charges.
Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and
operational functions become fully integrated. We incurred one-time third-party acquisition-related expenses in the
consolidated statements of comprehensive income in 2013 for the NorCal acquisition and in 2011 for the Charter Oak
acquisition as follows:
(Dollars in thousands)
Data processing
Professional services
Personnel severance
Other
Total
2013 NorCal Acquisition
2011 Charter Oak Acquisition
Year Ended
December 31, 2013
Year Ended
December 31, 2011
$
$
2,807 *
660
203
74
3,744
$
$
455
457
—
88
1,000
*Primarily relates to NorCal's core processing system contract termination and deconversion fees.
Note 3: Investment Securities
Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S.
government agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations
(“CMOs”) issued or guaranteed by Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), or Government National Mortgage Association ("GNMA"), debentures issued by government-
sponsored agencies such as FNMA and FHLMC, as well as privately issued CMOs, as reflected in the table below:
Page-73
(in thousands;)
Held-to-maturity
Obligations of state and
political subdivisions
Corporate bonds
Total held-to-maturity
Available-for-sale
Securities of U. S.
government agencies:
MBS pass-through
securities issued by
FHLMC and FNMA
CMOs issued by FNMA
CMOs issued by FHLMC
CMOs issued by GNMA
Debentures of government-
sponsored agencies
Privately issued CMOs
Obligations of state and
political subdivisions
Corporate bonds
Total available-for-sale
December 31, 2013
December 31, 2012
Amortized
Cost
Fair Gross Unrealized Amortized
Cost
Value Gains (Losses)
Fair Gross Unrealized
Value Gains (Losses)
$
80,381 $ 81,429 $ 1,764 $
42,429
42,114
123,858
122,495
375
2,139
(716) $ 96,922 $ 99,350 $ 2,855 $
(60)
(776)
42,530
139,452
42,881
142,231
458
3,313
(427)
(107)
(534)
124,063
18,573
23,710
24,944
123,033
18,438
23,679
25,454
21,845
10,649
21,312
10,874
616
60
144
609
108
257
15,948
5,426
245,158
15,771
5,437
243,998
14
25
1,833
(1,646)
(195)
(175)
(99)
(641)
(32)
(191)
(14)
(2,993)
52,042
4,447
13,527
38,871
20,462
21,071
53,713
4,550
13,778
39,756
20,589
21,576
—
—
150,420
—
—
153,962
1,711
105
251
886
228
595
—
—
3,776
(40)
(2)
—
(1)
(101)
(90)
—
—
(234)
Total investment securities
$ 367,653 $367,856 $ 3,972 $ (3,769) $ 289,872 $296,193 $ 7,089 $
(768)
The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2013 and
2012 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities
may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2013
December 31, 2012
Held-to-Maturity
Available-for-Sale
Held-to-Maturity
Available-for-Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost Fair Value
Amortized
Cost
$
8,731
$
8,784
$
5,522
$
5,521 $
764
$
763
$
— $
Fair
Value
—
88,255
89,095
42,229
42,338
98,672
99,689
26,417
27,060
24,244
1,265
24,786
26,232
25,478
1,193
171,175
170,661
29,165
10,851
30,898
10,881
23,719
23,820
100,284
103,082
(in thousands)
Within one year
After one but within five
years
After five years through
ten years
After ten years
Total
$ 122,495
$ 123,858
$ 245,158
$ 243,998 $ 139,452
$ 142,231
$ 150,420
$ 153,962
$8.0 million of available-for-sale securities were sold in 2013, resulting in net proceeds from sales of $8.0 million and
net losses of $18 thousand. During 2013, we also sold $6.4 million of held-to-maturity securities due to evidence of
significant deterioration of credit worthiness since purchase. The proceeds from the sales totaled $6.4 million and the
transactions resulted in net gains of $17 thousand. One available-for-sale security was sold in 2012 with proceeds of
$2.2 million and a loss of $34 thousand.
Investment securities carried at $61.8 million and $47.7 million at December 31, 2013 and December 31, 2012,
respectively, were pledged with the State of California: $61.1 million and $47 million to secure public deposits in
compliance with the Local Agency Security Program at December 31, 2013 and 2012, respectively, and $732 thousand
and $719 thousand to provide collateral for trust deposits at December 31, 2013 and 2012, respectively. In addition,
investment securities carried at $1.1 million were pledged to collateralize an internal Wealth Management and Trust
Services (“WMTS”) checking account at both December 31, 2013 and 2012.
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Other-Than-Temporarily Impaired Debt Securities
The table below shows investment securities that were in unrealized loss positions at December 31, 2013 and
December 31, 2012, respectively. They are summarized and classified according to the duration of the loss period as
follows:
December 31, 2013
< 12 continuous months
> 12 continuous months
Total securities
in a loss position
(In thousands)
Held-to-maturity
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Obligations of state & political
subdivisions
Corporate bonds
Total held-to-maturity
$
13,933 $
3,017
16,950
(419) $
(11)
9,033 $
4,963
(297) $
(49)
22,966 $
7,980
(430)
13,996
(346)
30,946
Available-for-sale
MBS pass-through securities
issued by FHLMC and FNMA
CMOs issued by FNMA
CMOs issued by FHLMC
CMOs issued by GNMA
Debentures of government-
sponsored agencies
Privately issued CMOs
Obligations of state & political
subdivisions
Corporate bonds
Total available-for-sale
Total temporarily impaired
securities
(716)
(60)
(776)
(1,646)
(195)
(175)
(99)
(641)
(32)
(191)
(14)
90,914
17,535
17,899
3,966
16,872
4,634
11,516
1,479
164,815
(1,297)
(195)
(175)
(99)
(641)
(31)
(191)
(14)
3,172
—
—
—
—
159
—
—
(349)
—
—
—
—
(1)
—
—
94,086
17,535
17,899
3,966
16,872
4,793
11,516
1,479
(2,643)
3,331
(350)
168,146
(2,993)
$ 181,765 $
(3,073) $
17,327 $
(696) $ 199,092 $
(3,769)
Page-75
December 31, 2012
< 12 continuous months
> 12 continuous months
Total securities
in a loss position
(In thousands)
Held-to-maturity
Obligations of state & political
subdivisions
Corporate bonds
Total held-to-maturity
Available-for-sale
MBS pass-through securities
issued by FHLMC and FNMA
CMOs issued by FNMA
CMOs issued by GNMA
Debentures of government-
sponsored agencies
Privately issued CMOs
Total available-for-sale
Total temporarily impaired
securities
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
$
33,196 $
15,649
48,845
(427) $
(107)
(534)
— $
—
—
$
— $
—
—
33,196
15,649
48,845
3,569
3,185
1,550
9,899
4,214
22,417
(40)
(2)
(1)
(101)
(89)
(233)
—
—
—
—
203
203
—
—
—
—
(1)
(1)
3,569
3,185
1,550
9,899
4,417
22,620
(427)
(107)
(534)
(40)
(2)
(1)
(101)
(90)
(234)
$
71,262 $
(767) $
203 $
(1) $
71,465
$
(768)
As of December 31, 2013, there were fourteen investment positions totaling $17.3 million that had been in a continuous
loss position for more than 12 months. These securities had an unrealized loss of $696 thousand and consisted of
U.S. state and political subdivisions, corporate bonds, MBS and privately issued CMOs. We have evaluated each of
the bonds and believe that the decline in fair value is primarily driven by factors other than credit. It is probable that
we will be able to collect all amounts due according to the contractual terms and no other-than-temporary impairment
exists. MBS are supported by the U.S. Federal government to protect us from credit losses. Additionally, the obligations
of state and political subdivisions and corporate bonds were rated as investment grade by at least one rating agency.
The CMO is collateralized by residential mortgages with low loan-to-value and delinquency ratios, may be prepaid at
par prior to maturity and is rated AA+ by Standard & Poors. Based upon our assessment of expected credit losses
given the performance of the underlying collateral and the credit enhancements, we concluded that the security was
not other-than-temporarily impaired at December 31, 2013.
Investment securities in our portfolio that were in a temporary loss position for less than twelve months as of December
31, 2013 consisted of eighty-one U.S. state and political subdivisions, corporate bonds, MBS, CMOs, Debentures and
privately issued CMOs. We determine that the strengths of GNMA and FNMA through guarantee or support from the
U.S. Federal Government are sufficient to protect us from credit losses. The other temporarily impaired securities are
deemed credit worthy after our internal analysis. Additionally, all are rated as investment grade by at least one major
rating agency. We also monitor the financial information of the issuers of obligations of U.S. states and political
subdivisions. As a result of this impairment analysis, we concluded that these securities were not other-than-temporarily
impaired at December 31, 2013.
In January 2014, we sold a $2.0 million available-for-sale security that was temporarily impaired at December 31, 2013.
The security had recovered essentially all of its amortized cost basis, and the sale resulted in a net loss of approximately
$15 thousand. We do not have the intent, and it is more likely than not that we will not have to sell the remaining
securities temporarily impaired at December 31, 2013 before recovery of the cost basis.
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 increase in the event we increase
our borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at
$100 per share par value. We held $7.8 million and $6.0 million of FHLB stock recorded at cost in other assets at
December 31, 2013 and 2012, respectively. On February 20, 2014, FHLB declared a cash dividend for the fourth
Page-76
quarter of 2013 at an annualized dividend rate of 6.67%. 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.
As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock with a carrying value of
zero, which is equal to our cost basis. These shares are restricted from resale until their conversion into Class A
(voting) shares upon the termination of Visa Inc.'s covered litigation escrow account. As a result of the restriction,
these shares are not considered available-for-sale and are not carried at fair value. The fair value of the Class B
common stock we own was $1.6 million and $1.1 million at December 31, 2013 and 2012, respectively, based on the
Class A as-converted rate of 0.4206, which is subject to further reduction upon the final settlement of the covered
litigation against Visa Inc. and its member banks. See Note 13 herein.
Page-77
Note 4: Loans and Allowance for Loan Losses
Credit Quality of Loans
The majority of our loan activity is with customers located in California, primarily in the counties of Marin, Sonoma,
Alameda, San Francisco and Napa. At December 31, 2013, 68% of our loans are for commercial real estate, 83% of
which are secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).
Approximately 86% and 85% of total loans were secured by real estate, while 2% and 3% were unsecured at both
December 31, 2013 and 2012, respectively.
Outstanding loans by class and payment aging as of December 31, 2013 and 2012 are as follows:
(dollars in thousands)
Commercial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home equity
Other
residential 1
Installment
and other
consumer
Loan Aging Analysis by Class as of December 31, 2013 and 2012
5,218
5,218
26,359
—
2,239
2,239
28,426
$
— $
— $
— $
—
—
—
1,403
1,403
2,807
2,807
240
—
234
474
97,995
$
717
$
—
660
1,377
71,257
Total
992
3
11,678
12,673
$
17
3
169
189
December 31, 2013
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 3
December 31, 2012
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 3
$
18
—
1,187
1,205
$
29
—
4,893
4,922
Non-accrual loans to total loans
0.6%
0.6%
0.4%
16.5%
0.2%
0.9%
1.0%
0.9%
182,086
239,710
622,212
17,030
1,256,649
$ 183,291
$ 241,113
$ 625,019
$
31,577
$
98,469
$
72,634
$
17,219
$ 1,269,322
$
— $
— $
— $
—
1,403
1,403
—
6,843
6,843
171,509
195,003
502,163
294
—
545
839
92,398
$
$
167
—
1,196
1,363
48,069
98
—
533
631
$
588
—
17,652
18,240
18,144
1,055,712
$ 176,431
$ 196,406
$ 509,006
$
30,665
$
93,237
$
49,432
$
18,775
$ 1,073,952
Non-accrual loans to total loans
2.8%
0.7%
1.3%
7.3%
0.6%
2.4%
2.8%
1.6%
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 higher loan-to-value ratios.
2 Amounts include $1.4 million and $1.6 million of Purchased Credit Impaired ("PCI") loans that have stopped accreting interest at December 31, 2013 and 2012,
respectively, and exclude accreting PCI loans of $5.7 million and $3.0 million at December 31, 2013 and 2012, respectively, as their accretable yield interest recognition
is independent from the underlying contractual loan delinquency status. There were no accruing loans past due more than ninety days at December 31, 2013 or 2012.
3 Amounts were net of deferred loan (costs)/fees of $(24) thousand and $769 thousand at December 31, 2013 and 2012, respectively. Amounts were also net of
unaccreted purchase discounts on non-PCI loans of $7.6 million and $2.1 million at December 31, 2013 and 2012, respectively.
Our commercial loans are generally made to established small to mid-sized businesses to provide financing for their
working capital needs, acquisitions, or refinancings. Management examines historical, current, and projected cash
flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are primarily made
based on the identified cash flows of the borrower and secondarily on the underlying collateral. The cash flows of
borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most
commercial and industrial loans are secured by the assets being financed, such as accounts receivable or inventory,
and include a personal guarantee. Some short-term loans may be made on an unsecured basis. We target stable
local businesses with guarantors that have proven to be more resilient in periods of economic stress. Typically, the
guarantors provide an additional source of repayment for most of our credit extensions.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans
discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral.
Repayment of commercial real estate loans is largely dependent on the successful operation of the property securing
the loan, or of the business conducted on the property securing the loan. Underwriting standards for commercial real
estate loans include, but are not limited to, conservative debt coverage and loan-to-value ratios. Furthermore,
Page-78
substantially all of our loans are guaranteed by the owners of the properties. Commercial real estate loans may be
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 have generally experienced a relatively low level of loss and delinquencies in this portfolio.
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 after obtaining independent appraisals. The construction industry can be impacted by major factors,
including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, ability
to obtain construction permits, labor or material shortages, and price hikes. Estimates of construction costs and value
associated with the complete project may be inaccurate. Repayment of construction loans is largely dependent on the
ultimate success of the project.
Consumer loans primarily consist of home equity lines of credit, 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. This activity, coupled with relatively small loan amounts that are spread across many
individual borrowers, mitigates risk. Additionally, trend reports are reviewed by Management on a regular basis.
Underwriting standards for home equity lines of credit include, but are not limited to, a conservative loan-to-value ratio,
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, is cautious compared to traditional residential
mortgages due to the unique ownership structure. In addition, these borrowers tend to have more equity in their
properties, which mitigates risk. Personal loans are nearly evenly split between mobile home loans and floating home
loans along with a small number of installment loans.
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and
ultimately in the portfolio. Definitions of loans that are risk graded “Special Mention” or worse are consistent with those
used by the Federal Deposit Insurance Corporation ("FDIC"). 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(s) 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. 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-dependent.
We regularly review our credits for accuracy of risk grades whenever new information is received. Borrowers are
required to submit financial information at regular intervals:
Page-79
• Generally, commercial borrowers with lines of credit are required to submit financial information with reporting
intervals ranging from monthly to annually depending on credit size, risk and complexity.
• Investor commercial real estate borrowers with loans greater than $750 thousand are required to submit rent
rolls or property income statements at least annually.
• 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, including the PCI loans, at
December 31, 2013 and 2012:
(in thousands)
Commercial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home
equity
Other
residential
Installment
and other
consumer
Purchased
credit-
impaired
Total
Credit Risk Profile by Internally Assigned Grade:
December 31, 2013
Pass
$
162,625
$
216,537
$
609,157
$
25,069
$
93,792
$
69,176
$
16,336
$
1,340
$ 1,194,032
Special Mention
Substandard
13,990
6,343
16,533
3,224
8,570
5,413
725
5,768
2,164
2,444
1,047
2,411
227
656
894
4,881
44,150
31,140
Total loans
$
182,958
$
236,294
$
623,140
$
31,562
$
98,400
$
72,634
$
17,219
$
7,115
$ 1,269,322
December 31, 2012
Pass
$
148,771
$
170,553
$
489,978
$
26,287
$
86,957
$
45,634
$
17,809
$
1,862
$
987,851
Special Mention
Substandard
13,267
13,753
20,346
2,992
8,671
8,963
1,970
2,408
2,931
3,349
1,067
2,731
—
966
933
1,754
49,185
36,916
Total loans
$
175,791
$
193,891
$
507,612
$
30,665
$
93,237
$
49,432
$
18,775
$
4,549
$ 1,073,952
Troubled Debt Restructuring
Our loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), where
economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically
result from our loss mitigation activities and could include reductions in the interest rate, payment extensions,
forgiveness of principal, forbearance or other actions. TDRs on nonaccrual status at the time of restructure may be
returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period,
generally six months, and there is reasonable assurance of repayment and performance.
When a loan is modified, Management evaluates any possible impairment based on the present value of expected
future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole
(remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases Management
uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If Management
determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-
offs and unamortized premium or discount), impairment is recognized through a specific allowance or a charge-off of
the loan.
Page-80
The table below summarizes outstanding TDR loans by loan class as of December 31, 2013, 2012 and 2011. The
summary includes those TDRs that are on nonaccrual status and those that continue to accrue interest.
(in thousands)
Recorded investment in Troubled Debt
Restructurings 1
As of
December 31, 2013
December 31, 2012
December 31, 2011
Commercial
$
5,117
$
9,470
$
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Total
4,333
534
6,335
506
2,063
1,693
1,403
—
1,929
908
2,831
1,743
$
20,581
$
18,284
$
4,969
1,403
—
800
467
1,464
1,552
10,655
1 Includes $12.9 million, $10.8 million and $6.3 million of TDR loans that were accruing interest as of December 31, 2013, 2012 and 2011
respectively.
The table below presents the following information for TDRs modified during the periods presented: number of contracts
modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans after the
loans were restructured. The table below excludes fully paid-off or fully charged-off TDR loans.
(dollars in thousands)
Troubled Debt Restructurings during the year ended December
31, 2013:
Commercial
Commercial real estate, owner occupied
Commercial real estate, investor
Construction
Installment and other consumer
Total
Troubled Debt Restructurings during the year ended December
31, 2012:
Commercial
Construction
Home Equity
Other residential
Installment and other consumer
Total
Troubled Debt Restructurings during the year ended December
31, 2011:
Commercial
Commercial real estate, owner occupied
Construction
Home Equity
Other residential
Installment and other consumer
Total
Number of
Contracts
Modified
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded Investment
at period end
8
1
1
3
2
$
1,176
$
1,377
$
2,961
539
7,135
11
2,956
538
7,156
9
15
$
11,822
$
12,036
$
14
$
9,980
$
9,903
$
2
2
2
2
2,793
472
1,422
231
2,793
473
1,401
231
22
$
14,898
$
14,801
$
27
$
5,854
$
5,940
$
1,366
817
478
1,467
1,607
1,403
817
469
1,467
1,605
$
11,589
$
11,701
$
2
2
3
3
13
50
Page-81
1,274
2,930
534
5,368
7
10,113
5,965
1,760
469
1,392
228
9,814
4,969
1,403
800
467
1,464
1,552
10,655
Modifications during the year ended December 31, 2013 primarily involved maturity or payment extensions and interest
rate concessions or some combination thereof, while modifications in 2012 primarily involved payment extensions,
forbearances, and interest rate concessions. Modifications in 2011 primarily involved interest rate concessions, maturity
extensions and payment deferrals. There were no loans modified as troubled debt restructuring that subsequently
defaulted during the year ended December 31, 2013, where the default occurred within the first twelve months after
modification into a TDR. There were three commercial loans, two commercial real estate loans and one construction
loan modified as troubled debt restructurings within the previous twelve months with recorded investments of $4.5
million that subsequently defaulted and $730 thousand were charged-off, net of recoveries, in the year ended
December 31, 2012. There were three TDRs in 2011 with loan balances of $1.0 million that subsequently defaulted
within twelve months of restructuring and were charged-off during 2011. We are reporting these defaulted TDRs based
on a payment default definition of more than ninety days past due.
Allowance for Loan Losses
Beginning with the quarter-ended September 30, 2013, Management refined the methodology for estimating general
allowances in order to provide a more comprehensive evaluation of the potential risk of loss in our loan portfolio. This
analysis encompasses our entire loan portfolio and excludes acquired loans where the discount has not been fully
accreted. For allowance established on acquired loans, refer to Note 1. Under the prior model, loans were pooled into
the following segments:
• Commercial real estate loans, owner occupied
• Commercial real estate loans, investor
• Construction loans
• Subdivision land loans
• Residential real estate loans
• Residential loans, fractional tenants-in-common
• Commercial loans
• Commercial asset-based lines
• Commercial quick qualifier loans
• Personal loans
• Personal floating home loans
• Personal mobile home loans
• Home equity loans
• Other loans
Under the new model, the loans are evaluated on a pool basis by loan segment which is further delineated by Federal
regulatory reporting codes ("call codes"). Each segment is assigned an expected loss factor which is primarily based
on a twelve quarter look-back at our historical losses for that particular segment, as well as a number of other factors.
We believe this change in methodology will provide a more comprehensive evaluation of the potential risk in our portfolio
because the additional delineation by call code establishes a stronger focus on areas of weakness and strength within
the portfolio. Loans are pooled into the following segments under the new model:
•
Loans secured by real estate:
- 1-4 family residential construction loans
- Other construction loans and all land development and other land loans
- Secured by farmland (including farm residential and other improvements)
- Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of
credit
- Closed-end loans secured by 1-4 family residential properties, secured by first liens
- Closed-end loans secured by 1-4 family residential properties, secured by junior liens
- Secured by multifamily (5 or more) residential properties
- Loans secured by owner-occupied non-farm nonresidential properties
- Loans secured by other non-farm nonresidential properties
Loans to finance agricultural production and other loans to farmers
Loans to individuals for household, family and other personal expenditures (i.e., consumer loans)
•
• Commercial and industrial loans
•
• Other loans
Page-82
The model determines loan loss reserves based on objective and subjective factors. Objective factors include the
rolling historical loss rate using a twelve quarter look-back, changes in the volume and nature of the loan portfolio,
changes in credit quality metrics (past due loans, non-accrual loans, net charge-offs), and the existence of credit
concentrations. Subjective factors include changes in the overall economic environment, legal and regulatory
conditions, lending management and other relevant staff, uncertainties related to acquisitions, as well as the quality
of our loan review process. The total amount allocated is determined by applying loss multipliers to outstanding loans
by call code.
The following table represents the effect on the 2013 provision for loan losses due to the change in methodology by
loan class. Commercial real estate loans have increased provisions of $565 thousand in the owner-occupied category
and $1.8 million in the investor category under the new methodology, which allocates additional reserves based on
concentration levels. When a loan class exceeds 100% of Tier 1 capital, additional reserves are allocated. Such factor
was not considered under the old methodology.
In addition, under the previous methodology, certain commercial loans collateralized by real estate were grouped under
commercial and industrial loans and thus received a higher loss factor than the current methodology.
Lastly, we added a subjective factor for the impact of the acquisition in 2013, which added approximately $800 thousand
in reserves by loan class, which would have been unallocated under the previous methodology.
(in thousands)
The year ended December 31, 2013
Calculated
Provision Based
on New
Methodology
Calculated
Provision Based
on Prior
Methodology
Difference In
ALLL
Commercial and industrial
$
(1,393) $
(449) $
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Unallocated
Total provision for loan losses
$
615
1,940
83
(223)
(234)
(535)
287
540
50
174
167
(39)
(138)
(319)
1,094
$
540
$
(944)
565
1,766
(84)
(184)
(96)
(216)
(807)
—
Page-83
Impaired Loan Balances and Their Related Allowance by Major Classes of Loans
The table below summarizes information on impaired loans and their related allowance. Total impaired loans include
non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in
cash flows expected to be collected.
(dollars in thousands)
December 31, 2013
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Commercial
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
impaired loans
Specific allowance
Average recorded investment in
impaired loans during 2013
Interest income recognized on impaired
loans during 2013
$
$
$
$
$
December 31, 2012
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 recorded investment in
impaired loans
Specific allowance
Average recorded investment in
impaired loans during 2012
Interest income recognized on impaired
loans during 2012
Average recorded investment in
impaired loans during 2011
Interest income recognized on impaired
loans during 2011
$
$
$
$
$
$
$
977
$
4,725
5,702
977
4,930
5,907
1,170
7,168
476
6,825
2,645
9,470
7,633
2,930
10,563
1,131
11,772
803
4,695
102
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,403
4,085
5,488
3,060
5,088
8,148
90
3,519
253
$
$
$
$
$
$
$
1,403
$
471
1,874
3,060
966
4,026
26
1,538
111
1,873
$
$
$
$
$
$
$
— $
3,341
$
—
3,341
5,333
—
$
$
2,806
3,927
6,733
5,547
4,114
5,333
$
9,661
— $
341
$
$
$
$
$
$
$
$
349
157
506
835
157
992
1
909
29
931
261
7,200
249
2,328
1,840
4,168
$ 1,192
2,514
4,519
$ 1,417
324
7,033
$ 1,741
118
$
154
12,909
$ 1,314
570
3,505
$
$
32
813
— $
14
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,254
$
112
$ 10,242
809
1,750
15,453
2,063
1,254
809
2,063
23
2,632
89
$
$
$
$
$
$
1,862
$ 25,695
154
$ 17,160
1,750
16,848
1,904
$ 34,008
364
$
1,989
1,872
$ 29,147
71
$
1,181
2,598
$
978
$ 18,788
715
1,070
11,515
3,313
2,598
715
3,313
120
2,509
175
1,612
72
$
$
$
$
$
$
$
$
2,048
$ 30,303
1,020
1,070
$ 23,959
15,411
2,090
$ 39,370
431
$
2,354
2,151
$ 37,328
96
$
2,299
1,844
$ 14,937
26
$
252
5,847
14
3,725
4,513
8,238
5,717
4,887
10,604
374
5,135
512
595
38
$
$
$
$
$
$
$
$
$
$
$
The gross interest income that would have been recorded had non-accrual loans been current totaled $1.0 million,
$937 thousand and $821 thousand in the years ended December 31, 2013, 2012 and 2011 respectively. $229 thousand,
$182 thousand and $6 thousand interest income was recognized during the time the loans were considered impaired
using the cash-basis method of accounting in 2013, 2012 and 2011, respectively. PCI loans are excluded from the
foregone interest data above as their accretable yield interest recognition is independent from the underlying contractual
loan delinquency status. See “Purchased Credit-Impaired Loans” below for further discussion.
Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard
or worse, to be evaluated individually for impairment testing. 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, 2013 totaled approximately $5.8 million. At December 31, 2013, there were $837
thousand of outstanding commitments to extend credit on impaired loans, including loans to borrowers whose terms
have been modified in troubled debt restructurings.
Page-84
$
$
$
$
Provision (reversal)
Charge-offs
Recoveries
Ending balance
Ending ALLL related to
loans collectively evaluated
for impairment
Ending ALLL related to
loans individually
evaluated for impairment
Ending ALLL related to
purchased credit-impaired
loans
Loans outstanding:
Collectively evaluated for
impairment
Individually evaluated for
impairment1
Purchased credit-
impaired
The following table discloses loans by major portfolio category and activity in the ALLL, as well as the related ALLL
disaggregated by impairment evaluation method:
Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31, 2013
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
(dollars in thousands)
Commercial
For the year ended December 31, 2013
Allowance for loan losses:
Beginning balance
$
4,100
$
1,313
$
$ 1,264
$
551
$
1,231
$
615
—
84
$
4,372
1,940
(156)
40
611
83
(62)
1
(223)
(176)
10
(234)
—
—
$
2,012
$
6,196
$
633
$
875
$
317
$
(1,393)
(672)
1,021
3,056
(535)
(88)
21
629
$
$
$
219
287
—
—
$
13,661
540
(1,154)
1,177
506
$
14,224
506
$
12,235
— $
1,747
1,886
987
183
$
$
$
1,922
31
59
$
$
$
6,196
$
292
— $
341
$
$
874
1
$
$
294
23
$
$
265
364
— $
— $
— $
— $
— $
— $
242
$ 177,550
$ 233,330
$ 619,833
$
24,829
$ 97,894
$ 70,571
$ 15,357
$
— $ 1,239,364
5,408
333
2,930
4,853
3,341
1,845
6,733
15
506
69
2,063
1,862
—
—
—
—
22,843
7,115
Total
$ 183,291
$ 241,113
$ 625,019
$
31,577
$ 98,469
$ 72,634
$ 17,219
$
— $ 1,269,322
Ratio of allowance for loan
losses to total loans
Allowance for loan losses
to non-accrual loans
1.67%
0.83%
0.99%
2.00%
0.89%
0.44%
3.65%
257%
143%
221%
12%
374%
48%
372%
NM
NM
1.12%
122%
1 Total excludes $2.9 million of PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.These loans are
included in the "purchased credit-impaired" amount in the next line below.
NM Not Meaningful
Page-85
Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31, 2012
(dollars in thousands)
Commercial
As of December 31, 2012:
Allowance for loan losses:
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
Beginning balance
$
4,334
$
1,305
$
Provision (reversal)
Charge-offs
Recoveries
117
(892)
541
184
(181)
5
3,710
3,076
(2,414)
—
Ending balance
$
4,100
$
1,313
$
4,372
$
$
1,505
$ 1,444
$
940
$
1,182
$
219
$
14,639
(643)
(373)
122
611
190
(382)
12
(193)
(196)
—
169
(122)
2
—
—
—
2,900
(4,560)
682
$ 1,264
$
551
$
1,231
$
219
$
13,661
Ending ALLL related to
loans collectively evaluated
for impairment
Ending ALLL related to
loans individually
evaluated for impairment
Ending ALLL related to
purchased credit-impaired
loans
Loans outstanding:
Collectively evaluated for
impairment
Individually evaluated for
impairment1
Purchased credit-
impaired
$
$
$
2,969
1,090
41
$
$
$
1,287
$
3,998
— $
178
26
$
196
$
$
$
493
$ 1,110
118
$
154
$
$
431
120
$
$
800
431
$
$
219
$
11,307
— $
2,091
— $
— $
— $
— $
— $
263
$ 166,860
$ 193,891
$ 500,768
$
26,497
$ 92,045
$ 46,119
$ 16,727
$
— $ 1,042,907
8,931
—
640
2,515
6,844
1,394
4,168
1,192
3,313
2,048
—
—
—
—
—
—
26,496
4,549
Total
$ 176,431
$ 196,406
$ 509,006
$
30,665
$ 93,237
$ 49,432
$ 18,775
$
— $ 1,073,952
Ratio of allowance for loan
losses to total loans
Allowance for loan losses
to non-accrual loans
2.32%
0.67%
0.86%
1.99%
1.36%
1.11%
6.56%
84%
94%
64%
27%
232%
46%
231%
NM
NM
1.27%
77%
1 Total excludes $3.8 million PCI loans that have experienced credit deterioration post-acquisition, which are included in the "purchased credit-impaired" amount in the
next line below.
NM Not Meaningful
Page-86
Allowance for Loan Losses and Recorded Investment in Loans as of and for the year ended December 31, 2011
(dollars in thousands)
Commercial
As of December 31, 2011:
Allowance for loan losses:
Beginning balance
$
Provision (reversal)
Charge-offs
Recoveries
3,114
4,469
(3,306)
57
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor
Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
$
1,037
$
4,134
$
1,694
$
643
$
377
(113)
4
(424)
—
—
275
(473)
9
1,342
(554)
13
$
738
202
—
—
835
787
(456)
16
$
197
$
12,392
22
—
—
7,050
(4,902)
99
Ending balance
$
4,334
$
1,305
$
3,710
$
1,505
$ 1,444
$
940
$
1,182
$
219
$
14,639
Ending ALLL related to
loans collectively
evaluated for impairment
Ending ALLL related to
loans individually
evaluated for impairment
Ending ALLL related to
purchased credit-impaired
loans
Loans outstanding:
Collectively evaluated for
impairment
Individually evaluated for
impairment 1
Purchased credit-
impaired
$
$
$
3,049
957
328
$
$
$
1,136
$
3,547
— $
169
$
91
72
$
$
$
1,311
$ 1,182
194
$
262
$
$
532
408
$
$
717
465
$
$
219
$
11,693
— $
2,377
— $
— $
— $
— $
— $
569
$ 169,564
$ 171,492
$ 444,060
$
48,653
$ 96,998
$ 58,095
$ 20,661
$
— $ 1,009,523
5,110
1,116
—
741
3,304
1,045
3,407
2,071
3,213
1,624
—
—
—
—
—
—
15,678
5,953
Total
$ 175,790
$ 174,705
$ 446,425
$
51,957
$ 98,043
$ 61,502
$ 22,732
$
— $ 1,031,154
Ratio of allowance for loan
losses to total loans
Allowance for loan losses
to non-accrual loans
2.47%
0.75%
0.83%
2.90%
1.47%
1.53%
5.20%
147%
64%
501%
50%
189%
48%
228%
NM
NM
1.42%
122%
1 Total excludes $4.5 million PCI loans that have experienced credit deterioration post-acquisition, which are included in the "purchased credit-
impaired" amount in the next line below.
NM Not Meaningful
Purchased Credit-Impaired Loans
We evaluated loans purchased in acquisitions in accordance with accounting guidance in ASC 310-30 related to loans
acquired with deteriorated credit quality. Acquired loans are considered credit-impaired if there is evidence of
deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect
all contractually required payments receivable. Management has determined certain loans purchased in the Acquisition
to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value
ratio, etc. Revolving credit agreements (e.g. home equity lines of credit and revolving commercial loans) are not
considered PCI loans as cash flows cannot be reasonably estimated.
For acquired loans not considered credit-impaired, the difference between the contractual amounts due (principal
amount) and the fair value is accounted for subsequently through accretion. We elect to recognize discount accretion
based on the acquired loan’s contractual cash flows using an effective interest rate method. The accretion is recognized
through the net interest margin.
Page-87
The following table presents the fair value of loans acquired from Bank of Alameda for purchased credit-impaired loans
and other purchased loans as of the acquisition date:
(dollars in thousands)
November 29, 2013
Purchased
credit-
impaired
loans
Other
purchased
loans
Total
Contractually required payments including interest
$
5,706
$
211,769
$
217,475
Less: nonaccretable difference
Cash flows expected to be collected (undiscounted)
Accretable yield
Fair value of purchased loans
(1,183)
4,523
(707)
—
211,769
(41,826) 1
(1,183)
216,292
(42,533)
$
3,816
$
169,943
$
173,759
1 $6.6 million of the $41.8 million represents the difference between the contractual principal amounts due and the fair value. This discount is to be accreted to
interest income over the remaining lives of the loans. The remaining $35.2 million is the contractual interest to be earned over the life of the loans.
The following table reflects the outstanding balance and related carrying value of PCI loans as of the acquisition
date:
PCI Loans
(dollars in thousands)
Commercial
Commercial real estate
Construction
Home equity
Total purchased credit-impaired loans
November 29, 2013
Unpaid principal
balance
Fair value
$
$
847
$
3,757
150
239
369
3,362
16
69
4,993
$
3,816
For the PCI loans, the accretable yield initially represents the excess of the cash flows expected to be collected at
acquisition over the fair value of the loans at the acquisition date, and is accreted into interest income over the estimated
remaining life of the purchased credit-impaired loans using the effective yield method, provided that the timing and
amount of future cash flows is reasonably estimable. The accretable yield is affected by:
(1) Changes in interest rate indices for variable rate loans – Expected future cash flows are based on the variable rates
in effect at the time of the regular evaluations of cash flows expected to be collected;
(2) Changes in prepayment assumptions – Prepayments affect the estimated life of the loans which may change the
amount of interest income, and possibly principal, expected to be collected; and
(3) Changes in the expected principal and interest payments over the estimated life – Updates to expected cash flows
are driven by the credit outlook and actions taken with borrowers. Changes in expected future cash flows from loan
modifications are included in the regular evaluations of cash flows expected to be collected.
When the timing and/or amounts of expected cash flows on such loans are not reasonably estimable, no interest is
accreted and the loan is reported as a non-accrual loan; otherwise, if the timing and amounts of expected cash flows
for purchased credit-impaired loans can be reasonably estimated, then interest is accreted and the loans are reported
as accruing loans. The initial estimated cash flows expected to be collected are updated each quarter based on current
assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions.
Probable decreases in expected cash flows after acquisition result in the recognition of impairment as a specific
allowance for loan losses or a charge-off to the allowance. The increase of specific allowance for PCI loan losses
amounted to $203 thousand, $36 thousand and $569 thousand during 2013, 2012 and 2011, respectively. Probable
and significant increases in expected cash flows would first reverse any related allowance for loan losses and any
remaining increases would be recognized prospectively as interest income over the estimated remaining lives of the
loans. During 2013, 2012 and 2011, the amount of reduction in the allowance for loan losses established for PCI loans
due to the increase in the present value of cash flows expected to be collected was $237 thousand, $76 thousand and
Page-88
$0, respectively. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest
income.
The non-accretable difference represents the difference between the undiscounted contractual cash flows and the
undiscounted expected cash flows, and also reflects the estimated credit losses in the acquired loan portfolio at the
acquisition date and can fluctuate due to changes in expected cash flows during the life of the PCI loans.
The following table reflects the outstanding balance and related carrying value of PCI loans related to the 2013 NorCal
acquisition and the 2011 Charter Oak acquisition as of December 31, 2013 and 2012:
PCI Loans
(dollars in thousands)
Commercial
Commercial real estate
Construction
Home equity
Total purchased credit-impaired loans
December 31, 2013
December 31, 2012
Unpaid principal
balance
Carrying value
Unpaid principal
balance
Carrying value
$
$
1,094
$
333
$
9,152
149
239
6,698
15
69
2,163
$
6,370
—
—
640
3,909
—
—
10,634
$
7,115
$
8,533
$
4,549
The activities in the accretable yield, or income expected to be earned, for PCI loans were as follows:
Accretable Yield
(dollars in thousands)
Balance at beginning of period
Additions
Removals 1
Accretion
Reclassifications (to)/from nonaccretable difference 2
Balance at end of period
Years ended
December 31, 2013
December 31, 2012
December 31, 2011
$
$
3,960
$
5,405
$
707
(793)
(725)
500
—
(1,221)
(1,641)
1,417
3,649
$
3,960
$
—
1,902
(1,019)
(1,418)
5,940
5,405
1 Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to
repossessed assets, etc.
2 Primarily relates to improvements in expected credit performance and changes in expected timing of cash flows.
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans
with an unpaid principal balance of $716.2 million and $567.8 million at December 31, 2013 and 2012, respectively.
Our FHLB line of credit totaled $416.3 million and $321.3 million at December 31, 2013 and 2012, respectively. In
addition, we pledge a certain residential loan portfolio, which totaled $24.4 million and $30.1 million at December 31,
2013 and 2012, respectively, to secure our borrowing capacity with the Federal Reserve Bank (“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-89
An analysis of net loans to related parties for each of the three years ended December 31, 2013, 2012 and 2011 is as
follows:
(in thousands)
Balance at beginning of year
Additions
Advances
Repayments
Reclassified as unrelated-party loan
Balance at end of year
2013
3,425 $
550
569
—
(795)
3,749 $
2012
6,866 $
826
3
(2,730)
(1,540)
3,425 $
2011
6,997
1,690
43
(1,864)
—
6,866
$
$
The undisbursed commitment to related parties was $657 thousand as of December 31, 2013.
Note 5: Bank Premises and Equipment
A summary of Bank premises and equipment at December 31 follows:
(in thousands)
Leasehold improvements
Furniture and equipment
Subtotal
Accumulated depreciation and amortization
Bank premises and equipment, net
$
$
2013
12,684 $
7,888
20,572
(11,462)
9,110 $
2012
12,116
7,402
19,518
(10,174)
9,344
The amount of depreciation and amortization was $1.4 million for the years ended December 31, 2013 and 2012, and
$1.3 million for the year ended 2011.
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 corporate office. During 2013 and 2012, we paid
$70 thousand and $29 thousand, respectively, for these improvements.
Note 6: Bank Owned Life Insurance
We have purchased life insurance policies on the lives of certain officers designated by the Board of Directors to finance
employee benefit programs as of December 31, 2013. Death benefits provided under the specific terms of these
programs are estimated to be $63.3 million at December 31, 2013 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 $27.8 million and $22.7 million at
December 31, 2013 and December 31, 2012, 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 $954 thousand, $762 thousand and $752 thousand was recognized on the life insurance policies
in 2013, 2012 and 2011, respectively, and is reported in non-interest income. The increase in BOLI income in 2013
relates to a $228 thousand benefit realized on the death of an insured employee in 2013. We regularly monitor the
credit ratings of our insurance carriers to ensure that they are in compliance with our policy.
Page-90
Note 7: Deposits
Total time deposits were $161.9 million and $156.8 million at December 31, 2013 and 2012, respectively. Of these
amounts, $111.7 million and $114.7 million represented time deposits of $100,000 or more at December 31, 2013 and
2012, respectively. Interest on time deposits was $0.9 million, $1.2 million and $1.6 million in 2013, 2012 and 2011,
respectively. Scheduled maturities of these deposits at December 31, 2013 are presented as follows:
(in thousands)
2014
2015
2016
2017
2018
Thereafter
Total
Scheduled maturities of time deposits
$100,350
$16,474
$22,457
$13,304
$9,283
$—
$161,868
We 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. The Bank acts as the point of contact for the client
and provides a monthly summary of where the deposits are placed.
As of December 31, 2013, $45.7 million in securities held-to-maturity and $15.6 million securities available-for-sale
were pledged as collateral for our local agency deposits.
The aggregate amount of deposit overdrafts that have been reclassified as loan balances was $207 thousand and
$276 thousand at December 31, 2013 and 2012, respectively. Collectability of these overdrafts is subject to the same
credit review process as 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 $8.1 million at December 31, 2013 and $7.3 million at December 31, 2012.
Note 8: Borrowings
Federal Funds Purchased – We had unsecured lines of credit totaling $87.0 million with correspondent banks for
overnight borrowings at both December 31, 2013 and 2012, respectively. In general, interest rates on these lines
approximate the Federal funds target rate. At December 31, 2013 and December 31, 2012, we had no overnight
borrowings outstanding under these credit facilities.
Federal Home Loan Bank Borrowings – As of December 31, 2013 and December 31, 2012, we had lines of credit with
the FHLB totaling $416.3 million and $321.3 million, respectively, based on eligible collateral of certain loans. At
December 31, 2013 and December 31, 2012, we had no FHLB overnight borrowings.
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%, which remained outstanding at December 31, 2013. Interest-only payments are required
every three months until the entire principal is due on February 5, 2018. The FHLB has the unconditional right to
accelerate the due date on May 5, 2014 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.
At December 31, 2013, $401.3 million was remaining as 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 have a line of credit with the FRB secured by a certain residential loan portfolio. At
December 31, 2013 and December 31, 2012, we had borrowing capacity under this line totaling $24.4 million and
$30.1 million, respectively, and had no outstanding borrowings with the FRB.
Subordinated Debt – On September 17, 2004, we issued a 15-year, $5.0 million subordinated debenture. Interest-
only payments were to be paid quarterly until maturity on September 17, 2019. The interest rate on the debenture
changed quarterly at the 3-month LIBOR plus 2.48%. The debenture was subordinated to the claims of depositors and
our other creditors. We had the right to repay the debenture, in whole or in part, on any interest payment date. We
Page-91
paid off the subordinated debenture entirely on September 17, 2012 without prepayment penalty and accelerated the
unamortized debt issuance cost of $42 thousand in the third quarter of 2012.
As part of the Acquisition, we assumed two subordinated debentures due to the NorCal Community Bancorp grantor
trusts at fair values totaling $4.95 million at acquisition date and contractual values totaling $8.2 million. The difference
between the contractual balance and the fair value at acquisition date is accreted into interest expense over the lives
of the debentures. The Trusts have the option to defer payment of the distributions for a period of up to five years, as
long as there is no default on the subordinated debentures. In the event of interest deferral, dividends to common
stock holders are limited. The trust preferred securities were sold and issued in private transactions pursuant to an
exemption from registration under the Securities Act of 1933, as amended. Bancorp has guaranteed, on a subordinated
basis, distributions and other payments due on trust preferred securities totaling $8.0 million issued by the grantor
trusts which have identical maturity, repricing and payment terms as the subordinated debentures.
The following is a summary of the contractual terms of the subordinated debentures due to NorCal Community Bancorp
grantor trusts as of December 31, 2013:
Subordinated debentures due to NorCal Community Bancorp Trust I on October 7,
2033 with interest payable quarterly, based on 3-month LIBOR plus 3.05%, repricing
quarterly (3.29% as of December 31, 2013), redeemable, in whole or in part, on any
interest payment date.
Subordinated debentures due to NorCal Community Bancorp Trust II on March 15,
2036 with interest payable quarterly, based on 3-month LIBOR plus 1.40%, repricing
quarterly (1.64% as of December 31, 2013), redeemable, in whole or in part, on any
interest payment date.
Total
$
$
$
4,124
4,124
8,248
Borrowings at December 31, 2013 and 2012 are summarized as follows:
(in thousands)
FHLB borrowings
Subordinated debentures
Carrying
Value
15,000 $
4,969 $
$
$
2013
Average
Balance
19,054
407
Average
Rate
1.67% $
1
, $
8.48%
Carrying
Value
15,000 $
— $
2012
Average
Balance
16,205
3,552
Average
Rate
2.09%
4.21% 2
1Amount includes the impact of $19 thousand of accretion on the fair value discount.
2 Amount includes the impact of the $42 thousand accelerated unamortized debt issuance cost in 2012 discussed above.
Page-92
Note 9: Stockholders' Equity and Stock Plans
Preferred Stock
Under the United States Department of the Treasury Capital Purchase Program (the “TCPP”), which was intended to
stabilize and inject liquidity into the financial industry, 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. The proceeds of $28.0 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 warrant was immediately exercisable and expires 10 years after
the issuance date.
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 was subsequently auctioned to two institutional investors in
November 2011 and remains outstanding. It is adjusted for cash dividend increases to represent a right to purchase
156,134 shares of common stock at $26.90 per share as of December 31, 2013 in accordance with Section 13(c) of
the Form of Warrant to Purchase Common Stock.
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 2013 and 2012, our directors were awarded a total of 5,619 and 5,270 common
shares, respectively from the 2010 Director Stock Plan in addition to their cash compensation. As of December 31,
2013, 130,071 shares were available for future grants under this plan.
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, 2013, there were 278,572 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 limited to 250,000 restricted or unrestricted shares, the number of shares
of Bancorp stock to be subject to each option and restricted stock award, and any other terms and conditions. In 2013
and 2012, there were no common shares awarded to directors from the 2007 Equity Plan.
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 194,446 shares
available for future grants under the plan as of December 31, 2013.
We also had the 1999 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 1999 Stock Option Plan were
subsequently adopted by Bancorp as part of the holding company formation. Stock options under that plan now relate
to shares of common stock of Bancorp. Upon approval of the 2007 Equity Plan, no new awards were granted under
the 1999 Stock Option Plan.
Options are issued at an exercise price equal to the fair 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 awards vested 20% on each
Page-93
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, 2013, 2012 and 2011 is presented below.
The intrinsic value is calculated as the number of in-the-money options times the difference between the market price
of our stock as of each year end presented and the exercise prices of the in-the-money options.
Weighted
Aggregate
Average Intrinsic Value
Exercise as of year-end
Price (in thousands)
Weighted
Average
Grant-Date
Fair Value
Number of
Shares
Average
Remaining
Contractual
Term
(in years)
Options outstanding at December 31, 2010
317,804 $
29.27 $
1,828 $
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2011
17,585
(670)
(34,913)
299,806
37.76
29.28
21.22
30.71
3
6
534
2,068
Exercisable (vested) at December 31, 2011
226,989
30.64
1,579
Options outstanding at December 31, 2011
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2012
299,806
23,930
(640)
(37,563)
285,533
30.71
38.18
31.51
27.70
31.73
2,068
—
4
400
1,661
Exercisable (vested) at December 31, 2012
217,232
31.15
1,372
Options outstanding at December 31, 2012
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2013
285,533
30,000
(23,840)
(71,237)
220,456
31.73
39.99
35.12
31.13
32.74
1,661
102
151
664
2,349
8.39
11.19
7.07
7.51
8.66
8.81
8.66
9.82
8.00
8.19
8.82
8.77
8.82
10.59
9.31
8.30
9.21
Exercisable (vested) at December 31, 2013
163,301
31.09
2,008
8.92
5.18
—
—
—
4.70
3.82
4.70
—
—
—
4.43
3.39
4.43
—
—
—
4.05
2.56
The following table summarizes non-vested share-based awards at December 31, 2013, and changes during the year
ended December 31, 2013.
Non-vested awards at December 31, 2012
Granted
Vested
Forfeited
Non-vested awards at December 31, 2013
Options
Restricted Stock Awards
Weighted
Average
Grant-Date
Fair Value
8.98
10.59
8.17
9.31
Number of
Shares
73,876 $
30,000
(22,881)
(23,840)
Number of
Shares
21,610 $
11,850
(6,941)
(3,998)
57,155
10.05
22,521
Weighted
Average
Grant-Date
Fair Value
34.05
39.96
31.42
36.19
37.59
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As of December 31, 2013, there was $1.1 million of total unrecognized compensation expense related to non-vested
stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of
approximately four years. The total grant-date fair value of option shares vested during the years ended December 31,
2013, 2012 and 2011 was $187 thousand, $212 thousand and $270 thousand, respectively. The total grant-date fair
value of restricted stock awards vested during 2013, 2012 and 2011 was $218 thousand, $152 thousand and $115
thousand, respectively.
A summary of the options outstanding and exercisable by price range as of December 31, 2013 is presented in the
following table:
Stock Options Outstanding as of
December 31, 2013
Stock Options Exercisable as of
December 31, 2013
Range of Exercise Prices
Outstanding
(in years)
Exercise Price
Exercisable Exercise Price
Remaining
Stock Options Contractual Life
Weighted
Average
Stock Options
Weighted
Average
$20.01 - $25.00
$25.01 - $30.00
$30.01 - $35.00
$35.01 - $40.00
$40.01 - $45.00
15,328
47,711
81,724
59,193
16,500
220,456
5.3 $
1.6
2.4
6.5
9.5
4.1
22.25
27.11
33.04
37.39
40.52
32.74
10,798 $
47,711
77,474
27,318
—
163,301
22.25
27.11
33.04
36.02
—
31.09
The fair value of stock options on the grant date is recorded as a stock-based compensation expense in the consolidated
statements of comprehensive 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 unvested 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. The total related income tax
benefit recognized in the consolidated statements of comprehensive income during 2013, 2012 and 2011 was $94
thousand, $35 thousand and $37 thousand, respectively.
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 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 expected 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.
Risk-free interest rate
Expected dividend yield on common stock
Expected life in years
Expected price volatility
Years ended December 31,
2012
1.60%
1.78%
7.0
28.70%
2013
1.60%
1.80%
6.8
30.01%
2011
2.77%
1.69%
7.5
28.92%
The fair value of the option is expensed on a straight-line basis over the vesting period. Forfeitures are estimated
based on historical forfeiture experience and expense is recognized only for those shares expected to vest. The
estimated forfeiture rate over the entire vesting period was 7.5% in 2013, 2012 and 2011 for stock options and was
10.0% in both 2013 and 2012 and 7.5% in 2011 for restricted stock awards.
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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 cash dividends paid to common shareholders, recorded as a reduction of retained
earnings.
Years ended December 31,
(in thousands except per share data)
Cash dividends to common stockholders
$
Cash dividends per common share
2013
3,970 $
0.73
2012
3,751 $
0.70
2011
3,457
0.65
The holders of the unvested restricted common stock awards 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 also
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 effective January 1, 2012, payment of dividends by Bancorp is restricted to
the amount of retained earnings immediately prior to the distribution or the amount of assets that exceeds the total
liabilities immediately after the distribution. As of December 31, 2013, Bancorp's retained earnings and the amount
of assets that exceeds the total liabilities were $101.5 million and $180.9 million, respectively.
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. Under this
restriction, approximately $18.8 million of the Bank's retained earnings balance was available for payment of dividends
to Bancorp as of December 31, 2013. Bancorp holds $8.7 million in cash at December 31, 2013. This cash, combined
with the $18.8 million dividends available to be distributed (discussed above), is expected to be adequate to cover
Bancorp's estimated operational needs and cash dividends to shareholders for 2014.
Shareholder Rights Plan
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. As of December 31, 2013, Bancorp
was also authorized to issue five million shares of preferred stock with no par value under the Rights Agreement. In
the event of a proposed merger, tender offer or other attempt to gain control of Bancorp that the Board of Directors
does not approve, it might be possible for the Board of Directors to authorize the issuance of shares of common or
preferred stock that would impede the completion of such a transaction. An effect of the possible issuance of common
or preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans
or understandings for the issuance of any common or preferred stock.
Refer to Exhibit 4.1 Registration Statement on Form 8-A12B filed with the Securities and Exchange Commission on
July 2, 2007.
Page-96
Note 10: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are measured at fair value in three levels within the fair value hierarchy, 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 involve 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.
Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances
that caused the transfer, which generally coincides with the our monthly and/or quarterly valuation process.
Page-97
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
Carrying
Value
At December 31, 2013:
Securities available-for-sale:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Mortgage-backed securities and collateralized
mortgage obligations issued by U.S.
$ 190,604 $
government-sponsored agencies
Debentures of government-sponsored agencies $ 21,312 $
Privately-issued collateralized mortgage
obligations
Obligations of state and political subdivisions
Corporate bonds
$ 10,874 $
$ 15,948 $
5,426 $
$
Derivative financial assets (interest rate contracts) $
961 $
— $
— $
— $
— $
— $
— $
190,604 $
21,312 $
10,874 $
15,771 $
5,437 $
961 $
Derivative financial liabilities (interest rate
contracts)
$
2,519 $
— $
2,519 $
At December 31, 2012:
Securities available-for-sale:
Mortgage-backed securities and collateralized
mortgage obligations issued by U.S.
government-sponsored agencies
$ 111,797 $
Debentures of government-sponsored agencies $ 20,589 $
Privately-issued collateralized mortgage
obligations
Derivative financial assets (interest rate contracts) $
$ 21,576 $
1 $
— $
— $
— $
— $
111,797 $
20,589 $
21,576 $
1 $
Derivative financial liabilities (interest rate
contracts)
$
5,240 $
— $
5,240 $
—
—
—
—
—
—
—
—
—
—
—
—
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, probability of default, loss severity and credit spreads (Level 2).
Level 2 securities include U.S. agencies’ or government sponsored agencies' debt securities, mortgage-backed
securities, government agency-issued and privately-issued collateralized mortgage obligations. As of December 31,
2013 and 2012, there are no securities that are considered Level 1 or Level 3 securities.
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 London Interbank Offered Rate (“LIBOR”) cash rates (for the very short term), quoted prices for
LIBOR futures contracts, observable market prices for LIBOR swap rates, and 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
Page-98
position is further discounted to reflect our potential credit risk to counterparties. We have used the spread between
the Standard & Poors BBB rated U.S. Bank Composite rate and LIBOR with maturity term corresponding to the duration
of the swaps to calculate this credit-risk-related discount of future cash flows.
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, such as other real estate owned ("OREO") and impaired loans.
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) or the current net realizable value of the underlying collateral securing the loan, if
the loan is collateral dependent (Level 3). Net realizable value of the underlying collateral is the fair value of the
collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices
are factored in when valuing the collateral. We review and verify the qualifications and licenses of the certified general
appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real
estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the
income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences
between them and the subject property such as type, leasing status and physical condition. When the appraisals are
received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall
resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics.
We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values
may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for
revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative
judgments made by management on a case-by-case basis. There have been no significant changes in the valuation
techniques during the period ended December 31, 2013. OREO represents collateral acquired through foreclosure
and is initially recorded at fair value as established by a current appraisal, adjusted for disposition costs. Subsequently,
OREO is measured at lower of cost or fair value. OREO values are reviewed on an ongoing basis and any subsequent
decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is determined
based on independent appraisals, similar to the process used for impaired loans, discussed above, and is generally
classified as Level 3. At December 31, 2013, we had $461 thousand of OREO acquired from Bank of Alameda as part
of the Acquisition. There was no change in the estimated fair value of the OREO from the date of the Acquisition
through December 31, 2013.
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.
Page-99
The following table presents the carrying value of financial instruments that were measured at fair value on a non-
recurring basis and that were still held in the consolidated statements of condition at each respective period end, by
level within the fair value hierarchy as of December 31, 2013 and 2012.
(in thousands)
Description of Financial Instruments
Carrying Value
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3) 1
At December 31, 2013:
Impaired loans carried at fair value:
Construction
Installment and other consumer
Total
At December 31, 2012:
Impaired loans carried at fair value:
Commercial and industrial
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Total
$
$
$
$
3,037
$
35
3,072
$
— $
—
— $
— $
—
— $
51
$
— $
— $
2,941
1,722
107
594
159
—
—
—
—
—
—
—
—
—
—
5,574
$
— $
— $
3,037
35
3,072
51
2,941
1,722
107
594
159
5,574
1 Represents collateral-dependent loan principal balances that had been generally written down to the values of the underlying collateral, net of
specific valuation allowance of $363 thousand and $729 thousand at December 31, 2013 and 2012, respectively. The carrying value of loans fully
charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero.
Page-100
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of December 31, 2013 and 2012,
excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).
The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated
captions. We have excluded non-financial assets and non-financial 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 of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.
(in thousands)
Financial assets
December 31, 2013
December 31, 2012
Carrying
Amounts
Fair Value
Fair
Value
Hierarchy
Carrying
Amounts Fair Value
Fair
Value
Hierarchy
Cash and cash equivalents
Investment securities held-to-maturity
Loans, net
Interest receivable
$ 103,773 $
122,495
1,255,098
5,767
103,773
Level 1 $
28,349 $
28,349
123,858
1,245,475
5,767
Level 2
Level 3
Level 2
139,452
142,231
1,060,291 1,111,355
5,073
5,073
Financial liabilities
Deposits
Federal Home Loan Bank borrowing
Subordinated debentures
Interest payable
1,587,102
15,000
4,969
253
1,588,278
15,665
4,950
253
Level 2
1,253,289 1,254,713
Level 2
Level 3
Level 2
15,000
15,989
—
225
—
225
Level 1
Level 2
Level 3
Level 2
Level 2
Level 2
—
Level 2
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 because
of the short-term nature of these instruments.
Held-to-maturity Securities - Held-to-maturity securities, which generally consist of obligations of state and political
subdivisions and corporate bonds, 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, 2013 and 2012, 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. The allowance for loan losses (“ALLL”) is considered to be a reasonable estimate of
loan discount due to credit risks.
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 deposits without stated maturity, such as 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.
Page-101
Federal Home Loan Bank Borrowing - The fair value is estimated by discounting the future cash flows using current
rates offered by the Federal Home Loan Bank of San Francisco ("FHLB") for similar credit advances corresponding
to the remaining duration of our fixed-rate borrowing.
Subordinated Debentures - As part of the Acquisition, we assumed two subordinated debentures from NorCal. See
Note 8 for further information. The fair values of the subordinated debentures were estimated by discounting the future
cash flows (interest payment at a rate of three-month LIBOR plus 3.05% and 1.40%, respectively) to their present
values using current market rates at which similar bonds would be issued with similar credit ratings as ours and similar
remaining maturities. Each payment was discounted at a spot rate of the corresponding term, determined based on
the yields and terms of comparable trust preferred securities, plus an illiquidity premium of 3.00%. In July 2010, the
Dodd-Frank Act was signed into law and limits the ability of certain bank holding companies to treat trust preferred
security debt issuances as Tier 1 capital. This law effectively closed the trust-preferred securities markets for new
issuance and led to the absence of observable or comparable transactions in the market place. Due to the unobservable
inputs of trust preferred securities, we consider the fair value to be a Level 3 measurement.
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.
Note 11: Benefit Plans
In 2003, we established a Deferred Compensation Plan that allows certain key management personnel designated by
the Board of Directors of the Bank to defer up to 80% of their salary and 100% of their annual bonus. The Plan was
amended in 2007 in order to comply with the most recent Internal Revenue Code Section 409A changes. Under the
amended plan, amounts deferred earn interest that is equal to the prime rate as published in the Wall Street Journal,
on the first business day of the year, which remained unchanged at 3.25% for the past five years. Our deferred
compensation obligation totaled $2.8 million and $2.7 million at December 31, 2013 and 2012, 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, and enter the plan during one of the
four open enrollment dates (January 1, April 1, July 1, and October 1) of each year. Under this plan employees can
defer between 1% and 50% of their eligible compensation, up to the maximum amount allowed by the Internal Revenue
Code. The Bank matched 50% of each participant's contribution in prior years and increased the matching to 60% in
2013, up to total matching of $4 thousand annually. Employer contributions totaled $473 thousand, $432 thousand
and $366 thousand for the years ended December 31, 2013, 2012 and 2011, 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 Directors 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 eligible employees based
on a set percentage of their salaries, regardless of whether an employee is participating in the 401(k) plan or not. The
Bank contributed cash in the amount of $886 thousand for the year ended December 31, 2013 and $1.1 million in both
2012 and 2011 to the ESOP, which purchased Bancorp stock from the open market or private parties who are diversifying
their portfolio or taking distributions. 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. As of December 31, 2013, 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. The 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 years two through four and 40% in year five.
Page-102
On January 1, 2011, we established a Salary Continuation Plan to a select group of Executive management, who will
receive twenty-five percent of their salary continuation benefit payments upon retirement. Each participant will need
to participate in this plan for five years before vesting begins. After five years, the participant will vest ratably in the
benefit over the remaining period until age 65. This Plan is unfunded and nonqualified for tax purposes and for purposes
of Title I of the Employee Retirement Income Security Act of 1974. Our liability under the Salary Continuation Plan was
$493 thousand and $326 thousand recorded in interest payable and other liabilities at December 31, 2013 and 2012,
respectively.
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
2013
2012
2011
$
$
6,717 $
2,574
9,291
(873)
(479)
(1,352)
7,939 $
7,994 $
2,875
10,869
(4)
26
22
10,891 $
7,045
2,635
9,680
(205)
(284)
(489)
9,191
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 deferred income tax (benefits)
expenses amounted to $(2.0) million, $330 thousand, and $37 thousand in 2013, 2012 and 2011, respectively.
Page-103
The following table shows the tax effect of our cumulative temporary differences as of December 31:
(in thousands)
Deferred tax assets:
Net operating loss carryforwards from the NorCal acquisition
Allowance for loan losses and off-balance sheet credit commitments
Fair value adjustment on loans acquired from the NorCal acquisition
Deferred compensation plan and salary continuation plan
Accrued but unpaid expenses
Net unrealized loss on securities available-for-sale
State franchise tax
Deferred rent and other lease incentives
Accretion on loans and investment securities
Other real estate owned
Stock-based compensation
Core deposit intangible asset
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan origination costs and fees
Core deposit intangible asset
Unaccreted discount on subordinated debentures from acquisition
Depreciation and disposals on premises and equipment
Net unrealized gain on securities available-for-sale
Accretion on loans and investment securities
Total gross deferred tax liabilities
$
2013
2012
5,096 $
4,671
3,182
1,376
1,177
830
737
591
520
448
225
—
264
19,117
(2,024)
(1,647)
(1,379)
(159)
—
—
(5,209)
—
5,955
—
1,271
957
—
1,000
571
—
—
259
266
—
10,279
(1,052)
—
—
(637)
(1,488)
(449)
(3,626)
Net deferred tax assets
$
13,908 $
6,653
As of December 31, 2013, we had federal and California net operating loss carryforwards ("NOLs") from the NorCal
acquisition of approximately $9.9 million and $23.7 million, respectively. If not fully utilized, the federal NOLs will begin
to expire in 2030, and the California NOLs will begin to expire in 2028. The NorCal acquisition resulted in limitations
on the annual utilization of these NOLs under section 382 of the Internal Revenue Code. Although we expect to fully
utilize all of the federal NOLs prior to their expiration, $788 thousand of California NOLs are expected to expire in 2031
and be unutilized. As a result, we wrote down $56 thousand of deferred tax asset associated with these California
NOLs as part of purchase accounting adjustment in 2013. Based upon the level of historical taxable income and
projections for future taxable income over the periods during which the deferred tax assets are expected to be deductible,
Management believes it is more likely than not we will realize the benefit of the remaining deferred tax assets.
Accordingly, no other valuation allowance has been established as of December 31, 2013 or 2012.
The effective tax rate for 2013, 2012 and 2011 differs from the current Federal statutory income tax rate as follows:
Page-104
Federal statutory income tax rate
Increase (decrease) due to:
California franchise tax, net of federal tax benefit
Tax exempt interest on municipal securities and loans
Tax exempt earnings on bank owned life insurance
Low income housing tax credits
Other
Effective Tax Rate
2013
35.0 %
6.5 %
(4.0)%
(1.5)%
(0.3)%
— %
35.7 %
2012
35.0 %
6.5 %
(2.9)%
(0.9)%
— %
0.2 %
37.9 %
2011
35.0 %
6.2 %
(2.8)%
(1.1)%
— %
(0.2)%
37.1 %
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.
We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax
jurisdiction. We are no longer subject to tax examinations by taxing authorities for years beginning before 2010 for
U.S. Federal or before 2009 for California. There were no ongoing federal income tax examinations at the issuance
of this report.
The State of California is currently examining 2011 and 2012 corporate income tax returns. At the time of issuance of
this report, no adjustments have been proposed by the California Franchise Tax Board in connection with the
examination. Although timing of the resolution or closure of the examination is uncertain, we do not anticipate a need
to provide for a reserve for uncertain tax positions in the next 12 months. At December 31, 2013 and 2012, neither
the Bank nor Bancorp had an accrual for interest and penalties related to unrecognized tax benefits.
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,
2013, the approximate minimum future commitments payable under non-cancelable contracts for leased premises are
as follows:
(in thousands)
Operating leases
$
2014
3,524 $
2015
3,575 $
2016
2017
2018 Thereafter
Total
3,654 $
3,681 $
3,708 $
10,078 $
28,220
Rent expense included in occupancy expense totaled $3.3 million in 2013 and 2012, and $3.1 million in 2011.
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
contingent liability, if any, will not have a material adverse effect on our financial position, results of operations, or cash
flows.
We are responsible for our proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa")
by its member banks in connection with lawsuits related to anti-trust charges and interchange fees. On December 13,
2013, the district court issued a memorandum and order approving Visa's definitive class settlement agreement in the
interchange multidistrict litigation ("Settlement Agreement") with the class plaintiffs. On January 14, 2014, the court
entered the final judgment order approving the settlement. A number of objectors to the settlement have appealed from
that order. Until the appeals are finally adjudicated, no assurance can be provided that Visa will be able to resolve the
class plaintiffs ' claims as contemplated by the Settlement Agreement. On January 27, 2014, Visa's portion of the
takedown payments related to the opt-out merchants, which was calculated to be approximately $1.1 billion, was
deposited into the litigation escrow account, and is expected to reduce our conversion rate of Visa Class B common
stock that we hold. The full impact to member banks is still uncertain. However, we are not aware of significant future
cash settlement payments required by us on the litigation.
Page-105
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 and sponsored by the U.S. Government, and its agencies, was
$211.9 million, or 58% of our total investment portfolio at December 31, 2013 and $132.3 million, or 45% at December
31, 2012. The second largest concentration was obligations of state and political subdivisions in California which
consist of $52.6 million, or 14% of our total investment portfolio at December 31, 2013 and $51.0 million, or 17% at
December 31, 2012.
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 of the borrowers is real estate, which accounts
for 80% and 78% of our loan portfolio at December 31, 2013 and 2012, respectively.
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 payments
to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us
against changes in the fair value of our loans associated with fluctuating interest rates.
The fixed-rate payment features of the interest rate swap agreements are generally structured at inception to mirror
substantially all of the provisions of the hedged loan agreements. These interest rate swaps, designated and qualified
as fair value hedges, are carried on the consolidated statements of condition 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 due to LIBOR
interest rate movements 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 consolidated statements of condition 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
Page-106
forward swap and the yield maintenance agreement are recorded in interest income. In June 2007, August 2010 and
June 2011, three previously undesignated forward swaps were designated to offset the change in fair value of a fixed-
rate loan originated in each of those periods. Subsequent to the point of the swap designations, 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 result in an insignificant amount of hedge ineffectiveness recognized
in interest income.
Our credit exposure, if any, on interest rate swaps is limited to the favorable value (net of any collateral pledged to us)
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 may be 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. As of December 31, 2013, five of our nine derivative instruments were in a liability position totaling $2.5
million and had collateral requirements, for which we had posted cash collateral of $2.8 million.
As of December 31, 2013, we had nine interest rate swap agreements, which are scheduled to mature in September
2018, June 2020, August 2020, June 2022, June 2031, October 2031, July 2032, August 2037 and October 2037. 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 $70 thousand and $75 thousand as of December 31, 2013 and December 31,
2012, respectively. Information on our derivatives follows:
(in thousands;)
Fair value hedges:
Asset derivatives
Liability derivatives
December 31,
2013
December 31,
2012
December 31,
2013
December 31,
2012
Interest rate contracts notional amount
$
17,956
$
4,932 $
21,577
$
Interest rate contracts fair value 1
961
1
2,519
(in thousands;)
Year ended December 31,
2013
2012
Increase (decrease) in value of designated interest rate swaps recognized in interest
income
$
3,680
$
(188) $
Payment on interest rate swaps recorded in interest income
(Decrease) increase in value of hedged loans recognized in interest income
(Decrease) increase in value of yield maintenance agreement recognized against
interest income
(1,422)
(3,971)
(71)
(1,342)
311
168
38,156
5,240
2011
(2,582)
(1,076)
2,436
(14)
Net loss on derivatives recognized against interest income 2
$
(1,784) $
(1,051) $
(1,236)
1 See Note 4 for valuation methodology.
2 Ineffectiveness of $362 thousand, $291 thousand and $(160) thousand was recorded in interest income during the years December 31, 2013,
2012 and 2011, respectively. Changes in value of swaps were included in the assessment of hedge effectiveness.
Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”)
master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights
to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset
such financial instruments for financial reporting purposes.
Page-107
Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
(in thousands;)
Gross Amounts Not Offset in
the Statements of Condition
Offsetting of Financial Assets and Derivative Assets
Gross Amounts
Net Amounts
Gross Amounts
Offset in the
of Assets Presented
of Recognized
Statements of
in the Statements
Financial
Cash Collateral
Assets1
Condition
of Condition1
Instruments
Received
Net Amount
As of December 31, 2013
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
As of December 31, 2012
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
$
$
$
$
961 $
—
961 $
1 $
—
1 $
— $
—
— $
— $
—
— $
961 $
—
961 $
1 $
—
1 $
(825) $
—
(825) $
(1) $
—
(1) $
— $
—
— $
— $
—
— $
136
—
136
—
—
—
1
Amounts exclude accrued interest totaling $10 thousand and $1 thousand at December 31, 2013 and December 31, 2012, respectively.
(in thousands;)
Gross Amounts Not Offset in
the Statements of Condition
Offsetting of Financial Liabilities and Derivative Liabilities
Gross Amounts
Net Amounts of
Gross Amounts
Offset in the
Liabilities Presented
of Recognized
Statements of
in the Statements of
Financial
Cash Collateral
Liabilities2
Condition
Condition2
Instruments
Pledged
Net Amount
As of December 31, 2013
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
As of December 31, 2012
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
$
$
$
$
825 $
1,694
2,519 $
2,616 $
2,624
5,240 $
— $
—
— $
— $
—
— $
825 $
1,694
(825)
—
— $
(1,694)
2,519 $
(825) $
(1,694) $
2,616 $
2,624
5,240 $
(1) $
—
(1) $
(1,860) $
(2,624)
(4,484) $
—
—
—
755
—
755
2 Amounts exclude accrued interest totaling $60 thousand and $74 thousand at December 31, 2013 and December 31, 2012, respectively.
Page-108
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 the Bank’s 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 directly applicable to bank holding companies such as Bancorp.
Quantitative measures established by regulation to ensure capital adequacy require Bancorp and the Bank 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.
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, the Bank’s ratios exceed
the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s
ratios exceed the required minimum ratios for capital adequacy purposes. The total risk-based capital ratio declined
year over year due to the NorCal acquisition in the fourth quarter of 2013. We expect the Bank to remain well-capitalized
under the current minimum requirements for capital adequacy, as well as under the new Basel III rules.
In December 2010, the Basel Committee on Bank Supervision finalized a set of international guidelines for determining
regulatory capital known as “Basel III.” These guidelines were developed to address many of the weaknesses in the
banking industry that contributed to the past financial crisis, including excessive leverage, inadequate and low-quality
capital and insufficient liquidity buffers. In July 2013, the Board of Governors of the Federal Reserve, the FDIC and
the Office of the Comptroller, finalized a rule to implement Basel III. The rule is subject to a phase-in period beginning
January 2015, and all the changes should be implemented by January 2019. The guidelines, among other things,
increase minimum capital requirements of bank holding companies, including increasing the Tier 1 capital to risk-
weighted assets ratio to 6%, introducing a new requirement to maintain a minimum ratio of common equity Tier 1 capital
to risk-weighted assets of 4.5%, and in 2019, when fully phased in, a capital conservation buffer of an additional 2.5%
of risk-weighted assets. In addition, there have been several updates to the way risk-weighted assets are assessed.
The three changes that will affect the Bank most significantly are: the movement of past due exposures from 100%
to 150% risk weight; the movement of off-balance sheet items with an original maturity of one year or less from 0% to
20% risk weight; and the risk weighting of mortgage-backed securities using the gross-up approach instead of the
ratings-based approach. As a result of their implementation, we have modeled our ratios under the finalized rules and
we do not expect that we will be required to raise additional capital.
The Bank’s and Bancorp’s capital adequacy ratios as of December 31, 2013 and December 31, 2012 are presented
in the following tables.
Capital Ratios for Bancorp (in thousands)
As of December 31, 2013
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
As of December 31, 2012
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Actual Ratio
Ratio for Capital
Adequacy Purposes
Amount
$ 190,738
$ 175,835
$ 175,835
Ratio
13.21%
12.18%
10.78%
Amount
115,524
57,762
65,222
$ 163,900
$ 149,737
$ 149,737
13.71%
12.52%
10.30%
95,655
47,827
58,169
Ratio
%
%
%
%
%
%
Page-109
Capital Ratios for the Bank
(in thousands)
Actual Ratio
Ratio for Capital
Adequacy Purposes
Ratio to be Well
Capitalized under
Prompt Corrective
Action Provisions
As of December 31, 2013
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Amount
$ 181,911
$ 167,007
$ 167,007
Ratio
12.60%
11.57%
10.24%
Amount
115,495
57,747
65,215
As of December 31, 2012
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
$ 162,554
$ 148,391
$ 148,391
13.60%
12.41%
10.20%
95,652
47,826
58,168
Ratio
%
%
%
%
%
%
Amount
144,368
86,621
81,519
119,566
71,739
72,710
Ratio
%
%
%
%
%
%
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 fully 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 credit worthiness 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 contractual amount of loan commitments and standby letters of credit not reflected on the consolidated statements
of condition was $336.9 million at December 31, 2013 at rates ranging from 1.70% to 18.00%. This amount included
$173.9 million under commercial lines of credit (these commitments are contingent upon customers maintaining specific
credit standards), $104.8 million under revolving home equity lines, $13.0 million under standby letters of credit, $33.4
million under undisbursed construction loans, and a remaining $11.7 million under personal and other lines of credit.
We have set aside an allowance for losses in the amount of $679 thousand for these commitments as of December 31,
2013, which is recorded in interest payable and other liabilities. Approximately 39% of the commitments expire in 2014
and approximately 61% expire between 2015 and 2021.
Page-110
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, 2013 and 2012
(in thousands)
Assets
Cash and due from Bank of Marin
Investment in bank subsidiary
Other assets
Total assets
Liabilities and Stockholders' Equity
Subordinated debentures
Accrued expenses payable
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
At December 31,
2013
2012
$
$
$
$
8,664
177,028
366
186,058
4,969
202
5,171
180,887
186,058
$
$
$
$
1,293
150,445
92
151,830
—
38
38
151,792
151,830
CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME
for the fiscal years ended December 31, 2013, 2012 and 2011
Years ended December 31,
2013
2012
2011
$
28,000
28,000
$
$
2,700
2,700
34
1,313
1,347
26,653
382
27,035
—
716
716
1,984
301
2,285
—
—
—
748
748
(748)
249
(499)
(12,765)
14,270
$
15,532
17,817
$
16,063
15,564
$
(in thousands)
Income
Dividends from bank subsidiary
Total income
Expense
Interest expense
Non-interest expense
Total expense
Income (loss) before income taxes and equity in undistributed
net income of subsidiary
Income tax benefit
Income (loss) before equity in undistributed net income of
subsidiary
Earnings of bank subsidiary (less) greater than dividends received
from bank subsidiary
Net income
Page-111
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
for the fiscal years ended December 31, 2013, 2012 and 2011
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash used
in operating activities:
Earnings of bank subsidiary less (greater) than
dividends received from bank subsidiary
Net change in operating assets and liabilities
Accretion of discount on subordinated debentures
Other assets
Other liabilities
Net cash used in operating activities
Cash Flows from Investing Activities:
Capital contribution to subsidiary
Cash consideration paid for acquisition, net of cash
acquired
Net cash used in investing activities
Cash Flows from Financing Activities:
Stock options exercised and stock purchases
Dividends paid on common stock
Net cash provided by (used 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 schedule of non-cash investing and financing
activities:
Stock issued in payment of director fees
Acquisition:
Fair value of assets acquired
Fair value of liabilities assumed
Stock issued to NorCal Community Bancorp shareholders
Years ended December 31,
2013
2012
2011
$
14,270
$
17,817
$
15,564
12,765
(15,532)
(16,063)
19
74
165
27,293
(2,258)
(15,952)
(18,210)
2,258
(3,970)
(1,712)
7,371
1,293
8,664
222
39,503
4,970
18,514
$
$
$
$
$
$
$
$
$
$
—
(71)
(6)
2,208
(1,070)
—
(1,070)
1,070
(3,751)
(2,681)
(1,543)
2,836
1,293
$
—
58
46
(395)
(774)
—
(774)
774
(3,457)
(2,683)
(3,852)
6,688
2,836
199
$
200
— $
— $
— $
—
—
—
End of 2013 Audited Consolidated Financial Statements
Page-112
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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, 2013. 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, 2013.
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 or
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-113
(D)
Changes in Internal Controls
During the quarter ended December 31, 2013, 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.
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 2014 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 Principal Accounting Officer. A copy of the Code of Ethical Conduct,
which is also included on our website, 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 2014 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 2014 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 2014 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 2014 Annual
Meeting of Shareholders.
Page-114
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
(A)
Documents Filed as Part of this Report
1.
Financial Statements
The financial statements and supplementary data listed below are filed as part of this report under
Item 8, captioned Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm for the years ended December
31, 2013, 2012 and 2011
Management's Report on Internal Control over Financial Reporting
Consolidated Statements of Condition as of December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2013, 2012 and 2011
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended December
31, 2013, 2012 and 2011
Consolidated Statement of Cash Flows for the Years Ended December 31, 2013, 2012 and
2011
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
All financial statement schedules have been omitted, as they are inapplicable or the required
information is included in the financial statements or notes thereto.
(B)
Exhibits Filed
The following exhibits are filed as part of this report or hereby incorporated by references to filings
previously made with the SEC.
Page-115
Bylaws, as amended
10-Q
001-33572
3.02
Rights Agreement dated as of July 2, 2007
8-A12B
001-33572
Exhibit
Number
2.01
2.02
3.01
3.02
4.01
4.02
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
Exhibit Description
Modified Whole Bank Purchase and Assumption
Agreement dated February 18, 2011 among
Federal Deposit Insurance Corporation, Receiver of
Charter Oak Bank, Napa, California, Federal
Deposit Insurance Corporation, and Bank of Marin
Agreement and Plan of Merger with NorCal
Community Bancorp, dated July 1, 2013
Articles of Incorporation, as amended
Form of Warrant for Purchase of Shares of
Common Stock, as amended
2007 Employee Stock Purchase Plan
1989 Stock Option Plan
1999 Stock Option Plan
2007 Equity Plan
2010 Director Stock Plan
Form of Indemnification Agreement for Directors
and Executive Officers dated August 9, 2007
Form of Employment Agreement dated January 23,
2009
2010 Director Stock Plan
2010 Annual Individual Incentive Compensation
Plan
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
10.11
2007 Form of Change in Control Agreement
10.12
11.01
Information Technology Services Agreement with
Fidelity Information Services, LLC, dated July 11,
2012
Earnings Per Share Computation - included in Note
1 to the Consolidated Financial Statements
Incorporated by Reference
Form
8-K
File No.
001-33572
Exhibit
99.2
Filing Date
February 28,
2011
Herewith
8-K
001-33572
2.1
July 5, 2013
November 7,
2007
May 9, 2011
July 2, 2007
December 20,
2011
July 24, 2007
July 24, 2007
July 24, 2007
July 24, 2007
June 21, 2010
November 7,
2007
January 26,
2009
June 21, 2010
October 21,
2010
January 6,
2011
10-Q
001-33572
3.01
POS AM
S-3
S-8
S-8
S-8
S-8
S-8
333-156782
333-144810
333-144807
333-144808
333-144809
333-167639
4.1
4.4
4.1
4.1
4.1
4.1
4.1
10-Q
001-33572
10.06
001-33572
333-167639
001-33572
001-33572
10.1
4.1
99.1
10.1
10.2
10.3
10.4
8-K
S-8
8-K
8-K
8-K
8-K
001-33572
10.1
001-33572
10.1
October 31,
2007
July 17, 2012
14.01
Code of Ethical Conduct
8-K
001-33572
14.01
January 26,
2008
23.01
31.01
31.02
32.01
Consent of Moss Adam LLP
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
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
Certification pursuant to 18 U.S.C. §1350 as
adopted pursuant to §906 of the Sarbanes-Oxley
Act of 2002
101.01*
XBRL Interactive Data File
Filed
Filed
Filed
Filed
Filed
Furnished
*
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and
12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
Page-116
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
March 14, 2014
Date
March 14, 2014
Date
March 14, 2014
Date
Bank of Marin Bancorp (registrant)
/s/ Russell A. Colombo
Russell A. Colombo
President &
Chief Executive Officer
(Principal Executive Officer)
/s/ Tani Girton
Tani Girton
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
/s/ Cecilia Situ
Cecilia Situ
First Vice President &
Manager of Finance & Treasury
(Principal Accounting Officer)
Page-117
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.
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
Dated: March 14, 2014
/s/ Tani Girton
Tani Girton
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ Cecilia Situ
Cecilia Situ
First Vice President & Manager of Finance & Treasury
(Principal Accounting Officer)
Members of Bank of Marin Bancorp's Board of Directors
/s/ Stuart D. Lum
Stuart D. Lum
Chairman of the Board
/s/ Russell A. Colombo
Russell A. Colombo
President & Chief Executive Officer
(Principal Executive Officer)
/s/ James C. Hale
James C. Hale
/s/ Robert Heller
Robert Heller
/s/ Norma J. Howard
Norma J. Howard
/s/ Kevin Kennedy
Kevin Kennedy
/s/ William H. McDevitt, Jr.
William H. McDevitt, Jr.
/s/ Michaela Rodeno
Michaela Rodeno
/s/ Joel Sklar
Joel Sklar, M.D.
/s/ Brian M. Sobel
Brian M. Sobel
/s/ J. Dietrich Stroeh
J. Dietrich Stroeh
/s/ Jan I. Yanehiro
Jan I. Yanehiro
Page-118
Exhibit No.
23.01
Consent of Moss Adams LLP.
EXHIBIT INDEX
Description
Location
Filed herewith.
31.01
31.02
32.01
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002.
Furnished
herewith.
Page-119
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 of our report dated March 14, 2014, 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, 2013.
/s/ Moss Adams LLP
Stockton, California
March 14, 2014
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to
§302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.01
I, Russell A. Colombo, 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 subsidiary, 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 controls over financial reporting.
March 14, 2014
Date
/s/ Russell A. Colombo
Russell A. Colombo
Chief Executive Officer
EXHIBIT 31.02
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to §302
of the Sarbanes-Oxley Act of 2002
I, Tani Girton, 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 subsidiary, 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 controls over financial reporting.
March 14, 2014
Date
/s/ Tani Girton
Tani Girton
Chief Financial Officer
EXHIBIT 32.01
Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §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, 2013, as filed with the Securities and Exchange Commission, the undersigned hereby certify pursuant
to 18 U.S.C. §1350, as adopted pursuant to §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.
March 14, 2014
Date
March 14, 2014
Date
/s/ Russell A. Colombo
Russell A. Colombo
President &
Chief Executive Officer
/s/ Tani Girton
Tani Girton
Executive Vice President &
Chief Financial Officer
This certification accompanies each report pursuant to §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 §18 of
the Securities Exchange Act of 1934, as amended.
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