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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, 2015
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, 2015, 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 $293 million. For the purpose of this response, directors and certain officers of
the Registrant are considered the affiliates at that date.
As of February 29, 2016, there were 6,078,363 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 17, 2016 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
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
Selected Quarterly Financial Data
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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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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
preceded by "will," "would," "should," "could" or "may."
Forward-looking statements are based on Management's current expectations regarding economic, legislative, and
regulatory issues that may affect 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 and the economic uncertainty in the United States
and abroad, including changes in interest rates, deposit flows, real estate values, and expected future cash flows on
loans and securities; integration of acquisitions and competition; changes in accounting principles, policies or guidelines;
changes in legislation or regulation; adverse weather conditions, including the drought in California; and other economic,
competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.
Important factors that could cause results or performance to materially differ from those expressed in our prior forward-
looking statements are detailed in Item 1A. Risk Factors 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 under 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 Section 12 of the
1934 Act. Upon formation of the holding company, Bancorp became subject to regulation under the Bank Holding
Company Act of 1956, as amended, which subjects Bancorp to Federal Reserve Board reporting and examination
requirements, 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.
Virtually all of our business is conducted through Bancorp's subsidiary, Bank of Marin, which is headquartered in
Novato, California. In addition to our headquarters office, we operate through twenty offices in Marin, Sonoma, San
Francisco, Napa and Alameda counties, with a strong emphasis on supporting the local communities. 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 lending categories include commercial real estate loans, commercial and industrial loans,
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construction financing, consumer loans, and home equity lines of credit. Merchant card services are available for our
business customers. Through third party vendors, we offer a proprietary Visa® credit card product combined with a
rewards program to our customers, a Business Visa® program, a leasing program for commercial equipment financing,
and cash management sweep services.
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, Certificate of
Deposit Account Registry Service® ("CDARS") and Insured Cash Sweep® ("ICS") accounts. CDARS and ICS are part
of 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 mobile banking, remote deposit capture, Automated
Clearing House services (“ACH”), fraud prevention services including Positive Pay for Checks, ACH, Apple Pay®, peer-
to-peer funds transfer, and image lockbox services. A valet deposit pick-up service is available to our professional and
business clients.
Automated teller machines (“ATM's”) are available at each retail 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, trust administration, estate settlement, custody services, and advice on charitable giving. We also offer
401(k) plan services to small and medium-sized businesses through a third party vendor.
We make international banking services available to our customers indirectly 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, not-for-profit and personal banking relationships within these market areas.
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, 2015, approximately 67% of our deposits are in Marin County and southern Sonoma County, and
approximately 56% of our deposits are from businesses and 44% 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 affected by changes in
regulation, interest rates, technology and product delivery systems, and consolidation among financial service providers.
The banking industry is seeing strong competition for quality loans, with larger banks expanding their activities to attract
businesses that are traditionally community bank customers. In all of our five counties, we have significant competition
from nationwide banks with much larger branch networks and greater financial resources, as well as credit unions and
other independent banks.
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In Marin County we have the third largest market share of total deposits at 10.1%, according to the Deposit & Market
Share Report from the California Banksite Corporation based upon the FDIC deposit market share data as of June
30, 2015. A significant driver of our franchise value is the growth and stability of our checking deposits, a low-cost
funding source for our loan portfolio. We are building our presence in the Sonoma, Napa, Alameda and San Francisco
markets.
Other competitors for depositors' funds are money market mutual funds and non-bank financial institutions such as
brokerage firms and insurance companies. Among the competitive advantages held by some of these large, non-bank
financial institutions is their ability to finance extensive advertising and funding campaigns.
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 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 that derive from our independent status, local
leadership and local decision making. Our competitive advantages also include an emphasis on personalized service,
extensive 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, 2015, we employed 259 full-time equivalent (“FTE”) staff. The actual number of employees, including
part-time employees, at year-end 2015 included five executive officers, 105 other corporate officers and 164 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.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both federal and state law. The following discussion
summarizes certain significant laws, rules and regulations affecting Bancorp and the Bank.
Bank Holding Company Regulation
Upon formation of the bank holding company on July 1, 2007, we became subject to regulation under the Bank Holding
Company Act of 1956, as amended (“BHCA”) which subjects Bancorp to Federal Reserve Board ("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. Under this requirement, we are expected to commit
resources to support the Bank, including at times when we may not be in a financial position to provide such resources,
and it may not be in our, or our shareholders’ or creditors’, best interests to do so. In addition, any capital loans we
make to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank.
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, supervision 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
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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 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”) in addition to regulations and policy statements of the FRB. 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 2016. 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, based on the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
Our FDIC insurance assessment base is quarterly average consolidated total assets minus average tangible equity,
defined as Common Equity Tier 1 Capital. Assessment rates are between 2.5 and 9 basis points annually on the
assessment base for banks in the lowest risk category and 30 to 45 basis points for banks in the highest risk category.
In deriving the risk categories, the FDIC uses a bank's capital level, supervisory ratios and other financial measures
to determine a bank's ability to withstand financial stress.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) was enacted in 1977 to encourage financial institutions to meet the credit
needs of the communities where they are chartered. 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. Regulatory agencies rate each bank's performance in assessing and meeting
these credit needs. The Bank is committed to serving the credit needs of the communities in which we do business,
and it is our policy to respond to all creditworthy segments of our market. As part of its CRA commitment, the Bank
maintains strong philanthropic ties to the community. We invest in affordable housing funds that help economically
disadvantaged individuals and residents of low- and moderate-income census tracts, in each case consistent with our
long-established prudent underwriting practices. We also donate to and volunteer with organizations in our communities
that serve small businesses or low-and moderate-income communities or individuals that offer educational and health
programs to economically disadvantaged students and families, community development service and affordable
housing programs. We provide CRA reportable small business, small farm and community development loans within
our assessment areas. The CRA requires a depository institution's primary federal regulator, in connection with its
examination of the institution, to assess the institution's record in meeting CRA requirements. 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. The FDIC's last CRA performance examination, completed in May 2015, was performed
under the large bank requirements and was assigned 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
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enhanced due diligence and “know your customer” standards in their dealings with high risk customers, foreign financial
institutions, and foreign individuals and entities.
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
CRA, Home Mortgage Disclosure Act, Fair Credit Reporting Act, Fair Lending, Equal Credit Opportunity Act, the Fair
Housing Act, Truth-in-Lending Act ("TILA"), and the Real Estate Settlement Procedures Act ("RESPA"). Our deposit
operations are also subject to laws and regulations that protect consumer rights including Expedited Funds Availability,
Truth in Savings, and Electronic Funds Transfers. Other regulatory requirements include: the Unfair, Deceptive or
Abusive Acts and Practices ("UDAAP"), Dodd-Frank Act, Right To Financial Privacy and Privacy of Consumer Financial
Information. Additional rules govern check writing ability on certain interest earning accounts and prescribe procedures
for complying with administrative subpoenas of financial records.
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
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.
In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy standards
of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of the
Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-based capital requirements,
makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt corrective action thresholds.
We became subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over
the period of 2015 through 2019. We have modeled our ratios under the finalized Basel III rules and we do not expect
that we will be required to raise additional capital when the new rules fully phase in. For further information on our
risk-based capital positions and the effect of the new Basel III rules, see Note 16 to the Consolidated Financial
Statements in Item 8 of this Form 10-K.
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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 on bank operations as regulations have been promulgated. 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.
(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) 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.
(5) Authorizes the FRB to regulate debit card and certain general-use prepaid card transaction interchange fees paid
to issuing banks with assets in excess of $10 billion to ensure that fees are “reasonable and proportional” to the cost
of processing individual transactions and to prohibit networks and issuers from requiring transactions be processed
on a single payment network.
(6) Effects changes in the FDIC assessment as discussed above.
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval and ongoing regulatory requirements on any shareholder or other party that
seeks to acquire direct or indirect "control" of an FDIC-insured depository institution. These laws include the BHCA
and the Change in Bank Control Act. Among other things, these laws require regulatory filings by a shareholder or
other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution or bank holding
company. The determination whether an investor "controls" a depository institution is based on all of the facts and
circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution
or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party
may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of
any class of voting stock. Ownership by family members, affiliated parties, or parties acting in concert, is typically
aggregated for these purposes. If a party's ownership of the Company were to exceed certain thresholds, the investor
could be deemed to "control" the Company for regulatory purposes. This could subject the investor to regulatory filings
or other regulatory consequences.
In addition, except under limited circumstances, bank holding companies are prohibited from acquiring, without prior
approval:
control of any other bank or bank holding company or all or substantially all the assets thereof; or
•
• more than 5% of the voting shares of a bank or bank holding company which is not already a subsidiary.
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Incentive Compensation
The Dodd-Frank Act requires the federal bank regulators and the Securities and Exchange Commission ("SEC") to
establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated
entities, including us and our bank, having at least $1 billion in total assets that encourage inappropriate risks by
providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits
or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or
guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies
proposed such regulations in April 2011, but the regulations have not been finalized. If the regulations are adopted in
the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our
executives.
The FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements
of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored
to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive
compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination.
Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability
to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its
incentive compensation arrangements, or related risk management control or governance processes, pose a risk to
the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct
the deficiencies.
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 materials on our website are available free of charge. This website address is for information only
and is not intended to be an active link, or to incorporate any website information into this document. In addition, copies
of our filings are available by requesting them in writing or by phone from:
Corporate Secretary
Bank of Marin Bancorp
504 Redwood Boulevard, Suite 100
Novato, CA 94947
415-763-4523
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ITEM 1A RISK FACTORS
We assume and manage a certain degree of risk in order to conduct our business. The material risks and uncertainties
that Management believes may affect our business are listed below. The list is not exhaustive; additional risks and
uncertainties that Management is not aware of, or focused on, or currently deems immaterial may also impair business
operations. If any of the following risks, or risks that have not been identified, actually occur, our financial condition,
results of operations, and stock trading price could be materially and adversely affected. We manage these risks by
promoting sound corporate governance practices, which includes but is not limited to, establishing policies and internal
controls, and implementing internal review processes. Before making an investment decision, investors should carefully
consider the risks, together with all of the other information included or incorporated by reference in this Annual Report
on Form 10-K and our other filings with the SEC. This report is qualified in its entirety by these risk factors.
Earnings are Significantly Influenced by General Business and Economic Conditions
We are subject to changes in general economic conditions that remain uncertain. The economic environment is affected
by political uncertainty, changes in fiscal and monetary policy, and uncertainty in the economies of Europe and emerging
markets, such as China, which could adversely and materially 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
has caused prepayments to increase as our customers sought to refinance existing loans, which resulted 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 a stricter regulatory environment. While unemployment rates in our core market
areas have continued to improve and are below the average California state rate, there can be no assurance that the
recent economic improvement is sustainable or that the creditworthiness of our borrowers will not deteriorate.1
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 in value;
Loan delinquencies, problem assets and foreclosures may increase;
•
Investment securities may become impaired.
•
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
of our control, including general economic conditions and the policies of various governmental and regulatory agencies
and, in particular, the 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 securities are also subject to prepayment risk when interest rates fall,
and subject to borrowers' credit risk when rates rise.
In December 2015, the Federal Open Market Committee of the FRB (“FOMC”) increased the federal funds target rate
by 25 basis points (basis points are equal to one hundredth of a percentage point) for the first time in seven years,
from a historically low range of 0% to 0.25% to 0.25% to 0.50% currently. However, growing uncertainty about the
durability of the U.S. economy's expansion and the Bank of Japan and European Central Bank's recent actions to cut
interest rates into negative territory has complicated FOMC's future interest rate planning policy. There was no interest
rate action in FOMC's first meeting of 2016 and it is widely expected that the FOMC will not raise interest rates until
____________________________________________________________________________________________
1 Unemployment rates were based on the latest available labor market information from the California Employment Development Department.
December 2015 results show that the unemployment rate in Marin County was the lowest in California at 3.2%. The unemployment rates in San
Francisco, Sonoma, Napa and Alameda County were 3.3%, 4.2%, 5.1% and 4.3%, respectively, compared to the state of California of 5.8%.
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they are confident that GDP growth returns to at least 2% from the 0.7% in the fourth quarter of 2015. The FRB's
sizable holdings of longer-term securities have placed and will continue to place downward pressure on longer-term
interest rates, and hence our net interest margin. Our net interest income is hampered by a flat or falling rate environment,
and the prolonged low level of interest rates has resulted in significant net interest margin compression over the last
several years. Our 2016 net interest margin may continue to compress due to repricing on loans and securities, if the
prevailing market interest rates do not increase.
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.
If interest rates rise, we anticipate that net interest income will increase. However, it may take several upward market
rate movements for certain variable rate loans to move above their floor rates and deposit behavior may deviate from
our expectations. 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 paradox of an improving economy (leading to higher
interest rates) with increased credit risk 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.
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, and compliance costs among
other things. 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 could affect our operating environment in substantive ways. The nature and extent of future legislative and
regulatory changes affecting us are unpredictable at this time.
The historic disruptions in the financial marketplace during the recent recession 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. Further restrictions on financial service companies may adversely affect 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.
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 broader outcome of the enacted legislation and related measures undertaken to alleviate the aftermaths of the
credit crisis is uncertain. 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
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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.
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
that 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 and peer-
to-peer lenders 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 continue for the coming year due to the consolidation
of many financial institutions and more changes in legislature, regulation and technology. National and regional banks
much larger than our size have entered into our market through acquisitions and they may be able to benefit from
economies of scale through their wider branch networks, more prominent national advertising campaigns, lower cost
of borrowing, capital market access and sophisticated technology infrastructures. Further, intense competition for
creditworthy borrowers could lead to loan rate concession pressure or affect our ability to generate profitable loans.
Going forward, we may see continued competition in the industry as competitors seek to expand market share in more
profitable and less risky customer segments. Further, if equity markets rebound, our deposit customers may perceive
alternative investment opportunities as providing superior expected returns. Recent recovery in the real estate market
also supports the sale of real estate that collateralizes our loans, leading to payoff activity. 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. Efforts and initiatives we may 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 may lose a relatively inexpensive source of funds, thus
increasing our funding costs through more expensive wholesale borrowings.
Negative Conditions Affecting Real Estate May Harm Our Business
Concentration of our lending activities in the California real estate sector could negatively affect 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 amounts of securities backed by such loans in the portfolio, we are
not immune to volatility in those markets. Approximately 85% of our loans were secured by real estate at December 31,
2015, of which 66% were secured by commercial real estate and the remaining 19% by residential real estate. Real
estate valuations are influenced by demand, and demand is driven by factors such as employment rates and interest
rates.
Loans secured by commercial real estate include those secured by office buildings, owner-user office/warehouses,
mixed-use residential/commercial properties and retail properties. In general, 2015 office, industrial and retail vacancy
rates remained largely unchanged in Marin County, fell in Sonoma County and increased slightly in Napa County based
on the latest available real estate information from Keegan & Coppin Company, Inc. 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 the event of default, the collateral value may not cover the outstanding amount due to
us, especially during real estate market downturns.
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. Institutions that are potentially
exposed to significant commercial real estate concentration risk may 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 maintain heightened review and analyses of our concentrations and have regular conversations
with regulators to avoid unexpected regulatory risk.
Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Affect 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, drought or flood. These events could interrupt our business operations
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unexpectedly. Climate-related physical changes and hazards could also pose credit risks for us. For example, our
borrowers may have collateral properties or operations located in coastal areas at risk to a rise in sea level or affected
by the severe drought in California. 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 outcome on our business of a natural disaster, whether or not caused by climate change,
is difficult to predict.
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 provisions 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. 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
Bancorp, 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. The allowance for loan
losses may increase due to a larger volume of financial assets that fall within the scope of the proposed model, which
may adversely affect earnings and lead to higher capital requirements. The FASB continued to deliberate the proposed
update at its December 31, 2015 meeting, and the full effect of the implementation of this new model is unknown until
the proposed guidance is finalized.
Non-performing Assets Take Significant Time to Resolve and Adversely Affect Results of Operations and
Financial Condition.
While we have significantly reduced non-performing assets, such assets may adversely affect our net income in the
future. We might incur losses relating to non-performing assets if their collateral values deteriorate. Historically, we
have not recorded interest income on non-accrual loans, which adversely affects our interest 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
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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 can distract Management from other responsibilities. There can be
no assurance that we will not experience further increases in non-performing assets in the future.
Securities May Lose Value due to Credit Quality of the Issuers
We invest in debentures issued by government-sponsored enterprises ("GSE"), such as Federal Home Loan Bank
("FHLB"), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation ("FHLMC"),
and Federal Farm Credit Bank. While we consider them to have low credit risk as they carry the implicit backing of the
U.S. Government, they are not direct obligations of the U.S. Government. GSE debt is sponsored but not guaranteed
by the federal government, whereas government agencies such as Government National Mortgage Association
("GNMA") are divisions of the government whose securities are backed by the full faith and credit of the United States.
We also hold mortgage-backed securities (“MBS”) securities issued by FNMA and FHLMC. Since 2008, both FNMA
and FHLMC have been under a U.S. Government conservatorship. As a result, the mortgage-backed securities (“MBS”)
issued by FNMA and FHLMC have benefited from this government support. However, there are political pressures to
phase out the governmental support via privatization or to wind down FNMA and FHLMC and uncertainty as to the
termination of conservatorship of FNMA and FHLMC remains.
The fair value of our securities issued or guaranteed by these entities may decline 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 suffers creditworthiness deterioration.
We also invest in obligations of state and political subdivisions, some of which may not have fully recovered from past
years' of loss of property tax from falling home values and declines in sales tax revenues. While we generally seek
to minimize our exposure by diversifying the 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.
Unexpected Early Termination of Interest Rate Swap Agreements May Affect Earnings
We have entered into interest-rate swap agreements, primarily as an asset/liability risk management tool, 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 prepayment penalties charged by our
counterparties and negatively affect our earnings.
Growth Strategy or Potential Future Acquisitions 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 strategic plan 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 incur significant acquisition related expenses either during the due diligence phase of acquisition targets or
during integration of the acquirees. These expenses may negatively impact our earnings prior to realizing the benefits
of acquisitions. We may also 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. Our
earnings, financial condition and prospects after a merger will depend in part on our ability to integrate the operations
and management of the acquired institution 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:
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•
•
•
•
•
•
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.
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 generally anticipate cost savings from
acquisitions, 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 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 has been intense, especially in light of the recent improvement in the job market, 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 key personnel could have an unfavorable affect on our business because of
the skills, knowledge of our market, years of industry experience and difficulty of promptly finding qualified replacement
personnel.
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.
The Value of Goodwill and Other Intangible Assets May Decline in the Future
As of December 31, 2015, we had goodwill totaling $6.4 million and a core deposit intangible asset totaling $3.1 million
from the NorCal acquisition (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.
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 were to assess 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 new 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.
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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. 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.
Risks Associated with Cyber Security Could Negatively Affect Our Earnings and Reputation
Our business requires the secure e-management of sensitive client and bank information. We work diligently through
implementing security measures that make our communications and information systems safe to conduct business.
Cyber threats such as social engineering, ransomware, and phishing emails are more prevalent now than ever before.
These incidents include intentional and unintentional events that may present threats to digital systems that are designed
to disrupt operations, corrupt data, release sensitive information or cause denial-of-service attacks. A cyber security
breach of systems operated by the Bank, merchants, vendors, customers, or externally publicized breaches of other
financial institutions may significantly harm our reputation, result in a loss of customer business, subject us to 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 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.
In particular, we outsource core processing to Fidelity Information Services ("FIS"), a leading financial services solution
provider, which allows us access to competitive technology offerings without having to directly invest in their
development. 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 economic downturn, the financial services industry in general was materially and adversely affected by the credit
crisis. We have witnessed failures and consolidations of banks in the industry in recent years. We rely on our
correspondent banks for lines of credit, which can be revoked unexpectedly. 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 regularly 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 the credit ratings of our insurers
and the insurers of our municipal 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 Management, which may lose value in the event of a carrier's insolvency. In the event that a bank-owned life
insurance policy carrier's credit ratings fall below investment grade, we may exchange policies to other carriers at a
cost charged by the original carrier, or we may terminate the policies which may result in adverse tax consequences.
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Our loan portfolio is secured primarily 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 recoverable by insurance.
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 or
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,
Bank of Marin 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 exchange. Our trading volume is less than that of nationwide
or larger 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 low trading volume of our common stock, significant trades of our stock in a given time,
or the expectations of these trades, could cause volatility in the stock price.
We may need to Raise Additional Capital in the Future, and if we Fail to Maintain Sufficient Capital, Whether
due to Losses, an Inability to Raise Additional Capital or Otherwise, our Financial Condition, Liquidity and
Results of Operations, as well as our Ability to Maintain Regulatory Compliance, Could be Adversely Affected
We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional
capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business
needs, which could include the possibility of financing acquisitions. In addition, Bancorp, on a consolidated basis, and
the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity.
Importantly, as discussed below, regulatory capital requirements could increase from current levels, which could require
us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions
in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding
the banking industry, market conditions and governmental activities, and on our financial condition and performance.
Accordingly, we cannot assure that we will be able to raise additional capital if needed or on terms acceptable to us.
If we fail to maintain capital to meet regulatory requirements, our liquidity, business, financial condition and results of
operations could be materially and adversely affected.
We may be Subject to more Stringent Capital Requirements in the Future
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain.
From time to time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these minimum
capital guidelines and other regulatory requirements, Bancorp or the Bank may be restricted in the types of activities
we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends and
repurchasing or redeeming capital securities.
In particular, the capital requirements applicable to us under the recently adopted capital rules implementing the Basel
III capital framework in the United States began to be phased-in on January 1, 2015. As these new rules take effect,
Page-18
we will be required to satisfy additional, more stringent, capital adequacy standards than we have in the past. In addition,
if we become subject to annual stress testing requirements, our stress test results may have the effect of requiring us
to comply with even greater capital requirements. While we currently meet the requirements of the new Basel III-based
capital rules on a fully implemented basis, we may eventually fail to do so. In addition, these requirements could have
a negative affect on our ability to lend, grow deposit balances, make acquisitions or make capital distributions in the
form of dividends or share repurchases. Higher capital levels could also lower our return on equity.
We may be Subject to Environmental Liabilities in Connection with the Foreclosure on Real Estate Assets
Securing our Loan Portfolio
Hazardous or toxic substances or other environmental hazards may be located on the properties that secure our loans.
If we acquire such properties as a result of foreclosure or otherwise, we could become subject to various environmental
liabilities. For example, we could be held liable for the cost of cleaning up or otherwise addressing contamination at
or from these properties. We could also be held liable to a governmental entity or third-party for property damage,
personal injury or other claims relating to any environmental contamination at or from these properties. In addition, we
own and operate certain properties that may be subject to similar environmental liability risks. Although we have policies
and procedures that are designed to mitigate against certain environmental risks, we may not detect all environmental
hazards associated with these properties. If we ever became subject to significant environmental liabilities, our
business, financial condition and results of operations could be adversely affected.
The Small to Medium-sized Businesses that we Lend to may have Fewer Resources to Weather Adverse
Business Developments, which may Impair a Borrower's Ability to Repay a Loan, and such Impairment could
Adversely Affect our Results of Operations and Financial Condition
We focus our business development and marketing strategy primarily on small to medium-sized businesses. Small
to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable
to economic downturns, often need substantial additional capital to expand or compete and may experience substantial
volatility in operating results, any of which may impair a borrower's ability to repay a loan. In addition, the success of
a small and medium-sized business often depends on the management talents and efforts of one or two people or a
small group of people, and the death, disability or resignation of one or more of these people could adversely affect
the business and its ability to repay its loan. If general economic conditions negatively affect the California markets
in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise
affected by adverse business developments, our business, financial condition and results of operations may be
negatively affected.
A Lack of Liquidity could Adversely Affect our Operations and Jeopardize our Business, Financial Condition
and Results of Operations
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment
and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity
to fund our operations. An inability to raise funds through deposits, borrowings, the sale of investment securities,
Federal Home Loan Bank advances, the sale of loans and other sources could have a substantial negative effect on
our liquidity. Our most important source of funds consists of deposits. Deposit balances can decrease when customers
perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank
deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs
and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment
securities and proceeds from the issuance and sale of any equity and debt securities to investors. Additional liquidity
is provided by the ability to borrow from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank
and our ability to raise brokered deposits. We also may borrow funds from third-party lenders, such as other financial
institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms
that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services
industries or the economy in general, such as disruptions in the financial markets or negative views and expectations
about the prospects for the bank or non-bank financial services industries.
Page-19
Based on past experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase
interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on
our business, financial condition and results of operations.
Any decline in available funding could adversely affect our ability to originate loans, invest in securities, meet our
expenses, pay dividends to our shareholders or to fulfill obligations such as repaying our borrowings or meeting deposit
withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition
and results of operations.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 PROPERTIES
We lease our corporate headquarters building in Novato, California, which houses substantial loan production,
operations and administration. 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 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.
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-20
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Bancorp common stock trades on the NASDAQ Capital Market under the symbol BMRC. At February 29, 2016,
6,078,363 shares of Bancorp's common stock, no par value, were outstanding and held by approximately 2,327 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 $
2015
High
52.96 $
53.00 $
52.89 $
56.77 $
Low
48.63 $
45.81 $
46.81 $
47.75 $
2014
High
46.09 $
47.97 $
49.32 $
53.63 $
Low
41.59
42.49
44.01
45.35
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 $
2015
2014
Per Share
Dollars
0.22 $
0.22 $
0.22 $
0.24 $
1,307 $
1,313 $
1,316 $
1,454 $
Per Share
Dollars
0.19 $ 1,120,000
0.19 $ 1,123,000
0.20 $ 1,185,000
0.22 $ 1,305,000
On January 22, 2016 the Company declared a quarterly cash dividend of 25 cents per share payable February 12,
2016 to shareholders of record at the close of business on February 5, 2016. The increase of one cent per share in
quarterly cash dividends follows an increase of two cent per share during the fourth quarter of 2015. 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 2015.
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, 2015, 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
185,269 1 $
38.35
324,262 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-21
Five-Year Stock Price Performance Graph
The following graph, compiled by SNL Financial LC of Charlottesville, Virginia, shows a comparison of cumulative total
shareholder return on our common stock during the five fiscal years ended December 31, 2015 compared to the Russell
2000 Stock index and the SNL Bank $1B - $5B Index. The comparison assumes $100 was invested on December 31,
2010 in our common stock and all of the dividends were reinvested. The graph represents past performance and
should not be considered to be an indication of future performance. In addition, total return performance results vary
depending on the length of the performance period.
The Company's Annual Report on Form 10-K for the year ended December 31, 2014 included the total return
performance of stock prices of a group of twenty public California peer bank issuers with assets ranging from $1 billion
to $5 billion compiled by an investment banking company. Management believes that a better comparison is provided
by the SNL Bank $1B to $5B index, which is a published industry index that includes a larger pool of peer banks
comparable to us. The following graph excludes the California peer issuers as the banks that could be included in the
group are limited and have been affected by mergers and changes in asset size.
Total Return Performance
Bank of Marin Bancorp
Russell 2000
SNL Banks $1B-$5B
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
0
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
Bank of Marin Bancorp (BMRC)
Russell 2000 Index
SNL Bank $1B - $5B Index
Source: SNL Financial LC of Charlottesville, Virginia
2010
100
100
100
2011
109
96
91
2012
111
111
112
2013
131
155
164
2014
161
162
171
2015
167
155
191
Page-22
ITEM 6
SELECTED FINANCIAL DATA
The following data has been derived from the audited consolidated financial statements of Bank of Marin Bancorp. For
additional information, refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Item 8, Financial Statements and Supplementary Data.
(dollars in thousands)
Selected financial condition data:
Total assets
Loans, net
Deposits
Borrowings
Stockholders' equity
(dollars in thousands, except per share data)
Selected operating data:
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense 1
Net income 1
Net income per common share:
Basic
Diluted
Performance and other financial ratios:
Return on average assets
Return on average equity
Tax-equivalent net interest margin
Efficiency ratio
Loan-to-deposit ratio
Cash dividend payout ratio on common stock 2
Cash dividends per common share
Asset quality ratios:
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans 3
Non-performing loans to total loans 3
Capital ratios:
Equity to total assets ratio
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common equity Tier 1 capital (to risk weighted assets)
Other data:
Number of full service offices
Full time equivalent employees
2015
2014
2013
2012
2011
At December 31,
$ 2,031,134
1,436,299
1,728,226
72,395
214,473
2015
$ 1,805,194
1,255,098
1,587,102
19,969
180,887
$ 1,787,130
1,348,252
1,551,619
20,185
200,026
For the Years Ended December 31,
2012
2013
2014
$ 1,434,749
1,060,291
1,253,289
15,000
151,792
$
$
$
$
$
$
$
$
67,187
500
9,193
46,949
18,441
3.09
3.04
2015
0.98%
8.84%
3.83%
61.47%
83.97%
29.10%
0.90
1.03%
6.88x
0.15%
10.60%
13.37%
12.44%
10.67%
12.16%
20
259
70,441
750
9,041
47,263
19,771
$
58,775
540
8,066
44,092
14,270
$
63,190
2,900
7,112
38,694
17,817
$
$
3.35
3.29
3.34
3.28
At or for the Years ended December 31,
2013
2.62
2.57
2012
2014
$
$
1.08%
10.31%
4.13%
59.46%
87.87%
23.90%
0.80
$
0.96%
8.86%
4.20%
65.97%
79.98%
27.90%
0.73
$
1.11%
1.61x
0.69%
11.20%
13.94%
12.87%
10.62%
N/A
21
260
1.12%
1.22x
0.92%
10.00%
13.21%
12.18%
10.78%
N/A
21
281
1.24%
12.36%
4.74%
55.04%
85.69%
21.00%
0.70
1.27%
0.77x
1.64%
10.60%
13.71%
12.52%
10.30%
N/A
17
238
$ 1,393,263
1,016,515
1,202,972
40,000
135,551
$
$
$
$
2011
63,819
7,050
6,269
38,283
15,564
2.94
2.89
2011
1.16%
12.01%
5.13%
54.62%
85.72%
22.10%
0.65
1.42%
1.22x
1.16%
9.70%
13.13%
11.45%
9.53%
N/A
17
232
1 2014 included $746 thousand in one-time acquisition expenses related to the NorCal Acquisition. 2013 included $3.7 million in one-time
expenses related to the NorCal Acquisition and 2011 included $1.0 million in 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.
3 Non-performing loans include loans on non-accrual status and loans past due 90 days or more and still accruing interest.
Page-23
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2015 and 2014 and results of operations for each
of the years in the three-year period ended December 31, 2015 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
Earnings in 2015 totaled $18.4 million compared to earnings of $19.8 million in 2014. Diluted earnings of $3.04 per
share for the year ended December 31, 2015 compared to $3.29 per share in the same period of 2014. Return on
assets ("ROA") was 0.98% in 2015 compared to 1.08% in 2014. Return on equity ("ROE") was 8.84% in 2015 compared
to 10.31% in 2014.
The following are highlights of our operating and financial performance for the year ended December 31, 2015:
• The Bank generated record loan originations of $252 million in 2015, offset by payoffs for a net increase of
$88 million from last year.
• Credit quality remains strong with non-accrual loans trending downward, representing 0.15% of total loans at
year end.
• Total deposits grew 11.4% year-over-year to $1.73 billion from $1.55 billion.
• Our loan to deposit ratio has increased to 84%.
• All of our capital ratios are well above current regulatory requirements for a "well-capitalized" institution. Total
risk-based capital ratio for Bancorp was 13.4% at December 31, 2015.
• Reflecting the strength of the Bank and its future prospects, the Board of Directors declared the 43rd consecutive
quarterly cash dividend in January 2016. The dividend increased $0.01 from the prior quarter and $0.03, or
14% from one year ago to $0.25 per share.
Net interest income totaled $67.2 million and $70.4 million in 2015 and 2014, respectively. The tax-equivalent net
interest margin was 3.83% in 2015 compared to 4.13% in 2014. The decrease in net interest margin relates to the
continued effect of the low interest rate environment on our loan and investment portfolio turnover and a decline in
accretion income related to acquired loans purchased at a discount.
Non-interest income totaled $9.2 million in 2015 compared to $9.0 million in the same period of 2014, an increase of
$152 thousand, or 1.7%. The increase in 2015 compared to 2014 primarily relates to higher dividend income from the
Federal Home Loan Bank of San Francisco, partially offset by lower merchant interchange fees due to decreased
transaction volume.
Non-interest expense totaled $46.9 million and $47.3 million in 2015 and 2014, respectively, a decrease of $314
thousand, or 0.7%. The decrease in non-interest expense from the prior year is primarily due to the reversal of provision
for losses on off-balance sheet commitments and a decrease in data processing expense as the first quarter of 2014
included $442 thousand in one-time NorCal Acquisition-related expenses. Decreases were partially offset by higher
salaries and benefits and higher occupancy expense relating to non-recurring accounting adjustments in 2015. Our
Page-24
efficiency ratio (the ratio of non-interest expense divided by the sum of net interest income and non-interest income)
was 61.47%, 59.46% and 65.97% in 2015, 2014 and 2013, respectively. Our expense discipline allowed for a healthy
efficiency ratio, notwithstanding the challenging interest rate, competitive and regulatory environments.
Gross loans increased to $1,451.2 million at December 31, 2015 compared to $1,363.4 million at December 31, 2014,
which was driven substantially by new loan volume in investor commercial real estate and commercial and industrial
(and related owner occupied commercial real estate). Loan growth in 2015 totaled $87.8 million, or 6.5% over 2014,
and was the result of strong new loan volume partially offset by high payoffs.
Credit quality is very strong and continues to improve. Non-accrual loans continued to trend downward, and decreased
to $2.2 million at December 31, 2015 from $9.4 million at December 31, 2014, and as a percentage of total loans
declined to 0.15% from 0.69% a year ago. The decrease in non-accrual loans from the prior year primarily relates to
a previously non-performing loan that was returned to accrual status, the payoff of a commercial real estate loan, and
a land development loan that was sold. Net charge-offs for the year ended December 31, 2015 totaled $600 thousand
compared to net recoveries of $124 thousand in the prior year. The charge-offs during 2015 primarily related to the
land development loan sale.
The provision for loan losses totaled $500 thousand in 2015, compared to $750 thousand in the prior year. The ratio
of loan loss reserve to loans decreased from 1.11% at December 31, 2014 to 1.03% at December 31, 2015. The
decrease compared to the prior year is primarily related to the improvement in credit quality.
Deposits totaled $1,728.2 million at December 31, 2015 compared to $1,551.6 million at December 31, 2014. Total
deposits increased $176.6 million, or 11.4%, compared to December 31, 2014. Non-interest bearing deposits totaled
$770.1 million at December 31, 2015, an increase of $99.2 million, or 14.8%, when compared to December 31, 2014.
Non-interest bearing deposits represented 44.6% of total deposits as of December 31, 2015 compared to 43.2% at
December 31, 2014. The increase in deposits resulted from existing relationships and the development of a number
of new relationships.
The total risk-based capital ratio for Bancorp was 13.4% at December 31, 2015 compared to 13.9% at December 31,
2014. The decrease primarily resulted from an increase in risk-weighted assets due to higher loan and investment
balances. All risk-based capital ratios continue to be well above (i) regulatory requirements and the new Basel III
requirements that took effect on January 1, 2015 (Basel Committee on Bank Supervision guidelines for determining
regulatory capital) and (ii) the new Basel III requirements on a fully phased-in basis.
In summary, 2015 was a good year reflecting our consistent approach to the way we do business. Our discipline
brought us through the recession in solid financial condition and should ensure our continued success and profitable
growth.
The following factors may impact the Company’s performance in 2016:
• New lending and deposit relationships in 2015 should benefit us for a full year in 2016.
• We have ample liquidity and capital to support continued growth in coming years.
• Acquisitions remain a component of our strategic plan. The Bay Area is the most attractive area in the country
and we intend to expand our footprint through organic growth and strategic acquisitions.
• Expense control continues to be a critical component of our success. We are convinced that great efficiencies
can be achieved as we grow as an organization serving the Bay Area.
• Our net interest margin in 2016 may continue to compress if the current market interest rates do not increase.
Page-25
Critical Accounting Policies and Estimates
Critical accounting policies are those that are both very 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 and imprecise.
Management has determined the following four accounting policies to be critical:
Allowance for Loan Losses: For information regarding our ALLL methodology, the related provision for loan losses,
risks related to asset quality and lending activity, see Item 1A - Risk Factors, Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, and Note 1 - Summary of Significant Accounting Policies
and Note 4 - Loans and Allowance for Loan Losses in Item 8 - Financial Statements and Supplementary Data of this
Form 10-K.
Other-than-temporary Impairment of Investment Securities: For information regarding our investment securities,
investment activity, and related risks, see Item 1A - Risk Factors, Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, and Note 1 - Summary of Significant Accounting Policies and Note 3
- Investment Securities in Item 8 - Financial Statements and Supplementary Data of this Form 10-K.
Accounting for Income Taxes: For information on our tax assets and liabilities, and related provision for income taxes,
see Note 1 - Summary of Significant Accounting Policies and Note 12 - Income Taxes in Item 8 - Financial Statements
and Supplementary Data of this Form 10-K.
Fair Value Measurements: For information on our use of fair value measurements and our related valuation
methodologies, see Note 1 - Summary of Significant Accounting Policies and Note 10 - Fair Value of Assets and
Liabilities in Item 8 - Financial Statements and Supplementary Data of this Form 10-K.
RESULTS OF OPERATIONS
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
affected 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 effect 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-26
Table 1 Average Statements of Condition and Analysis of Net Interest Income
Year ended
Year ended
Year ended
December 31, 2015
December 31, 2014
December 31, 2013
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
$
52,004 $
135
0.26% $
63,150 $
161
0.25% $
47,401 $
120
0.25%
370,730
8,255
2.23%
341,787
8,385
2.45%
272,767
6,648
2.44%
1,354,564
62,953
4.58%
1,317,794
65,856
4.93%
1,092,885
55,157
4.98%
1,777,298
71,343
3.96%
1,722,731
74,402
4.26%
1,413,053
61,925
4.32%
Cash and non-interest-bearing due from banks
Bank premises and equipment, net
Interest receivable and other assets, net
44,543
9,705
58,201
44,452
9,290
56,592
32,903
9,214
38,993
Total assets
$ 1,889,747
$ 1,833,065
$ 1,494,163
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
$
95,662 $
115
0.12% $
101,133 $
Savings accounts
Money market accounts
CDARS and other time accounts
Overnight borrowings 1
FHLB fixed-rate advances
Subordinated debentures
134,997
505,280
156,316
50
0.04%
495
853
0.10%
0.55%
784
3
0.38%
125,169
507,055
155,229
4
15,000
315
2.07%
15,000
5,288
420
7.94%
5,070
99
46
550
917
—
315
422
0.04%
0.11%
0.59%
—%
2.07%
8.36%
0.10% $
97,336 $
100,185
437,441
145,750
4,054
15,000
52
35
419
922
0.05%
0.03%
0.10%
0.63%
7
0.17%
315
2.07%
407
35
8.57%
5
Total interest-bearing liabilities
913,327
2,251
0.25%
908,660
2,349
0.26%
800,173
1,785
0.22%
Demand accounts
Interest payable and other liabilities
Stockholders' equity
753,038
14,856
208,526
717,738
14,934
191,733
518,986
13,970
161,034
Total liabilities & stockholders' equity
$ 1,889,747
$ 1,833,065
$ 1,494,163
Tax-equivalent net interest income/margin 1
Reported net interest income/margin 1
Tax-equivalent net interest rate spread
$ 69,092
3.83%
$ 72,053
4.13%
$ 60,140
4.20%
$ 67,187
3.73%
$ 70,441
4.03%
$ 58,775
4.10%
3.71%
4.00%
4.10%
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%.
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.
2015 compared with 2014:
The tax-equivalent net interest margin was 3.83% in 2015, compared to 4.13% in 2014. The decrease of thirty basis
points was primarily due to a lower yield on interest-earning assets, mainly relating to a decrease in accretion and
gains on payoffs of acquired loans, new loans and investment securities yielding lower rates and downward repricing
on renewed loans. The net interest spread decreased twenty nine basis points over the same period for the same
reasons.
The yield on average interest-earning assets decreased thirty basis points in 2015 compared to 2014 for the reasons
listed above. The loan portfolio as a percentage of average interest-earning assets, decreased to 76.2% in 2015, from
76.5% in 2014. The investment securities were 20.9% and 19.8% of average interest-earning assets in 2015 and
2014, respectively. Total average interest-earning assets increased $54.6 million, or 3.2%, in 2015 compared to 2014.
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) regulated by the FOMC. In December 2015, the FOMC raised the target federal funds
rate by 25 basis points to a range of 0.25% to 0.50%. This increase from the historic low of 0.00% to 0.25% had not
changed for the past seven years. The prolonged low interest rate environment has negatively affected our net interest
margin and yields on our earning assets and resulted in significant net interest margin compression over the last several
years. Our net interest margin in 2016 may continue to compress if the current market interest rates do not increase.
Page-27
Early payoffs or prepayments of our acquired loans with significant unamortized purchase discount/premium could
result in volatility in our net interest margin. Accretions and gains on payoffs of purchased loans recorded to interest
income and the affect on our net interest margin during the past three years were as follows:
Years ended December 31,
2015
2014
2013
Dollar
Amount
$
$
$
495
1,389
44
Basis point
affect on net
interest
margin
Basis point
affect on net
interest
margin
Basis point
affect on net
interest
margin
Dollar
Amount
Dollar
Amount
3 bps
8 bps
0 bps
$
$
$
614
3,292
622
4 bps
19 bps
4 bps
$
$
$
725
1,163
469
5 bps
8 bps
3 bps
(dollars in thousands; unaudited)
Accretion on PCI loans
Accretion on non-PCI loans
Gains on payoffs of PCI loans
2014 Compared with 2013:
The tax-equivalent net interest margin was 4.13% in 2014, compared to 4.20% in 2013. The decrease of seven basis
points was primarily due to a lower yield on interest-earning assets, mainly relating to new loans yielding lower rates
and downward repricing on renewed loans offset by an increase in accretion and gains on payoffs of acquired loans.
In addition to the decrease on lower yielding interest-earning assets, the cost of interest-bearing liabilities increased
by four basis points in 2014 due to subordinated debt acquired, compared to 2013. The net interest spread decreased
ten basis points over the same period for the same reasons.
The average yield on interest-earning assets decreased six basis points in 2014 compared to 2013 due to the reasons
listed above. The loan portfolio as a percentage of average interest-earning assets, decreased to 76.5% in 2014, from
77.3% in 2013. The investment securities were 19.8% and 19.3% of average interest-earning assets in 2014 and
2013, respectively. Total average interest-earning assets increased $309.7 million, or 21.9%, in 2014 compared to
2013.
Page-28
Table 2
Analysis of Changes in Net Interest Income
The following table presents the effects of changes in average balances (volume) or changes in average rates on net
interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances
multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period
average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average
balances.
(in thousands, unaudited)
Interest-bearing due from banks
Investment securities 1
Loans 1
Total interest-earning assets
Interest-bearing transaction accounts
Savings accounts
Money market accounts
CDARS & other time deposits
FHLB borrowings and overnight
borrowings
Subordinated debentures
Total interest-bearing liabilities
2015 compared to 2014
2014 compared to 2013
Volume
Yield/
Rate
Mix
Total Volume
Yield/
Rate
Mix
$
(28) $
3 $
(1) $
(26) $
40 $
1 $
— $
710
1,838
2,520
(774)
(4,612)
(5,383)
(66)
(129)
(196)
(130)
1,682
(2,903)
11,351
(3,059)
13,073
(5)
4
(2)
6
—
18
21
23
—
(53)
(70)
—
(20)
(120)
(1)
—
—
—
3
(1)
1
17
4
(55)
(64)
3
(3)
(98)
2
9
67
60
(68)
401
471
44
(541)
(496)
43
2
55
(61)
78
(1)
116
11
(111)
(100)
2
—
9
(4)
(17)
(13)
(23)
Total
41
1,737
10,699
12,477
47
11
131
(5)
(7)
387
564
$ 2,499 $ (5,263) $
(197) $ (2,961) $ 12,602 $
(612) $
(77) $ 11,913
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 35%.
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 provisions for loan losses charged to expense. For further discussion, see the section captioned “Critical
Accounting Policies.”
Our provision for loan losses totaled $500 thousand in 2015, compared to $750 thousand in 2014 and $540 thousand
in 2013. The decrease compared to 2014 primarily relates to a lower level of impaired loans from the successful
resolution of problem loans, as well as a decrease in classified loans. The allowance for loan losses of $15.0 million
totaled 1.03% of loans at December 31, 2015, compared to 1.11% at December 31, 2014. Net charge-offs in 2015
totaled $600 thousand and were primarily related to one land development loan that was sold, compared to net
recoveries of $125 thousand in the prior year. See the section captioned “Allowance for Loan Losses” below for further
analysis of the provision for loan losses.
Page-29
Non-interest Income
The table below details the components of non-interest income.
Table 3 Components of Non-Interest Income
Years ended
December 31,
(dollars in thousands; unaudited)
2015
2014
2013
2015 compared to 2014
2014 compared to 2013
Amount
Percent
Amount
Percent
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Service charges on deposit accounts
$ 1,979 $ 2,167 $ 2,062 $
(188)
(8.7)% $
Wealth Management and Trust Services
Debit card interchange fees
Merchant interchange fees
Earnings on bank-owned life insurance
Dividends on FHLB stock
Gains (losses) on investment securities, net
Other income
2,391
1,445
545
814
1,003
79
937
2,309
1,378
2,162
1,104
803
841
563
80
900
822
954
259
(1)
704
82
67
3.6 %
4.9 %
(258)
(32.1)%
(27)
440
(1)
37
(3.2)%
78.2 %
(1.3)%
4.1 %
Total non-interest income
$ 9,193 $ 9,041 $ 8,066 $
152
1.7 % $
105
147
274
(19)
5.1 %
6.8 %
24.8 %
(2.3)%
(113)
(11.8)%
304
81
196
975
117.4 %
NM
27.8 %
12.1 %
NM - not meaningful
2015 Compared with 2014:
Non-interest income totaled $9.2 million and $9.0 million at December 31, 2015 and December 31, 2014, respectively.
The increase compared to the prior year primarily relates to the increase in dividends on Federal Home Loan Bank
("FHLB") stock, due to a $305 thousand special dividend from the FHLB and higher annualized dividend rates in 2015.
The increase was partially offset by lower merchant interchange fees due to decreased transaction volume and lower
service charges on deposit accounts compared to 2014.
2014 Compared with 2013:
Service charges on deposit accounts increased in 2014 when compared to 2013 primarily due to increased volume
related to the NorCal Acquisition.
The increase in Wealth Management and Trust Services ("WMTS") income in 2014 compared to 2013 is due to the
acquisition of new assets and market value appreciation of existing assets under management. Assets under
management totaled approximately $352.2 million at December 31, 2014 and $335.9 million at December 31, 2013.
Debit card interchange fees increased in 2014 when compared to the prior year primarily due to an increase in the
volume of debit card usage. Bank-owned life insurance (“BOLI”) income decreased in 2014 compared to 2013 due to
a $228 thousand benefit realized on the death of an insured employee in the first quarter of 2013, partially offset by
earnings from additional policies.
Other income increased when compared to the prior year primarily due to higher dividend income from the FHLB and
higher commission income from mortgage brokerage activity. We discontinued the small mortgage brokerage acquired
from Bank of Alameda effective June 30, 2014 and the financial impact has not been material.
Page-30
Non-interest Expense
The table below details the components of non-interest expense.
Table 4 Components of Non-Interest Expense
Years ended
2015 compared to 2014
2014 compared to 2013
(dollars in thousands; unaudited)
Salaries and related benefits
Occupancy and equipment
Depreciation and amortization
FDIC insurance
Data processing
Professional services
(Reversal of) provision for losses on off-
balance sheet commitments
Other non-interest expense:
Advertising
Amortization of core deposit
intangible
Other expense
Total other non-interest expense
December 31,
Amount
Percent
Amount
Percent
2015
2014
2013
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
Increase
(Decrease)
$ 25,764 $ 25,005 $ 21,974 $
5,498
1,968
997
3,318
2,121
5,470
1,585
1,032
3,665
2,230
4,347
1,395
921
5,334
2,985
759
28
383
(35)
(347)
(109)
3.0 % $
0.5 %
24.2 %
(3.4)%
(9.5)%
(4.9)%
3,031
1,123
190
111
13.8 %
25.8 %
13.6 %
12.1 %
(1,669)
(31.3)%
(755)
(25.3)%
(263)
334
112
(597)
(178.7)%
222
198.2 %
334
400
490
(66)
(16.5)%
(90)
(18.4)%
619
6,593
7,546
771
6,771
7,942
69
6,465
7,024
(152)
(178)
(396)
(314)
(19.7)%
(2.6)%
(5.0)%
702
306
918
(0.7)% $
3,171
NM
4.7 %
13.1 %
7.2 %
Total non-interest expense
$ 46,949 $ 47,263 $ 44,092 $
NM - not meaningful
2015 Compared with 2014:
The increase in salaries and related benefits was mainly due to higher employee benefits and lower deferred loan
origination costs. These expenses were partially off-set by lower salaries, commissions and associated payroll taxes
in 2015 mainly related to the absence of acquisition-related personnel costs. The number of average FTE employees
totaled 260 in 2015 and 266 in 2014.
The increase in depreciation and amortization is primarily due to non-recurring accounting adjustments in 2015.
The decrease in data processing expenses in 2015 mainly reflects one-time NorCal Acquisition-related expenses
totaling $442 thousand in the first quarter of 2014 related to the system conversion.
The reversal of provision for losses on off-balance sheet commitments was primarily due to a refinement in methodology
used in the calculation of the loss reserve on these commitments by incorporating rolling four-quarter and average
commitment usage, as well as eliminating outlier data for small commitment categories. Going forward we expect the
result of the refined methodology to reduce the fluctuation in the provision for losses on off-balance sheet commitments.
2014 Compared with 2013:
The increase in salaries and benefit expenses was mainly due to higher salaries and commissions and associated
payroll taxes, due to an increase in personnel from the NorCal Acquisition and the addition of commercial lenders, as
well as higher costs incurred in 2014 with the temporary NorCal Acquisition integration staff. These expenses were
partially offset by higher capitalized and deferred loan origination costs. The number of average FTE employees totaled
266 in 2014 and 242 in 2013.
The increase in occupancy and equipment primarily reflects higher rent and common area maintenance expenses and
other occupancy expenses related to new facilities from the NorCal Acquisition.
Page-31
The decrease in data processing expenses in 2014 primarily reflects one-time acquisition-related expenses totaling
$2.8 million in the fourth quarter of 2013, mainly relating to NorCal's core processing system contract termination and
deconversion fees, partially offset by $746 thousand of NorCal deconversion expense recognized in the first quarter
of 2014 and increased data processing transaction volumes due to the NorCal Acquisition.
Professional service expenses in 2014 decreased when compared to 2013. This is primarily due to $660 thousand of
2013 professional and legal fees related to the NorCal Acquisition and cost savings on various professional services
in 2014.
The increase in the provision for off-balance sheet commitments in 2014 was primarily due to a change in allowance
for loan loss methodology, which is applied to these commitments as well as the allowance for loan losses. $771
thousand amortization of core deposit intangibles from the NorCal Acquisition were recorded in other expense in 2014
compared to $69 thousand in 2013. FDIC insurance and other expenses include higher on-going expenses as a result
of larger size and increased transaction volume.
Provision for Income Taxes
The provision for income taxes totaled $10.5 million at an effective tax rate of 36.3% in 2015, compared to $11.7 million
at an effective tax rate of 37.2% in 2014 and $7.9 million at an effective tax rate of 35.7% in 2013. 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 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.
Additionally, effective tax rates reflect the adoption of the amended FASB Accounting Standards Codification ("ASC")
Topic 323-740 Investments—Equity Method and Joint Ventures—Income Taxes. Beginning in 2014, we adopted this
ASU to apply the proportional amortization methodology in accounting for low income tax credit investments. In
accordance with ASC 323-740, the tax credit investment amortization expense is now presented as a component of
provision for income taxes. Previously, the amortization expense was included as non-interest expense. This change
resulted in lower non-interest expense, increased income tax expense and an increased effective tax rate, but did not
alter the amount of income taxes actually paid by the Bank. For further discussion, see Note 1, Note 3 and Note 12
to Item 8. Financial Statements and Supplementary Data.
We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax
jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. In June
2015, the State of California completed its examination of the 2011 and 2012 corporate income tax returns, resulting
in a minor adjustment. At December 31, 2015 and 2014, neither the Bank nor Bancorp had accruals for interest and
penalties related to unrecognized tax benefits.
Page-32
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 types of securities to be purchased based on
liquidity and the desire to attain a reasonable investment yield balanced with risk exposure. Table 5 shows the
composition of the debt securities portfolio by expected maturity at December 31, 2015 and 2014. 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, 2015 was
approximately four years.
Table 5 Investment Securities
December 31, 2015
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
(dollars in thousands;
unaudited)
Held-to-maturity:
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1 Fair Value
Average
Yield2
State and municipal
$ 7,795
2.82% $ 28,966
4.42% $ 6,158
6.40% $
Corporate bonds
11,534
2.16
3,538
1.07
—
—
MBS/CMOs issued by U.S.
government agencies
—
—
Total held-to-maturity
19,329
2.43
2,240
34,744
4.65
4.09
9,406
15,564
1.80
3.62
—
—
—
—
—% $ 42,919 $ 44,146
4.41%
—
—
—
15,072
15,098
1.90
11,646
11,810
69,637
71,054
2.35
3.52
Available-for-sale:
MBS/CMOs issued by U.S.
government agencies
State and municipal
Debentures of government
sponsored agencies
Privately issued CMOs
Corporate bonds
4,262
4,673
2.93
2.24
157,982
32,406
19,107
1.00
142,583
—
—
—
—
980
3,954
Total available-for-sale
28,042
1.50
337,905
2.04
2.25
1.36
1.30
1.40
1.76
27,459
17,755
—
2,980
993
49,187
2.41
3.58
—
2.20
1.43
2.80
—
—
189,703
190,093
2,276
4.84
57,110
57,673
—
—
—
—
—
—
161,690
160,892
3,960
4,947
4,150
4,979
2,276
4.84
417,410
417,787
2.11
2.77
1.32
1.98
1.41
1.88
Total
$ 47,371
1.88% $372,649
1.98% $ 64,751
3.00% $ 2,276
4.84% $487,047 $488,841
2.12%
December 31, 2014
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
(dollars in thousands;
unaudited)
Held-to-maturity:
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1 Fair Value
Average
Yield2
State and municipal
$ 18,536
2.37% $ 36,287
3.80% $ 8,602
6.18% $
Corporate bonds
25,060
1.55
15,197
1.89
MBS/CMOs issued by U.S.
government agencies
Total held-to-maturity
Available-for-sale:
MBS/CMOs issued by U.S.
government agencies
6,222
49,818
4.32
2.20
6,533
58,017
2.26
3.13
State and municipal
2,378
2.01
11,264
—
—
105,761
2.31
2.40
Debentures of government
sponsored agencies
Privately issued CMOs
Corporate bonds
—
6,818
3,000
Total available-for-sale
12,196
—
3.58
0.91
2.62
14,694
1.66
—
—
—
—
131,719
2.25
—
—
—
—
8,602
6.18
48,227
725
—
—
1,936
50,888
2.25
3.18
—
—
1.97
2.25
—
—
—
—
—% $ 63,425 $ 65,121
3.70%
—
—
—
40,257
40,448
1.68
12,755
13,074
116,437
118,643
3.23
2.94
2,557
1,366
2.13
5.08
156,545
158,119
15,733
15,880
—
—
14,694
14,557
319
2.38
—
—
7,137
4,936
7,294
4,998
4,242
3.10
199,045
200,848
2.29
2.62
1.66
3.53
1.33
2.29
Total
$ 62,014
2.28% $189,736
2.51% $ 59,490
2.82% $ 4,242
3.10% $315,482 $319,491
2.53%
1 Book value reflects cost, adjusted for accumulated amortization and accretion.
2 Weighted average yields on tax-exempt basis and weighted average calculation is based on amortized cost of securities.
Page-33
The amortized cost of our investment securities portfolio increased $171.6 million or 54.4% during 2015 in order to
deploy temporary excess liquidity from deposit growth earlier in 2015. $289.5 million in securities were purchased in
2015 and were designated as available-for-sale to provide the flexibility for liquidity management. These purchases
were partially offset by $112.0 million of paydowns and maturities, and $3.1 million of sales during 2015.
During 2015, we purchased $172.0 million in agency debentures issued by FNMA, Federal Farm Credit Bureau, FHLB
and FHLMC, $65.5 in million mortgage pass-through securities, $44.5 million in municipal securities, and $7.5 million
in collateralized mortgage obligations ("CMOs"). We consider agency debentures, mortgage-backed securities, and
CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the implicit backing of the
U.S. Government. We also invest in municipalities with sound credit fundamentals. The debentures and MBS issued
by the U.S. government sponsored agencies, state and municipal securities and corporate bonds, made up 74.5%,
20.5% and 4.1% of the portfolio at December 31, 2015, compared to 58.4%, 25.0% and 14.3%, respectively at December
31, 2014. See the discussion in the section captioned “Securities May Lose Value due to Credit Quality of the Issuers”
in Item 1A Risk Factors above.
Any investment securities in our portfolio that may be backed by sub-prime or Alt-A mortgages, which account for
approximately 0.2% of our total securities portfolio, relate to privately issued CMOs. See Note 3 to the Consolidated
Financial Statements in Item 8, for more information on investment securities.
At December 31, 2015, distribution of our investment in obligations of state and political subdivisions was as follows:
(dollars in thousands; unaudited)
Within California:
December 31, 2015
December 31, 2014
Amortized
Cost
Fair Value
% of
state and
municipal
securities
Amortized
Cost
Fair Value
% of
state and
municipal
securities
General obligation bonds
$
18,642 $
18,830
18.6% $ 18,556
$ 18,734
23.7%
Revenue bonds
Tax allocation bonds
Total within California
Outside California:
General obligation bonds
Revenue bonds
Total outside California
15,453
5,411
39,506
51,920
8,603
60,523
15,767
5,603
40,200
52,990
8,629
61,619
15.5
5.4
39.5
51.9
8.6
60.5
21,344
6,280
46,180
22,549
10,429
32,978
21,684
6,446
46,864
23,680
10,457
34,137
26.9
7.6
58.2
28.8
13.0
41.8
Total obligations of state and political
subdivisions
$
100,029 $ 101,819
100.0% $ 79,158
$ 81,001
100.0%
The portion of the portfolio outside the state of California is distributed among 18 states. The largest concentrations
outside California are in Minnesota (8.5%), Washington (8.3%), and Texas (6.4%). 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-34
Loans
Table 6 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
2015
219,452 $
2014
210,223 $
2013
183,291 $
2012
176,431 $
2011
175,790
$
242,309
715,879
65,495
112,300
73,154
22,639
1,451,228
(14,999)
1,436,229 $
230,605
673,499
48,413
110,788
73,035
16,788
1,363,351
(15,099)
1,348,252 $
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
$
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. Substantially all of our residential loans are indexed to Treasury Constant Maturity Rates and have
provisions to reset five years after their origination dates.
2015 was highlighted by record new loan volume of approximately $252 million for the year, compared to approximately
$192 million in 2014, as we continued to strengthen our markets throughout our footprint.
Commercial loans increased $9.2 million in 2015 and $26.9 million in 2014. We successfully expanded our lending
in strategic market segments such as wine-related industries in 2015.
Commercial real estate loans increased $54.1 million in 2015 and $38.0 million in 2014. Of the commercial real estate
loans at December 31, 2015, 75% were non-owner occupied and 25% were owner occupied. This compares to 74%
non-owner occupied and 26% owner occupied at December 31, 2014. Our commercial real estate loan portfolio is
weighted towards term loans for which the primary source of repayment is cash flow from net operating income of the
real estate property. 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, 2015 and 2014:
Table 7 Commercial Real Estate Loans Outstanding by Geographic Location
(dollars in thousands; unaudited)
Marin
Alameda
Sonoma
San Francisco
Napa
Contra Costa
San Mateo
Sacramento
Other
Total
$
$
December 31, 2015
December 31, 2014
Amount
% of Commercial
real estate loans
Amount
317,035
135,835
132,592
130,164
76,409
40,084
21,756
17,592
86,721
958,188
33.1% $
14.2
13.8
13.6
8.0
4.2
2.3
1.8
9.0
100.0% $
295,423
143,194
139,627
110,345
66,757
24,281
12,012
21,003
91,462
904,104
% of Commercial
real estate loans
32.7%
15.9
15.4
12.2
7.4
2.7
1.3
2.3
10.1
100.0%
Construction loans increased $17.1 million in 2015 and $16.8 million in 2014. The increase in 2015 was due to
substantial draws on existing single family development construction projects as they approached completion and
origination of new construction loans. The improving economy resulted in a number of new financing opportunities
for existing customers who had successfully completed construction projects in the past.
Page-35
The following table shows an analysis of construction loans by type and location as of December 31, 2015 and 2014:
Table 8 Construction Loans Outstanding by Type and Geographic Location
(dollars in thousands; unaudited)
December 31, 2015
December 31, 2014
Construction loans by type
1-4 Single family residential
Commercial real estate
Apartments and multifamily
Land - improved
Land - unimproved
Total
(dollars in thousands; unaudited)
Construction loans by geographic location
San Francisco
Marin
San Mateo
Napa
Riverside
Sonoma
Other
Total
% of
Construction
Loans
60.2%
27.4
4.8
4.9
2.7
100.0%
Amount
39,444
17,962
3,127
3,224
1,738
65,495
December 31, 2015
% of
Construction
Loans
39.9%
24.3
14.2
11.8
4.9
2.6
2.3
100.0%
Amount
26,120
15,921
9,327
7,749
3,224
1,725
1,429
65,495
$
$
$
$
% of
Construction
Loans
41.2%
24.9
16.5
13.6
3.8
100.0%
Amount
19,991
12,033
7,970
6,589
1,830
48,413
December 31, 2014
% of
Construction
Loans
45.0%
28.2
6.8
4.3
6.9
7.8
1.0
100.0%
Amount
21,769
13,649
3,287
2,100
3,355
3,811
442
48,413
$
$
$
$
Approximately 85% and 87% of our outstanding loans were secured by real estate at December 31, 2015 and 2014,
respectively. Also see Item 1A, Risk Factors, regarding our loan concentration risk.
At December 31, 2015 and 2014, approximately 1.5% and 1.0%, respectively, of our loans contained an interest-only
feature as part of the loan terms. All of these loans were current with their payments as of December 31, 2015. Except
for two loans to one borrowing relationship totaling $7.0 million, all were considered to have low credit risk (graded
"Pass").
As of December 31, 2015 and 2014, approximately $43.4 million and $31.3 million, respectively, of our loans had
interest reserves, all of which were 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, 2015 and 2014, no construction loans having interest reserve balances were determined to be impaired.
Page-36
The following table presents the maturity distribution of our commercial and construction loans as of December 31,
2015 based on their contractual maturity dates and does not include scheduled payments or potential prepayments.
Table 9A Commercial and Construction Loan Maturity Distribution
(in thousands; unaudited)
Maturity distribution:
Commercial
Construction
Total
Due within
1 year
Due after 1 but
within 5 years
Due after
5 years
$
$
85,192 $
53,652
138,844 $
57,922 $
67
57,989 $
76,338 $
11,776
88,114 $
Total
219,452
65,495
284,947
The following table shows the mix of variable-rate loans to fixed-rate loans for commercial and construction 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 original terms of more than five years have provisions for
the fixed rates to reset, or convert to variable rates, after one, three or five years. These loans are included in variable
rate balances.
Table 9B Commercial and Construction Loan Interest Rate Sensitivity
(in thousands; unaudited)
Commercial
Construction
Total
Allowance for Loan Losses
$
$
Fixed
88,331 $
1,608
Variable
131,121 $
63,887
89,939 $
195,008 $
Total
219,452
65,495
284,947
Credit risk is inherent in the business of lending. As a result, we maintain an allowance for loan losses to absorb
possible losses 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 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 $15.0 million allowance for loan losses at December 31, 2015 is adequate to absorb losses 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 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, results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. Through Management's ongoing loan grading and credit
monitoring process, individual loans are identified that have conditions indicating 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 PCI loans, specific allowances are
established to account for credit deterioration subsequent to acquisition if we have probable decreases in cash flows
expected to be collected. 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 or if foreclosure is imminent. Generally with problem
Page-37
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. Impaired loan balances decreased to $21.2 at December 31, 2015
from $25.2 million at December 31, 2014. The decrease primarily relates to payoffs, sale, and paydowns of several
large impaired loans, as well as five loans that were no longer considered modified as a troubled debt restructuring
(“TDR”). The specific allowance increased slightly to $1.2 million at December 31, 2015 from $1.1 million at
December 31, 2014.
The second component is an estimate of the probable inherent losses in each loan pool with similar risk characteristics.
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 derived from a rolling twenty-quarter look-
back at our historical losses for that particular segment, as well as other qualitative factors. This analysis encompasses
the entire loan portfolio and excludes acquired loans where the purchase discount has not been fully accreted. At
December 31, 2015 and 2014, the allowance allocated for the second component by categories of credits totaled $13.8
million and $14.0 million, respectively. The allocated allowance related to historical charge-off experience, totaled $2.3
million and $2.8 million at December 31, 2015 and 2014, respectively. In addition, the allocated allowance related to
objective 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, adversely-graded loans), and the existence of credit
concentrations totaled $4.9 million and $4.4 million at December 31, 2015 and 2014, respectively. The remaining
amounts were allocated based on subjective factors including 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.
Table 10 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 10 Allocation of Allowance for Loan Losses
December 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
December 31, 2011
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
(dollars in thousands; unaudited)
Commercial loans
allocation
$ 3,023
loans
allocation
15.1 % $ 2,837
loans
allocation
15.4 % $ 3,056
loans
allocation
14.4 % $ 4,100
loans
allocation
16.4 % $ 4,334
loans
17.1 %
Real Estate:
Commercial, owner-occupied
Commercial, investor
Construction
Home Equity
Other residential
Installment and other consumer
Unallocated allowance
2,249
6,178
724
910
394
425
1,096
Total allowance for loan losses
$ 14,999
16.7
49.4
4.5
7.7
5.0
1.6
1,924
6,672
839
859
433
566
N/A
969
$ 15,099
16.9
49.4
3.6
8.1
5.4
1.2
N/A
2,012
6,196
633
875
317
629
506
19.0
49.2
2.5
7.8
5.7
1.4
N/A
1,313
4,372
611
1,264
551
1,231
219
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
$ 14,224
$ 13,661
$ 14,639
Total percent
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Table 11 shows the activity in the allowance for loan losses for each of the years in the five-year period ended
December 31, 2015. Net charge-offs totaled $600 thousand in 2015, compared to net recoveries of $125 thousand
in 2014. Charge-offs in 2015 were primarily comprised of an $839 charge-off related to a land development loan that
was sold. The percentage of net charge-offs (recoveries) to average loans was 0.04% in 2015, compared to (0.01)%
in 2014 and 0.00% in 2013, reflecting the factors discussed above.
Page-38
Table 11 Allowance for Loan Losses at December 31,
(dollars in thousands; unaudited)
2015
2014
2013
2012
2011
Beginning balance
Provision for loan losses
Loans charged-off:
Commercial
Real Estate:
Commercial
Construction
Home equity
Other residential
Installment and other consumer
Total
Loans recovered:
Commercial
Real Estate:
Commercial
Construction
Home equity
Other residential
Installment and other consumer
Total
Net loans (charged-off) recovered
Ending balance
$
15,099
$
14,224
$
13,661
$
14,639
$
12,392
500
750
540
2,900
7,050
(5)
(66)
(672)
(892)
(3,306)
—
(839)
—
—
(20)
(864)
—
(204)
—
—
(7)
(156)
(62)
(176)
—
(88)
(2,595)
(373)
(382)
(196)
(122)
(113)
(473)
(554)
—
(456)
(277)
(1,154)
(4,560)
(4,902)
236
168
1,021
23
—
3
—
2
264
(600)
50
96
3
—
85
402
125
124
1
10
—
21
1,177
23
541
5
122
12
—
2
682
57
4
9
13
—
16
99
(3,878)
(4,803)
$
14,999
$
15,099
$
14,224
$
13,661
$
14,639
Total loans outstanding at end of year, before deducting allowance for
loan losses
$ 1,451,228
$1,363,351
$1,269,322
$ 1,073,952
$ 1,031,154
Average total loans outstanding during year
$ 1,354,564
$1,317,794
$1,092,885
$ 1,023,165
$ 984,211
Ratio of allowance for loan losses to total loans at end of year
1.03%
1.11 %
1.12 %
1.27%
1.42%
Net charge-offs (recoveries) to average loans
0.04%
(0.01)%
— %
0.38%
0.49%
Ratio of allowance for loan losses to net (recoveries) charge-offs
2,499.8% (12,079.2)% (61,843.5)%
352.3%
304.8%
Non-performing assets for each of the past five years are presented below. The decrease in non-performing loans
from 2014 to 2015 primarily relates to a previously non-performing loan that was returned to accrual status, the payoff
of a commercial real estate loan, and a land development loan that was sold. The decrease in non-accrual loans from
2013 to 2014 primarily relates to the successful resolution of several problem loans that led to pay offs, pay downs or
resumption of payments on these loans. The decrease in non-performing 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 ratio
of allowance for loan losses to non-accrual loans increased to 688.3% at December 31, 2015 from 161.5% at
December 31, 2014.
Page-39
Table 12 Non-performing Assets at December 31,
(dollars in thousands; unaudited)
2015
2014
2013
2012
2011
Non-accrual loans:
Commercial
Real Estate:
Commercial, owner-occupied
Commercial, investor
Construction
Home equity
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
Construction1
Total accreting impaired PCI loans
$
21
$
— $
1,187
$
4,893
$
2,955
$
$
—
1,903
1
171
—
83
2,179
421
—
1,403
2,429
5,134
280
—
104
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
9,350
11,678
17,652
11,970
461
—
461
—
—
35
—
25
2,600
$
9,811
$
12,139
$
17,687
$
11,995
4,562
$
3,584
$
4,514
$
4,577
$
2,741
6,993
513
3,237
388
2,011
1,168
7,056
524
550
414
2,045
1,689
534
2,930
1,516
272
1,403
1,693
—
—
1,929
648
2,116
1,515
18,872
15,862
12,862
10,785
—
—
290
279
1,464
1,552
6,326
—
137
—
137
—
—
11
11
1,155
1,866
1,710
—
—
—
—
139
—
1,155
1,866
1,849
Total impaired loans
$
21,188
$
25,223
$
25,695
$
30,303
$
20,145
Allowance for loan losses to non-accrual loans at period end
688.3%
161.5%
121.8%
77.4%
122.3%
Non-accrual loans to total loans
0.15%
0.69%
0.92%
1.64%
1.16%
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 $19.1 million and $22.7 million as of December 31,
2015 and 2014, respectively. The decrease primarily relates to five loans that were removed from TDR designation,
one sold TDR loan and payoffs and paydowns of several other TDR loans. For more information, refer to Note 4 under
“Troubled Debt Restructuring”.
Page-40
Other Assets
BOLI totaled $29.5 million at December 31, 2015, compared to $28.6 million at December 31, 2014, and is recorded
in other assets. Other assets also included net deferred tax assets of $12.7 million and $12.6 million at December 31,
2015 and 2014, respectively. These deferred tax assets consist primarily of tax benefits expected to be realized in
future periods related to net operating loss carryforwards, temporary differences of allowance for loan losses, fair value
adjustments on acquired loans, deferred compensation, and accrued but unpaid expenses. The increase in deferred
tax assets in 2015 primarily relates to the change in the net unrealized gain/loss on securities available-for-sale, increase
in interest received on nonaccrual loans, offset by the utilization of net operating loss carryforwards from the NorCal
Acquisition and reduction in deferred assets associated with accretion on purchase discounts 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, 2015 or 2014.
In addition, we held $8.4 million and $8.2 million of FHLB stock recorded at cost in other assets at December 31, 2015
and 2014, respectively. The FHLB paid $1.0 million and $563 thousand in cash dividends in 2015 and 2014, respectively.
On February 18, 2016, the FHLB declared a cash dividend for the fourth quarter of 2015 at an annualized dividend
rate of 7.99%. Other assets as of December 31, 2015 also included goodwill of $6.4 million and a core deposit intangible
asset, net of amortization, totaling $3.1 million from the NorCal Acquisition.
Deposits
Deposits, which are used to fund our interest earning assets, increased $176.6 million, or 11.4%, in 2015. The increase
in deposits in 2015 compared to 2014 is primarily due to the expansion of business by many of our commercial depositors
as well as the acquisition of key clients. Non-interest bearing deposits totaled $770.1 million at December 31, 2015,
an increase of $99.2 million when compared to December 31, 2014. Non-interest bearing deposits totaled 44.6% of
total deposits as of December 31, 2015, compared to 43.2% at December 31, 2014. No individual customer accounted
for more than 5% of deposits.
The increase in CDARS balances resulted from redirecting certain accounts back onto our balance sheet as part of
our contingency funding testing and management.
Table 13 shows the relative composition of our average deposits for the years 2015, 2014 and 2013.
Table 13 Distribution of Average Deposits
(dollars in thousands; unaudited)
Non-interest bearing
Interest bearing transaction
Savings
Money market 1
CDARS
Other Time deposits:
Less than $100,000
$100,000 or more
Total other time deposits
Total Average Deposits
Years ended December 31,
2015
2014
2013
$
Amount
753,038
95,662
134,997
505,280
10,747
Percent
45.8% $
5.8
8.2
30.7
0.7
Amount
717,738
101,133
125,169
507,055
—
Amount
Percent
44.7% $ 518,986
97,336
100,185
437,441
5,416
6.3
7.8
31.6
—
39,666
105,903
145,569
$ 1,645,293
2.4
6.4
8.8
43,982
111,247
155,229
100.0% $ 1,606,324
2.9
6.7
9.6
38,089
102,245
140,334
100.0% $1,299,698
Percent
39.9%
7.5
7.7
33.7
0.4
2.9
7.9
10.8
100.0%
1 Included in money market balances are Insured Cash Sweep® ("ICS") balances defined in Note 7: Deposits in Item 8 - Financial Statements
and Supplementary Data.
Note- For average rates paid on deposits, refer to Table 1 in Item 7- Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Page-41
Table 14 below shows the maturity groupings for time deposits of $100,000 or more at December 31, 2015, 2014 and
2013.
Table 14 Maturities of Time Deposits of $100,000 or more at December 31
(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,
2015
29,694 $
18,525
35,735
37,969
121,923 $
2014
19,634 $
16,668
20,207
49,076
105,585 $
2013
22,485
19,022
22,578
47,584
111,669
$
$
As of December 31, 2015 and 2014, respectively, we had $470.6 million and $450.6 million in secured lines of credit
with FHLB, $37.8 million and $27.7 million with Federal Reserve Bank of San Francisco (“FRBSF”), and $92.0 million
and $72.0 million in unsecured lines with correspondent banks to cover any short or long-term borrowing needs. As
of December 31, 2015, we had one long-term FHLB fixed-rate advance outstanding totaling $15.0 million. We also
incurred overnight borrowing from FHLB totaling $52.0 million (due to significant funding of loans and deposit volatility
associated with a few large depositors in the fourth quarter of 2015) and a standby letter of credit totaling $241 thousand
as of December 31, 2015, leaving $403.4 million available borrowing capacity with FHLB. As of December 31, 2014,
we had one FHLB fixed-rate advance outstanding totaling $15.0 million and a standby letter of credit totaling $241
thousand, leaving $435.3 million available borrowing capacity with FHLB. The FRBSF and correspondent bank lines
were not utilized at December 31, 2015 and 2014. 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
Trusts I and II at fair values totaling $5.0 million and contractual values totaling $8.2 million at the acquisition date.
The subordinated debentures have been accreted up to $5.4 million and $5.2 million as of December 31, 2015 and
2014. 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, 2015 and 2014, our aggregate
payment obligations under this plan totaled $3.0 million and $2.9 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, 2015 and 2014, our liability under the Salary Continuation Plan was $823
thousand and $645 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-42
Off-Balance Sheet Arrangements, Commitments and Contractual Obligations
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 obligations as of December 31, 2015.
Table 15 Contractual Obligations at December 31, 2015
(in thousands; unaudited)
Operating leases
FHLB overnight borrowings
FHLB fixed-rate advances
Subordinated debentures
Certificates of deposit
Total
Payments due by period
<1 year
1-3 years
4-5 years
>5 years
$
3,763 $
7,539 $
6,544 $
3,659 $
52,000
—
—
113,232
—
15,000
—
32,799
—
—
—
15,426
—
—
8,248
—
$
168,995 $
55,338 $
21,970 $
11,907 $
Total
21,505
52,000
15,000
8,248
161,457
258,210
The contractual amount of loan commitments not reflected on the consolidated statement of condition was $376.6
million and $349.3 million at December 31, 2015 and 2014, 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 13.7% at December 31, 2014 to 13.1%
at December 31, 2015, primarily due to an increase in risk-weighted assets, driven mainly by an increase in the loan
portfolio, partially offset by the accumulation of undistributed net income of the Bank in 2015 of $12.7 million. Bancorp's
total risk-based capital ratio decreased from 13.9% at December 31, 2014 to 13.4% at December 31, 2015, primarily
due to an increase in risk-weighted assets as discussed above, partially offset by the accumulation of undistributed
net income of $13.1 million in 2015.
We expect to maintain strong capital levels. Our anticipated sources of capital in 2016 include future earnings and
shares issued upon the exercise of stock options.
Liquidity
The goal of liquidity management is to provide adequate funds to meet loan demand and fund operating activities and
deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of
credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as needed. Our ALCO, which
is comprised of certain directors of the Bank, is responsible for approving and monitoring our liquidity targets and
strategies. ALCO has approved a contingency funding plan that addresses decreases in liquidity below internal
requirements.
Page-43
We obtain funds from the repayment and maturity of loans as well as deposit inflows, investment security maturities
and paydowns, 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.
Management monitors our liquidity position daily. Our liquid assets totaled $375.0 million and $198.6 million at
December 31, 2015 and 2014, respectively, which included unencumbered available-for-sale securities and cash. 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 affect our liquidity. 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. In addition, we have secured borrowing
capacity through the FHLB and FRBSF that can be drawn upon. Management anticipates our current strong liquidity
position and core deposit base will provide adequate liquidity to fund our operations.
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, 2015 totaled $26.3 million, a decrease of $15.0 million from
December 31, 2014. The primary sources of funds during 2015 included $115.1 million in paydowns, maturities and
sales of investment securities, a net increase of $176.6 million in deposits, $52.0 million FHLB borrowings and $23.7
million in net cash provided by operating activities. The primary uses of funds were $289.5 million in investment
securities purchases, $88.1 million of loan originations, net of principal collections, and $5.4 million cash dividends
paid on common stock to our shareholders.
In addition to cash and cash equivalents, we have substantial additional borrowing capacity including unsecured lines
of credit totaling $92.0 million with correspondent banks. Further, our borrowing capacity with the FRBSF totaled
$37.8 million at December 31, 2015, and is secured by a certain residential loan portfolio. As of December 31, 2015,
there is no debt outstanding to correspondent banks or the FRBSF. 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 $470.6 million, of which $403.4 million was available at December 31, 2015.
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 target federal funds rate.
Undisbursed loan commitments, which are not reflected on the consolidated statements of condition, totaled $376.6
million at December 31, 2015 at varying rates. This amount included $191.3 million under commercial lines of credit
(these commitments are contingent upon customers maintaining specific credit standards), $130.4 million under
revolving home equity lines, $39.4 million under undisbursed construction loans, $4.4 million under standby letters of
credit and a remaining $11.1 million under personal and other lines of credit. These commitments, to the extent used,
are expected to be funded primarily through the repayment of existing loans, deposit growth and existing balance sheet
liquidity. Over the next twelve months $113.2 million of time deposits will mature. We expect these funds to be replaced
with new deposits. Our emphasis on local deposits combined with our well capitalized equity position, provides a very
stable funding base.
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 $3.8 million of cash at December 31, 2015.
Bancorp obtained a dividend distribution from the Bank in the amount of $3.0 million in January of 2016. 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.
Page-44
Quarterly Financial Data
Table 16 Summary of Quarterly Financial Data
(dollars in thousands; unaudited)
Dec. 31
Sept. 30
Jun. 30
Mar. 31
Dec. 31
Sept. 30
Jun. 30
Mar. 31
2015 Quarters Ended
2014 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
$
$
$
$
$ 17,795 $
17,445 $
17,018 $
17,180
$ 17,722 $
18,108 $
18,456 $ 18,504
552
562
564
582
580
577
582
610
17,243
16,883
16,454
16,598
17,142
17,531
17,874
17,894
500
—
—
—
—
—
600
150
16,743
2,098
11,135
7,706
2,781
16,883
16,454
16,598
17,142
17,531
17,274
17,744
2,298
2,608
2,189
2,156
2,301
2,368
2,216
11,638
12,319
11,848
11,613
11,350
11,457
12,843
7,543
2,770
6,743
2,457
6,939
2,482
7,685
2,993
8,482
3,104
8,185
3,017
7,117
2,584
4,925 $
4,773 $
4,286 $
4,457
4,925 $
4,773 $
4,286 $
4,457
0.82 $
0.80 $
0.72 $
0.81 $
0.79 $
0.71 $
0.75
0.74
$
$
$
$
4,692 $
5,378 $
5,168 $
4,533
4,692 $
5,378 $
5,168 $
4,533
0.79 $
0.91 $
0.88 $
0.78 $
0.89 $
0.86 $
0.77
0.76
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 (or prices) of financial
instruments. A significant form of market risk is interest rate risk, which is inherent in our investment, borrowing, lending
and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest
margin, earnings, and capital to changes in interest rates. 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.
To mitigate interest rate risk, the structure of the Consolidated Statement of Condition is managed with the objective
of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings.
The asset liability management policy sets limits on the acceptable amount of change to net interest income and
economic value of equity in different interest rate environments.
From time to time, we enter into interest rate swap contracts 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 ALCO and the Board of Directors. Simulation models
are used to measure interest rate risk and to evaluate strategies 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 rate
changes are not within the limits established by the Board of Directors, Management may adjust the asset and liability
mix to bring the risk position within approved limits.
In December 2015, the FOMC raised the target federal funds rate by 25 basis points to a range of 0.25% to 0.50%.
This increase from the historic low of 0.00% to 0.25% had not changed for the past seven years. The Bank currently
has low interest rate risk and is asset sensitive (net interest margin is expected to increase if rates go up and adjustable
rate loans at their interest rate floors start to float again as they reprice. However, there may be a lag between repricing
of certain floating rate loans at their floors and increases in rates).
Page-45
Based on our most recent simulation, net interest income is projected to increase by approximately 2% in year one
given an immediate 200 basis point increase in interest rates. For modeling purposes, the likelihood of a decrease in
interest rates beyond 25 basis points as of December 31, 2015 was considered to be remote given prevailing low
interest rate levels. The interest rate risk is within policy guidelines established by ALCO and the Board of Directors.
The following table estimates the effect of interest rate changes in all points of the yield curve as measured against a
flat rate scenario.
Table 17 Effect of Interest Rate Change on Net Interest Income (NII) at December 31, 2015
Immediate Changes in Interest Rates (in basis points)
up 400
up 300
up 200
up 100
Estimated Change in
NII in Year One (as
percent of NII)
2.4%
2.1%
1.6%
0.9%
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 transaction 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, limitations are inherent in the process and dependent on
assumptions. 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 effect of 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, and the behavior of depositors,
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-46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
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, 2015 and 2014, 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, 2015. We
also have audited the Company's internal control over financial reporting as of December 31, 2015, based on criteria
established in Internal Control - Integrated Framework (2013) 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, 2015 and 2014, and the
consolidated results of their operations and their cash flows each of the three years in the period ended December 31,
2015, 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
San Francisco, California
March 11, 2016
Page-47
504 Redwood Blvd, Suite 100
Novato, CA 94947
March 11, 2016
To the Shareholders:
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, 2015. The assessment was based on criteria for effective internal control over financial
reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, Management believes that, as of
December 31, 2015, 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 2015.
Management's assessment of the effectiveness of Bancorp's internal control over financial reporting as of December 31,
2015 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-48
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2015 and 2014
(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 $417,410 and
$199,045 at December 31, 2015 and 2014, respectively)
Total investment securities
Loans, net of allowance for loan losses of $14,999 and $15,099 at
December 31, 2015 and 2014, respectively
Bank premises and equipment, net
Goodwill
Core deposit intangible
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
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 - 6,068,543 and 5,939,482 at
December 31, 2015 and 2014, respectively
Retained earnings
Accumulated other comprehensive income, net
Total stockholders' equity
2015
2014
$
26,343
$
41,367
69,637
417,787
487,424
116,437
200,848
317,285
1,436,229
1,348,252
9,305
6,436
3,113
62,284
9,859
6,436
3,732
60,199
$
2,031,134
$
1,787,130
$
770,087
$
670,890
114,277
141,316
541,089
161,457
93,758
133,714
503,543
149,714
1,728,226
1,551,619
67,000
5,395
16,040
15,000
5,185
15,300
1,816,661
1,587,104
—
—
84,727
129,553
193
214,473
82,436
116,502
1,088
200,026
Total liabilities and stockholders' equity
$
2,031,134
$
1,787,130
The accompanying notes are an integral part of these consolidated financial statements.
Page-49
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2015, 2014 and 2013
2015
2014
2013
$
61,754
$
64,823
$
54,408
(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 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
Dividends on FHLB stock
Gains (losses) on investment securities, net
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
Directors' expense
Information technology
(Reversal of) provision for losses on off-balance sheet commitments
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 income
Change in net unrealized (loss) gain on available-for-sale securities
Reclassification adjustment for (gain) loss on available-for-sale securities
included in net income
Net change in unrealized (loss) 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-50
$
$
$
$
$
$
4,709
2,155
685
135
69,438
115
51
495
853
317
420
2,251
67,187
500
66,687
1,979
2,391
1,445
545
814
1,003
79
937
9,193
25,764
5,498
1,968
997
3,318
2,121
826
736
(263)
5,984
46,949
28,931
10,490
18,441
3.09
3.04
5,966
6,065
0.90
18,441
(1,420)
(6)
(1,426)
(531)
(895)
17,546
$
$
$
$
$
$
4,502
2,273
1,031
161
72,790
99
46
550
917
315
422
2,349
70,441
750
69,691
2,167
2,309
1,378
803
841
563
80
900
9,041
25,005
5,470
1,585
1,032
3,665
2,230
628
675
334
6,639
47,263
31,469
11,698
19,771
3.35
3.29
5,893
6,006
0.80
19,771
2,939
24
2,963
1,203
1,760
21,531
$
$
$
$
$
$
2,573
2,214
1,245
120
60,560
52
35
419
922
322
35
1,785
58,775
540
58,235
2,062
2,162
1,104
822
954
259
(1)
704
8,066
21,974
4,347
1,395
921
5,334
2,985
537
513
112
5,974
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
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2015, 2014 and 2013
Common Stock
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
(in thousands, except share data)
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 / 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
Stock issued to NorCal Community Bancorp shareholders
Balance at December 31, 2013
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, 2014
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 / 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
Stock issued from exercise of warrants
Balance at December 31, 2015
Shares
5,389,210 $
—
—
71,237
—
870
11,850
(3,998)
—
—
—
160
5,619
402,576
5,877,524 $
—
—
49,415
—
521
8,523
(2,067)
—
—
—
260
5,306
5,939,482 $
—
—
37,071
—
339
15,970
(450)
—
—
—
245
5,295
70,591
6,068,543 $
Retained
Earnings
Amount
58,573 $
—
—
2,218
125
34
—
—
175
228
—
6
222
18,514
80,095 $ 101,464 $
91,164 $
14,270
—
—
—
—
—
—
—
—
(3,970)
—
—
—
—
—
1,452
172
23
—
—
200
246
—
12
236
19,771
—
—
—
—
—
—
—
—
(4,733)
—
—
82,436 $ 116,502 $
—
—
1,139
212
17
—
—
252
384
—
12
275
—
18,441
—
—
—
—
—
—
—
—
(5,390)
—
—
—
84,727 $ 129,553 $
The accompanying notes are an integral part of these consolidated financial statements.
Page-51
—
(2,727)
—
—
—
—
—
—
—
—
—
—
—
Total
2,055 $ 151,792
14,270
(2,727)
2,218
125
34
—
—
175
228
(3,970)
6
222
18,514
(672) $ 180,887
19,771
1,760
1,452
172
23
—
—
200
246
(4,733)
12
236
1,088 $ 200,026
18,441
(895)
1,139
212
17
—
—
252
384
(5,390)
12
275
—
193 $ 214,473
—
1,760
—
—
—
—
—
—
—
—
—
—
—
(895)
—
—
—
—
—
—
—
—
—
—
—
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2015, 2014 and 2013
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2015
2014
2013
$
18,441 $
19,771 $
14,270
Provision for loan losses
(Reversal of) provision for losses on off-balance sheet commitments
Compensation expense--common stock for director fees
Stock-based compensation expense
Excess tax benefits from exercised stock options
Amortization 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
Net amortization of deferred loan origination costs/fees
Write-down of other real estate owned
(Gain) loss on sale of investment securities
Other-than-temporary impairment on securities available-for-sale
Depreciation and amortization
(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
Net cash provided by operating activities
Cash Flows from Investing Activities:
Purchase of held-to-maturity securities
Purchase of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of held-to-maturity securities
Proceeds from paydowns/maturities of held-to-maturity securities
Proceeds from paydowns/maturities of available-for-sale securities
Loans originated and principal collected, net
Purchase of bank owned life insurance policies
Purchase of premises and equipment
Proceeds from sale of loan
Proceeds from sale of repossessed assets
Cash acquired from acquisitions, net of cash paid
Purchase 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 (decrease) in deposits
Proceeds from stock options exercised
Federal Home Loan Bank borrowings
Cash dividends paid on common stock
Proceeds from stock issued under employee and director stock purchase plans
Excess tax benefits from exercised stock options
Net cash provided (used in) 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 items, non-cash investing and financing activities:
Cash paid in interest
Cash paid in income taxes
Change in unrealized gain on available-for-sale securities
Loans transferred to repossessed assets
Stock issued in payment of director fees
Subscription in low income housing tax credit investment
Securities transferred from available-for-sale to held-to-maturity
Transfer of loan to loans held-for-sale at fair value
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-52
500
(263)
274
636
(187)
619
2,825
(1,883)
210
(281)
40
(79)
—
1,968
—
(814)
(734)
(26)
(4)
1,081
1,359
23,682
(2,375)
(287,144)
2,099
1,015
47,181
64,839
(88,123)
—
(1,418)
1,502
—
—
(136)
(718)
(263,278)
176,607
1,139
52,000
(5,390)
29
187
224,572 $
(15,024)
41,367 $
26,343 $
2,066 $
9,068 $
(1,426) $
— $
275 $
1,023 $
— $
1,502 $
— $
— $
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
750
334
270
446
(118)
771
2,759
(3,906)
216
(463)
—
(93)
13
1,585
—
(841)
(143)
(40)
160
(184)
(2,430)
18,857
—
(18,206)
2,436
2,146
16,793
46,371
(88,872)
—
(2,334)
—
—
—
(492)
(494)
(42,652)
(35,483)
1,452
—
(4,733)
35
118
(38,611) $
(62,406)
103,773 $
41,367 $
2,185 $
11,290 $
2,963 $
— $
236 $
1,000 $
14,297 $
— $
540
112
215
403
(96)
69
3,004
(1,871)
19
(793)
—
1
—
1,395
(43)
(954)
(694)
28
338
299
4,959
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
1,000
—
—
— $
— $
— $
280,917
246,384
18,514
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the accounts of Bank of Marin Bancorp
(“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California
state-chartered commercial bank. References to “we,” “our,” “us” mean the holding company and the Bank that are
consolidated for financial reporting purposes. All material intercompany transactions have been eliminated. 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 “NorCal 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 three 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, 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 ("impaired security"), 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. 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, the entire difference between the investment’s amortized cost basis and its fair value at the
balance sheet date is recognized against 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 both held-to-maturity and available-for-
Page-53
sale securities, if the amount of cash flows expected to be collected are less than the amortized cost, an other-than-
temporary impairment shall be considered to have occurred and the credit loss component is recognized against
earnings as the difference between present value of the expected future cash flows and the amortized cost. 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 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.
For held-to-maturity securities, if there is no credit loss component, no impairment is recognized. The portion of other-
than-temporary impairment recognized in other comprehensive income for credit impaired 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
on the sale of securities and credit losses related to other-than-temporary impairment on available-for-sale and held-
to-maturity securities are included in non-interest income as gains (losses) on investment securities, net. The specific
identification method is used to calculate realized gains and losses on sales of securities.
Originated Loans are reported at the principal amount outstanding net of deferred fees (costs), 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. Non-accrual loans may be returned
to accrual status when one of the following occurs:
• The loan is brought current or after all principal and past due interest has been collected, and we are satisfied
with the borrower's financial position and we are reasonably assured as to repayment.
• The loan has become well secured and is in the process of collection.
• We are satisfied with the borrower’s financial position, the obligor has resumed paying the full amount of the
contractual interest and principal, the amounts contractually due are reasonably assured of repayment within
a reasonable period, and there has been a sustained period of repayment performance (generally, six
consecutive monthly payments), according to the modified terms for loans whose contractual terms have been
restructured in a manner which grants a concession to a borrower experiencing financial difficulties (“troubled
debt restructuring”).
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 loan 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. For overdraft accounts, we generally charge them off when they exceed 60 days past
due.
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 calculating fair values of the acquired loans, including estimates 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
Page-54
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 ("PCI") loans, were grouped together according to similar risk characteristics and treated in the aggregate
when applying various valuation techniques. Expected cash flows incorporated our best estimate of key assumptions
at the time, such as property values, default rates, loss severity and prepayment speeds. Discount rates were based
on market rates for new originations of comparable loans, where available, and included adjustments for liquidity
factors.
To the extent comparable market rates were 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 did not include a factor for credit losses, as that had 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 significant 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. Management applied significant subjective judgment in determining which loans were 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 were not considered PCI loans because
the timing and amount of cash flows cannot be reasonably estimated.
According to the accounting guidance for PCI loans, the nonaccretable difference on the date of acquisition is defined
as the difference between the contractually required payments and the cash flows expected to be collected, considering
the result of prepayments, and is not recorded. The difference between the undiscounted expected cash flows and
the fair value at acquisition date ("accretable difference") 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.
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. If a PCI loan pays off earlier than expected, a gain is recorded as interest income
when the payoff amount exceeds the recorded investment.
For acquired loans not considered credit impaired ("non-PCI"), we recognize the entire fair value discount accretion
to interest income, based on contractual cash flows using an effective interest rate method for term loans, and on a
straight line basis for revolving lines. When a non-PCI loan is placed on non-accrual status subsequent to acquisition,
accretion stops until the loan is returned to accrual status. The level of accretion on non-PCI loans varies from period
to period due to maturities and early pay-offs of these loans during the reporting periods. 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. All acquired loans were acquired in acquisitions and do not
represent loans purchased from third parties.
For further information regarding our acquired loans, see Note 4.
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,
Page-55
and ultimate losses may vary from current estimates. Our Board of Directors' Asset/Liability Management Committee
(“ALCO”) reviews the adequacy of the ALLL at least quarterly.
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, results from the analysis of identified problem credits and the evaluation of
sources of repayment including collateral, as applicable. Through Management's ongoing loan grading and credit
monitoring process, individual loans are identified that have conditions indicating 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. 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 estimate of cash flows expected to be collected on PCI loans is updated each quarter and requires the continued
use of key assumptions and estimates. We apply judgment to develop our estimate of cash flows given the current
economic environment, changes in collateral values, loan workout plans, changing probability of default, loss severities
and prepayments. If we have probable decreases in cash flows expected to be collected on PCI loans, specific
allowances are established to account for credit deterioration subsequent to acquisition.
The second component is an estimate of the probable inherent losses in each loan pool with similar risk characteristics.
This analysis encompasses the entire loan portfolio excluding individually identified impaired loans and acquired loans
whose purchase discount has not been fully accreted. 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"):
•
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 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
The model determines loan loss reserves by loan segment based on objective and subjective expected loss factors.
Objective factors include an historical loss rate using a rolling twenty-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
adversely-graded loans), and the existence of credit concentrations. When a loan segment exceeds 100% of Tier 1
capital, additional reserves are provided due to credit concentration risk. Subjective factors include changes in the
overall economic environment, legal and regulatory conditions, experience level of 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 factors to outstanding loans by CALL code.
Page-56
For further information regarding the allowance for loan losses, see Note 4.
Allowance for Losses on Off-Balance Sheet Commitments: We make commitments to extend credit to meet the
financing needs of our customers in the form of loans or standby letters of credit. We are exposed to credit loss in the
event that a decline in credit quality of the borrower leads to nonperformance. We record an allowance for losses on
these off-balance sheet commitments based on an estimate of probabilities of these commitments being drawn upon
according to our historical utilization experience on different types of commitments and expected loss severity. This
allowance is included in interest payable and other liabilities on the consolidated statements of condition.
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 and liabilities have
been isolated from us, (2) the transferee has the right to pledge or exchange the assets (or beneficial interests) it
received, free of conditions that constrain it from taking advantage of that right, beyond a trivial benefit 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 in 2015,
2014 and 2013.
Premises and Equipment: 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.
Business Combinations: Business combinations are accounted for under the acquisition method of accounting in
accordance with ASC 805, Business Combinations. Under the acquisition method the acquiring entity in a business
combination recognizes the acquired assets and assumed liabilities at their estimated fair values as of the date of
acquisition. Any excess of the purchase price over the fair value of net assets and other identifiable intangible assets
acquired is recorded as goodwill. To the extent the fair value of net assets acquired, including other identifiable assets,
exceed the purchase price, a bargain purchase gain is recognized. Assets acquired and liabilities assumed from
contingencies must also be recognized at fair value, if the fair value can be determined during the measurement period.
Results of operations of an acquired business are included in the statement of operations from the date of acquisition.
Acquisition-related costs, including conversion and restructuring charges, are expensed as incurred.
Goodwill and Other Intangible Assets: Goodwill is determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets
acquired and liabilities assumed as of the acquisition date. Goodwill that arises from a business combination determined
to have an indefinite useful life is not amortized, but is periodically evaluated for impairment at the reporting unit level,
at least annually. Intangible assets with definite useful lives are amortized over their estimated useful lives to their
estimated residual values. Core deposit intangible represents estimated future benefit of deposits related to an
acquisition and is booked separately from the related deposits and is evaluated periodically for impairment. The core
deposit intangible asset is amortized on an accelerated method over its estimated useful life of ten years.
We make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit where
goodwill is assigned is less than its carrying amount before applying a two-step goodwill impairment test. If we conclude
that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, we do not perform
the two-step impairment test. Goodwill is tested for impairment on an interim basis if circumstances change or an
event occurs between annual tests that would more likely than not reduce the fair value of the reporting unit below its
carrying amount. The qualitative assessment includes adverse events or circumstances identified that could negatively
affect the reporting units’ fair value as well as positive and mitigating events. Such indicators may include, among
others, a significant change in legal factors or in the general business climate, significant change in our stock price
and market capitalization, unanticipated competition, and an action or assessment by a regulator.
Page-57
Other Real Estate Owned ("OREO"): OREO is comprised of property acquired through foreclosure, in substance
repossession or acceptance of deeds-in-lieu of foreclosure when the related loan receivable is de-recognized. OREO
is recorded at fair value of the collateral less estimated costs to sell, establishing a new cost basis, and subsequently
accounted for at the lower of cost or fair value less estimated costs to sell. Any shortfall of collateral value from the
recorded investment of the related loan is recognized as loss at the time of foreclosure and is charged against the
allowance for loan losses. Fair value of collateral 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 income and expense when
incurred.
Bank Owned Life Insurance: The Bank has purchased life insurance policies on certain key current and former officers.
Bank owned life insurance ("BOLI") is recorded in interest receivable and other assets on the consolidated statements
of condition at the amount that can be realized under the insurance contract at the period end, which is the cash
surrender value adjusted for other charges or amounts due that are probable at settlement.
Federal Home Loan Bank of San Francisco ("FHLB") Stock: The Bank is a member of the FHLB. Members are
required to own a certain amount of stock based on the level of borrowings and other factors. Our investment in FHLB
stock is carried at cost and is included as part of interest receivable and other assets on the consolidated statements
of condition. We periodically evaluate FHLB stock for impairment based on ultimate recovery of par value. Both cash
and stock dividends are reported as non-interest income.
Investments in Low Income Housing Tax Credit Funds: We have invested in limited partnerships that were formed to
develop and operate affordable housing projects for low or moderate income tenants throughout California. Our
ownership in each limited partnership is less than two percent. In accordance with ASU No. 2014-01, Investments -
Equity Method and Joint Ventures (Topic 323), we elected to account for the investments in qualified affordable housing
tax credit funds using the proportional amortization method. 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 as part of income tax expense (benefit). Each of the partnerships must meet the regulatory
minimum requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits.
If the partnerships cease to qualify during the compliance period, the credit may be denied for any period in which the
project is not in compliance and a portion of the credit previously taken is subject to recapture with interest.
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 2015, 2014
and 2013, the Bank only made cash contributions to the ESOP without leveraging.
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 record deferred
tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in
which the temporary 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 and the need to
establish a valuation allowance against the deferred tax assets, Management considers all available positive and
negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies. 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
and record the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate
settlement with the taxing authority. The remainder of the benefits associated with tax positions taken is recorded as
Page-58
unrecognized tax benefits, along with any related interest and penalties. Interest and penalties related to unrecognized
tax benefits are recorded in tax expense.
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 effective tax rates and results of operations for any reporting period.
We present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss ("NOL")
carryforward, or similar tax loss or tax credit carryforward, rather than as a liability, when (1) the uncertain tax position
would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) we intend to and
are able to use the deferred tax asset for that purpose. Otherwise, the unrecognized tax benefit is presented as a
liability instead of being netted with deferred tax assets.
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) potentially dilutive weighted average common
shares related to stock options, unvested restricted stock awards and stock warrant, and 3) weighted average diluted
shares. Basic EPS are calculated by dividing net income by the weighted average number of common shares
outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the
weighted average number of potentially dilutive common shares. The number of potentially dilutive 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 potentially dilutive common shares included in
year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive 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 unvested restricted stock awards receive non-forfeitable dividends at the same
rate as common shareholders and they both share equally in undistributed earnings. Therefore, under the two-class
method, the difference in EPS is not significant for these participating securities.
(in thousands, except per share data)
Weighted average basic shares outstanding
Potentially dilutive common shares related to:
Stock options
Unvested restricted stock awards
Warrant
2015
5,966
41
5
53
2014
5,893
43
5
65
2013
5,457
44
4
53
Weighted average diluted shares outstanding
6,065
6,006
5,558
Net income
Basic EPS
Diluted EPS
$
$
$
18,441 $
19,771 $
14,270
3.09 $
3.04 $
3.35 $
3.29 $
Weighted average anti-dilutive shares not included in the calculation of
diluted EPS
36
45
2.62
2.57
49
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-
Page-59
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 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 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 six 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
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, 2015, 2014, and 2013, advertising
costs totaled $334 thousand, $400 thousand, and $490 thousand, respectively.
Comprehensive Income includes net income and changes in the unrealized gain or loss of available-for-sale investment
securities, net of related taxes, reported on the statements of comprehensive income and as components of
stockholders' equity.
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, 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 estimates 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.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles
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
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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, accrued liabilities,
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 Adopted and Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.
2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is a converged standard involving FASB and
International Financial Reporting Standards that provides a single comprehensive revenue recognition model for all
contracts with customers across transactions and industries. The core principal of the guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount and at a time that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective
Date which institutes a one-year deferral of the effective date of this amendment to annual reporting periods beginning
after December 15, 2017. We are currently evaluating the provisions of this ASU and will be monitoring developments
and additional guidance to determine the potential outcome the new standard will have on our financial condition and
results of operations.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718) Accounting for
Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period. This ASU provides guidance for entities that grant their employees share-based payment
awards where a performance target that affects vesting could be achieved after the requisite service period. That is
the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in
which a performance target could be achieved and still be eligible to vest in the award if and when the performance
target is achieved. This ASU stipulates that compensation expense should be recognized in the period where the
performance target becomes probable of being achieved as opposed to the date that the award was granted.
ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after
December 15, 2015. We do not expect this ASU to have a material impact on our financial condition or results of
operations.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40) Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this ASU
provide guidance about a customer's accounting for fees paid in a cloud computing arrangement. If a cloud computing
arrangement includes a software license, then the customer should account for the software license element of the
arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not
include a software license, then the customer should account for the arrangement as a service contract. The two
criteria that must be met to be considered a software license are: 1) the customer has the contractual right to take
possession of the software at any time during the hosting period without significant penalty; and 2) it is feasible for the
customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host
the software. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods
beginning after December 15, 2015. We do not expect this ASU to have a material impact on our financial condition
or results of operations.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) Simplifying the Accounting
for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments
to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment
amounts are determined. Prior to the amendments, an acquirer was required to retrospectively adjust the provisional
amounts recognized at the acquisition date with a corresponding adjustment to goodwill. ASU 2015-16 is effective for
public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal
years. We do not expect this ASU to have a material impact on our financial condition or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to
GAAP related to financial instruments that include the following as applicable to us.
• Equity investments, except for those accounted for under the equity method of accounting or those that result
in consolidation of the investee, are required to be measured at fair value with changes in fair value recognized
Page-61
in net income. However, an entity may choose to measure equity investments that do not have readily
determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable
price changes in orderly transactions for the identical or a similar investment of the same issuer.
• Simplifies the impairment assessment of equity investments without readily determinable fair values by
requiring a qualitative assessment to identify impairment - if impairment exists, this requires measuring the
investment at fair value.
• Eliminates the requirement for public companies to disclose the method(s) and significant assumptions used
to estimate the fair value that is currently required to be disclosed for financial instruments measured at
amortized cost on the balance sheet.
• Public companies will be required to use the exit price notion when measuring the fair value of financial
instruments for disclosure purposes.
• Requires separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset on the balance sheet or the accompanying notes to the financial statements.
• The reporting entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the entity's other deferred tax assets.
ASU 2016-01 is effective for public business entities for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years. This ASU will impact our financial statement disclosures, however, we do not
expect this ASU to have a material impact on our financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU was issued to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases
classified as operating leases under previous GAAP, on the balance sheet and requiring additional disclosures of key
information about leasing arrangements. ASU 2016-02 is effective for annual periods, including interim periods within
those annual periods beginning after December 15, 2018 and requires a modified retrospective approach to adoption.
Early application of the amendments is permitted. We are currently evaluating the provisions of this ASU and will be
monitoring developments and additional guidance to determine the potential outcome the amendments will have on
our financial condition and results of operations.
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Note 2: Acquisition
On November 29, 2013, we completed the acquisition of NorCal, parent company of Bank of Alameda, to enhance
our market presence. The acquisition 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.
Effective October 31, 2014, the Emeryville branch was closed after Management determined that our customers and
the business community can be easily supported from our Oakland location. 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. 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.
Goodwill
As a result of the NorCal Acquisition, we recorded $6.4 million in goodwill, which 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. Goodwill
mainly reflects expected value created through the combined operations of Bank of Alameda and Bank of Marin and
our expanded footprint in the East Bay. At December 31, 2015 and 2014, we determined that the fair value of our
traditional community banking activities (provided through our branch network) exceeded the carrying amount.
Therefore, no impairment on goodwill has been recorded. The goodwill is not deductible for tax purposes.
Core Deposit Intangible
The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately
from the related deposits. 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 transaction, savings
and money market accounts) and alternative funding sources. It was calculated as the present value of the difference
in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of
an equal amount of funds with a similar term from an alternative source. The core deposit intangible is amortized on
an accelerated basis over an estimated ten-year life, and it is evaluated periodically for impairment. No impairment
loss was recognized in 2015 or 2014.
We recorded a core deposit intangible asset of $4.6 million at acquisition, of which $69 thousand was amortized in
2013, $771 thousand was amortized in 2014 and $619 thousand was amortized in 2015. At December 31, 2015, the
future estimated amortization expense is as follows:
(in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
Core deposit intangible amortization
$
533 $
472 $
413 $
388 $
365 $
942 $
3,113
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.
This pro forma information does not necessarily reflect the results of operations that would have resulted had the
acquisition been completed on January 1, 2013, nor is it indicative of the results of operations in future periods.
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Pro Forma Revenue and Earnings
(in thousands)
Revenue
Earnings
Actual from November 29, 2013 to December 31, 2013 of NorCal only
2013 supplemental pro forma of the combined entity from January 1, 2013 to December 31, 20131
$
$
1,239 $
70
79,586 $
14,514
1 2013 supplemental pro forma earnings include $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.
Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and
operational functions become fully integrated. We did not incur any one-time acquisition-related expenses in 2015.
We incurred one-time third-party acquisition-related expenses in the consolidated statements of comprehensive income
in 2014 and 2013 as follows:
(in thousands)
Data processing
Professional services
Personnel severance
Other
Total
2014
2013
442 $
2,807 *
—
304
—
660
203
74
746 $
3,744
$
$
*Primarily relates to NorCal's core processing system contract termination and deconversion fees.
Page-64
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, Federal Farm Credit Bureau, FHLB and FHLMC, as well as privately issued
CMOs, as reflected in the table below:
(in thousands)
Held-to-maturity:
Obligations of state and
political subdivisions
Corporate bonds
MBS pass-through securities
issued by FHLMC and FNMA
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, 2015
December 31, 2014
Amortized
Fair Gross Unrealized
Amortized
Fair Gross Unrealized
Cost
Value
Gains
(Losses)
Cost
Value
Gains
(Losses)
$
42,919 $
15,072
44,146 $ 1,246 $
15,098
42
(19) $
(16)
63,425 $ 65,121 $ 1,736 $
40,448
40,257
216
11,646
69,637
11,810
71,054
171
1,459
(7)
(42)
12,755
116,437
13,074
118,643
319
2,271
138,222
18,266
22,889
10,326
138,462
18,219
22,932
10,480
161,690
3,960
160,892
4,150
694
97
82
169
28
190
(454)
(144)
(39)
(15)
(826)
—
92,963
14,771
31,238
17,573
14,694
7,137
94,214
14,790
31,260
17,855
14,557
7,294
57,110
4,947
417,410
57,673
4,979
417,787
580
43
1,883
(17)
(11)
(1,506)
15,733
4,936
199,045
15,880
4,998
200,848
1,262
77
109
298
95
172
155
66
2,234
(40)
(25)
—
(65)
(11)
(58)
(87)
(16)
(232)
(15)
(8)
(4)
(431)
Total investment securities
$
487,047 $ 488,841 $ 3,342 $ (1,548) $ 315,482 $ 319,491 $ 4,505 $
(496)
The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2015 and
2014 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, 2015
December 31, 2014
Held-to-Maturity
Available-for-Sale
Held-to-Maturity
Available-for-Sale
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Amortized
Cost Fair Value
Cost Fair Value
$ 18,853
$ 18,920
$ 12,135
$ 12,176 $ 39,778
$ 39,913
$
2,378
$
2,388
31,677
32,360
188,007
187,326
50,983
51,953
43,866
43,919
8,580
10,527
8,969
64,899
64,999
10,805
152,369
153,286
11,679
13,997
12,426
14,351
9,644
9,749
143,157
144,792
(in thousands)
Within one year
After one but within five
years
After five years through
ten years
After ten years
Total
$ 69,637
$ 71,054
$ 417,410
$ 417,787 $ 116,437
$ 118,643
$ 199,045
$ 200,848
Sales of investment securities and gross gains and losses are shown in the following table. The sales of the held-to-
maturity securities were due to evidence of significant deterioration of the issuers' creditworthiness since purchase.
Page-65
(in thousands)
Available-for-sale:
Sales proceeds
Gross gains
Gross losses, including OTTI
Held-to-maturity:
Sales proceeds
Gross gains
Gross losses
2015
2014
2013
$
$
$
$
$
$
2,099
7
(1)
$
$
$
$
1,015
73
$
— $
2,436
4
(28)
$
$
$
2,146
104
$
$
— $
7,973
86
(104)
6,442
67
(50)
Investment securities carried at $87.9 million and $74.7 million at December 31, 2015 and 2014, respectively, were
pledged with the State of California: $87.1 million and $73.8 million to secure public deposits in compliance with the
Local Agency Security Program, and $840 thousand and $856 thousand to provide collateral for trust deposits. 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, 2015 and 2014.
Other-Than-Temporarily Impaired ("OTTI") Debt Securities
We have evaluated the credit ratings of our investment securities and their issuers and/or insurers. Based on our
evaluation, Management has determined that no investment security in our investment portfolio is other-than-
temporarily impaired as of December 31, 2015. 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, 2015 before recovery of the amortized
cost basis.
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Fifty-four and twenty-eight investment securities were in unrealized loss positions at December 31, 2015 and 2014,
respectively. Those securities are summarized and classified according to the duration of the loss period in the tables
below:
December 31, 2015
< 12 continuous months
Total securities
in a loss position
(in thousands)
Held-to-maturity:
MBS pass-through securities
issued by FHLMC and FNMA
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 FHLMC
CMOs issued by GNMA
Debentures of government-
sponsored agencies
Obligations of state & political
subdivisions
Corporate bonds
Total available-for-sale
Total temporarily impaired
securities
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
$
2,332
$
(7) $
— $
— $
2,332
$
8,297
3,523
14,152
68,809
9,277
—
164
(19)
(15)
(41)
(454)
(80)
—
—
—
1,999
1,999
—
3,158
1,989
2,374
—
(1)
(1)
—
(64)
(39)
(15)
8,297
5,522
16,151
68,809
12,435
1,989
2,538
136,064
(713)
9,887
(113)
145,951
4,557
2,986
(15)
(11)
579
—
(2)
—
5,136
2,986
(7)
(19)
(16)
(42)
(454)
(144)
(39)
(15)
(826)
(17)
(11)
221,857
(1,273)
17,987
(233)
239,844
(1,506)
$
236,009
$
(1,314) $
19,986
$
(234) $
255,995
$
(1,548)
December 31, 2014
< 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 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
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
$
5,830
$
(27) $
359
$
(13) $
6,189
$
3,009
8,839
1,960
—
17,157
3,262
494
817
2,695
1,002
27,387
(1)
(28)
(11)
—
(44)
(16)
(1)
(15)
(3)
(1)
(91)
3,533
3,892
—
4,115
2,291
—
9,769
—
1,112
990
18,277
(24)
(37)
—
(58)
(43)
—
(231)
—
(5)
(3)
(340)
6,542
12,731
1,960
4,115
19,448
3,262
10,263
817
3,807
1,992
45,664
(40)
(25)
(65)
(11)
(58)
(87)
(16)
(232)
(15)
(8)
(4)
(431)
$
36,226
$
(119) $
22,169
$
(377) $
58,395
$
(496)
Page-67
As of December 31, 2015, there were six investment positions that had been in a continuous loss position for 12 months
or more. These securities consisted of a debenture of government-sponsored agency, an obligation of U.S. state and
political subdivisions, one corporate bond and three CMOs. We have evaluated each of the securities 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 on these securities.
The CMOs issued by FNMA, FHLMC and GNMA are supported by the U.S. Federal Government to protect us from
credit losses. Additionally, the obligation of state and political subdivisions was deemed creditworthy based on our
review of the issuer's recent financial information. The corporate bond subsequently matured and paid off in February
2016.
Forty-eight investment securities in our portfolio were in a temporary loss position for less than twelve months as of
December 31, 2015. They consisted of obligations of U.S. state and political subdivisions, corporate bonds, MBS,
CMOs, and debentures of government-sponsored agencies. 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. Other
temporarily impaired securities are deemed creditworthy after credit analysis. Additionally, all are rated as investment
grade by at least one major rating agency. We concluded that these securities were not other-than-temporarily impaired
at December 31, 2015.
Non-Marketable Securities
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. 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 $8.4 million and $8.2 million of FHLB stock recorded at cost in other assets at December 31, 2015
and 2014, respectively. The carrying amounts of these investments are reasonable estimates of fair value because
the securities are restricted to member banks and they do not have a readily determinable market value. Management
does not believe that the FHLB stock is other-than-temporarily-impaired, as we expect to be able to redeem it at cost.
On February 18, 2016, the FHLB announced a cash dividend for the fourth quarter of 2015 at an annualized dividend
rate of 7.99% to be distributed in mid-March 2016.
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. Converting this Class B common
stock to Class A common stock at a conversion rate of 1.6483, the value would be $2.2 million and $1.8 million at
December 31, 2015 and 2014, respectively. The conversion rate is subject to further reduction upon the final settlement
of the covered litigation against Visa Inc. and its member banks. See Note 13 herein.
We invest in low income housing tax credit funds as a limited partner, which totaled $2.7 million and $1.8 million
recorded in other assets as of December 31, 2015 and 2014, respectively. Beginning 2014, we have elected to account
for all low income housing investments using the proportional amortization method instead of the cost method. In
2015, we recognized $225 thousand of low income housing tax credits and other tax benefits, net of $174 thousand
of amortization expense of low income housing tax credit investment, as a component of income tax expense for 2015.
As of December 31, 2015, our unfunded commitments for these low income housing tax credit funds totaled $1.7
million. We did not recognize any impairment losses on these low income housing tax credit investments during 2015,
2014 or 2013.
Page-68
Note 4: Loans and Allowance for Loan Losses
Credit Quality of Loans
Virtually all of our loans are generated from customers located in California, primarily in the counties of Marin, Alameda,
Sonoma, San Francisco and Napa. Approximately 85% and 87% at December 31, 2015 and 2014, respectively, of
total loans were secured by real estate, while 2% were unsecured at both December 31, 2015 and 2014. At December 31,
2015, 66% of our loans were for commercial real estate, 83% of which were secured by real estate located in Marin,
Sonoma, Alameda, San Francisco and Napa counties (California).
Outstanding loans by class and payment aging as of December 31, 2015 and 2014 are as follows:
(dollars in thousands)
December 31, 2015
30-59 days past due
60-89 days past due
90 days or more past due
Total past due
Current
Total loans 3
Non-accrual loans 2
December 31, 2014
30-59 days past due
Non-accrual loans 2
Total past due
Current
Total loans 3
$
$
$
$
Loan Aging Analysis by Class as of December 31, 2015 and 2014
Commercial
and industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction Home equity
Other
residential 1
Installment
and other
consumer
36 $
— $
—
21
57
—
—
—
1,096 $
—
—
1,096
219,395
219,452 $
242,309
242,309 $ 715,879 $
714,783
1 $
—
—
— $
633
99
732
1
65,494
65,495 $ 112,300 $
111,568
— $
—
—
—
73,154
73,154 $
Total
1,382
722
120
2,224
249 $
89
—
338
22,301
1,449,004
22,639 $ 1,451,228
21 $
— $
1,903 $
1 $
171 $
— $
83 $
2,179
183 $
—
183
— $
— $
— $
1,403
1,403
2,429
2,429
5,134
5,134
646 $
280
926
210,040
$
210,223 $
229,202
230,605 $ 673,499 $
671,070
43,279
48,413 $ 110,788 $
109,862
— $
—
—
73,035
73,035 $
180 $
104
284
1,009
9,350
10,359
16,504
1,352,992
16,788 $ 1,363,351
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 thousand and $1.4 million of Purchased Credit Impaired ("PCI") loans that have stopped accreting interest at December 31, 2015 and 2014,
respectively. Amounts exclude accreting PCI loans of $3.7 million and $3.8 million at December 31, 2015 and 2014, respectively, as we have a reasonable expectation
about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. There were no accruing loans past due more
than ninety days at December 31, 2015 or 2014.
3 Amounts included deferred loan origination costs, net of deferred loan origination fees, of $768 thousand and $487 thousand at December 31, 2015 and 2014, respectively.
Amounts were also net of unaccreted purchase discounts on non-PCI loans of $3.2 million and $4.4 million at December 31, 2015 and 2014, respectively.
Our commercial loans are generally made to established small and mid-sized businesses to provide financing for their
growth and working capital needs, equipment purchases and/or acquisitions. Management examines historical, current,
and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are
made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and/or
guarantor support. 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 and/or inventory, and typically include a personal guarantee. We target stable businesses with
guarantors that have proven to be 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.
Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value
ratios. Furthermore, 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, guarantors are expected to carry 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.
Page-69
Construction loans are generally made to developers and builders to finance construction, renovation and occasionally
land acquisitions. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior
track record, and independent appraisals. The construction industry can be affected by significant events, including:
the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain
construction permits, labor or material shortages, and price changes. Estimates of construction costs and value
associated with the completed 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 installment and other consumer loans. We originate consumer loans utilizing credit score information, debt-to-
income ratio and loan-to-value ratio analysis. Diversification, 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. Our residential loan portfolio includes TIC units almost entirely in San Francisco. These loans tend to have more
equity in their properties than conventional residential mortgages, which mitigates risk. Installment and other consumer
loans include mostly loans for floating homes and mobile homes 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 consequences. 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:
• 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 are generally required to submit rent rolls or property income statements
at least annually.
• Construction loans are monitored monthly, and reviewed on an ongoing basis.
• Home equity and other consumer loans are reviewed based on delinquency.
• Loans graded “Watch” or more severe, regardless of loan type, are reviewed no less than quarterly.
Page-70
The following table represents an analysis of loans by internally assigned grades, including PCI loans, at December 31,
2015 and 2014:
(in thousands)
Commercial
and
industrial
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, 2015
Pass
Special Mention
Substandard
$ 192,560 $ 219,060 $ 710,042 $
62,255 $ 109,959 $ 73,154 $ 22,307 $
22,457
4,260
12,371
9,167
372
3,739
—
3,239
1,100
1,173
—
—
—
332
3,260 $ 1,392,597
36,300
—
421
22,331
Total loans
$ 219,277 $ 240,598 $ 714,153 $
65,494 $ 112,232 $ 73,154 $ 22,639 $
3,681 $ 1,451,228
December 31, 2014
Pass
Special Mention
Substandard
$ 197,659 $ 205,820 $ 651,548 $
41,710 $ 107,933 $ 70,987 $ 16,101 $
6,776
5,464
10,406
11,763
13,304
6,473
1,008
5,684
322
2,466
—
2,048
190
497
2,210 $ 1,293,968
33,146
1,140
1,842
36,237
Total loans
$ 209,899 $ 227,989 $ 671,325 $
48,402 $ 110,721 $ 73,035 $ 16,788 $
5,192 $ 1,363,351
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 non-accrual status at the time of restructure may be returned to
accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period,
generally six months, and obtains reasonable assurance of repayment and performance.
A loan may no longer be reported as a TDR if all of the following conditions are met:
• The loan is subsequently refinanced or restructured at current market interest rates and the new terms are
consistent with the treatment of creditworthy borrowers under regular underwriting standards;
• The borrower is no longer considered to be in financial difficulty;
• Performance on the loan is reasonably assured; and;
• Existing loan did not have any forgiveness of principal or interest.
The removal of TDR status must be approved by the same management level that approved the upgrading of the loan
classification.
During 2015, five loans with a recorded investment totaling $1.6 million were removed from TDR designation. There
were no loans removed from TDR designation during 2014.
Page-71
The table below summarizes outstanding TDR loans by loan class as of December 31, 2015 and December 31, 2014.
The summary includes both TDRs that are on non-accrual status and those that continue to accrue interest.
(in thousands)
Recorded investment in Troubled Debt Restructurings 1
As of
December 31, 2015 December 31, 2014
Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction 2
Home equity
Other residential
Installment and other consumer
Total
$
4,698 $
6,993
514
3,238
460
2,010
1,168
3,584
8,459
524
5,684
694
2,045
1,713
$
19,081 $
22,703
1 Includes $19.0 million and $15.9 million of TDR loans that were accruing interest as of December 31, 2015 and December 31, 2014 respectively.
Includes $137 thousand and $1.8 million of acquired loans at December 31, 2015 and December 31, 2014, respectively.
2 In June 2015, one TDR loan was transferred to loans held-for-sale at fair value totaling $1.5 million, net of an $839 thousand charge-off to the
allowance for loan losses. The loan was subsequently sold in June 2015 for no gain or loss.
The table below presents the following information for loans modified in a TDR during the presented periods, number
of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the
loans after being restructured. The table below excludes fully charged-off TDR loans and loans modified in a TDR and
subsequently paid-off during the years presented.
Number of
Contracts
Modified
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded Investment
at period end
(dollars in thousands)
Troubled Debt Restructurings during the year ended
December 31, 2015:
Commercial and industrial
Total
Troubled Debt Restructurings during the year ended
December 31, 2014:
Commercial and industrial
Commercial real estate, owner occupied
Commercial real estate, investor
Construction
Installment and other consumer
Total
Troubled Debt Restructurings during the year ended
December 31, 2013:
7 $
7 $
6 $
1
2
2
6
3,271 $
3,271 $
3,251 $
3,251 $
1,039 $
4,226
224
964
281
1,258 $
4,216
224
1,312
278
17 $
6,734 $
7,288 $
Commercial and industrial
8 $
1,176 $
1,377 $
Construction
Home Equity
Other residential
Installment and other consumer
Total
1
1
3
2
2,961
539
7,135
11
2,956
538
7,156
9
15 $
11,822 $
12,036 $
Modifications during 2015, 2014 and 2013 primarily involved maturity or payment extensions and interest rate
concessions or some combination thereof. During 2015, 2014 and 2013, there were no defaults on loans that had been
modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition
of more than ninety days past due.
Page-72
2,811
2,811
1,251
4,175
220
1,309
268
7,223
1,274
2,930
534
5,368
7
10,113
Impaired Loan Balances and Their Related Allowance by Major Classes of Loans
The table below summarizes information on impaired loans and their related allowances. 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.
(in thousands)
December 31, 2015
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home
equity
Other
residential
Installment
and other
consumer
Total
Recorded investment in impaired loans:
With no specific allowance recorded
$
With a specific allowance recorded
2,198
2,522
Total recorded investment in impaired
loans
$
4,720
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 2015
Interest income recognized on impaired
loans during 2015
December 31, 2014
Recorded investment in impaired loans:
With no specific allowance recorded
With a specific allowance recorded
$
$
$
$
$
$
2,198
2,565
4,763
912
4,237
238
1,141
2,443
Total recorded investment in impaired
loans
$
3,584
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 2014
Interest income recognized on impaired
loans during 2014
Average recorded investment in impaired
loans during 2013
Interest income recognized on impaired
loans during 2013
$
$
$
$
$
$
$
1,186
2,524
3,710
694
5,354
378
7,168
476
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,111
2,882
6,993
4,111
2,882
6,993
70
7,886
295
5,577
2,882
8,459
6,577
2,882
9,459
65
6,604
288
3,519
253
$
1,214
$
$
2,416
$
2,687
—
551
$ 171
388
$
$
$
$
$
$
$
$
2,416
4,408
—
3,238
$ 559
2,687
737
$ 171
388
4,408
$
3,424
$ 559
— $
1
$
3
2,833
33
$
$
4,164
$ 602
86
$
18
$
2,954
$
5,134
—
561
$ 393
300
$
$
2,954
4,945
—
5,695
$ 693
7,824
749
$ 880
300
797
2,011
1,214
797
2,011
67
2,028
92
1,026
1,019
2,045
1,026
1,019
$
$
$
$
$
$
$
$
$
4,945
$
8,573
$ 1,180
$
2,045
— $
3
$ — $
92
3,138
28
5,847
14
$
$
$
$
6,471
$ 741
85
$
19
7,200
$ 909
249
$
29
$
$
$
$
1,744
74
2,632
89
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
131
1,120
$ 12,928
8,260
1,251
$ 21,188
131
1,120
$ 14,920
8,489
1,251
$ 23,409
116
$ 1,169
1,523
$ 23,273
64
$
826
239
1,554
$ 16,464
8,759
1,793
$ 25,223
239
1,554
$ 22,677
9,028
1,793
$ 31,705
284
$ 1,138
1,857
$ 25,909
76
$
948
1,872
$ 29,147
71
$ 1,181
Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard
or worse, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is
net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed
uncollectible. The charged-off portion of impaired loans outstanding at December 31, 2015 and 2014 totaled
approximately $2.1 million and $5.5 million, respectively. In addition, the recorded investment in impaired loans is net
of purchase discounts or premiums on acquired loans. At December 31, 2015 and 2014, outstanding commitments to
extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs,
totaled $1.3 million and $1.4 million, respectively.
Page-73
The following tables disclose loans by major portfolio category and activity in the ALLL, as well as the related ALLL
disaggregated by impairment evaluation method:
(dollars in thousands)
As of December 31, 2015:
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
Allowance for Loan Losses and Recorded Investment In Loans
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
$
2,111
$
2,179
$
6,178
$
723
$
907
$
327
$
309
$
1,096 $
13,830
904
8
70
—
—
—
—
1
3
—
67
—
116
—
—
—
1,160
9
Ending balance
$
3,023
$
2,249
$
6,178
$
724
$
910
$
394
$
425
$
1,096 $
14,999
Loans outstanding:
Collectively evaluated for
impairment
Individually evaluated for
impairment1
Purchased credit-impaired
$214,695
$233,605
$711,737
$ 62,256
$111,673
$ 71,143
$ 21,388
$
— $ 1,426,497
4,582
175
6,993
1,711
2,416
1,726
3,238
1
559
68
2,011
1,251
—
—
—
—
21,050
3,681
Total
$219,452
$242,309
$715,879
$ 65,495
$112,300
$ 73,154
$ 22,639
$
— $ 1,451,228
Ratio of allowance for loan
losses to total loans
Allowance for loan losses to
non-accrual loans
1.38%
0.93%
0.86%
1.11%
0.81%
0.54%
1.88%
14,395%
NM
325%
72,400%
532%
NM
512%
NM
NM
1.03%
688%
1 Total excludes $138 thousand 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
(dollars in thousands)
As of December 31, 2014:
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
Allowance for Loan Losses and Recorded Investment In Loans
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
$
2,143
$
1,859
$
6,672
$
836
$
859
$
341
$
282
$
969 $
13,961
690
4
65
—
—
—
—
3
—
—
92
—
284
—
—
—
1,131
7
Ending balance
$
2,837
$
1,924
$
6,672
$
839
$
859
$
433
$
566
$
969 $
15,099
Loans outstanding:
Collectively evaluated for
impairment
Individually evaluated for
impairment1
Purchased credit-impaired
$206,603
$220,933
$668,371
$ 42,718
$110,028
$ 70,990
$ 14,995
$
— $ 1,334,638
3,296
324
7,056
2,616
2,954
2,174
5,684
11
693
67
2,045
1,793
—
—
—
—
23,521
5,192
Total
$210,223
$230,605
$673,499
$ 48,413
$110,788
$ 73,035
$ 16,788
$
— $ 1,363,351
Ratio of allowance for loan
losses to total loans
Allowance for loan losses to
non-accrual loans
1.35%
0.83%
0.99%
1.73%
0.78%
0.59%
3.37%
NM
137%
275%
16%
307%
NM
544%
NM
NM
1.11%
161%
1 Total excludes $1.7 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-74
(in thousands)
Year ended December 31, 2015:
Allowance for loan losses:
Beginning balance
Provision (reversal)
Charge-offs
Recoveries
Ending balance
Year ended December 31, 2014:
Allowance for loan losses:
Beginning balance
Provision (reversal)
Charge-offs
Recoveries
Ending balance
Year ended December 31, 2013:
Allowance for loan losses:
Beginning balance
Provision (reversal)
Charge-offs
Recoveries
Ending balance
Allowance for Loan Losses Rollforward for the Period
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
$
$
$
$
$
$
2,837 $
(45)
1,924 $
325
(5)
—
236
3,023 $
—
2,249 $
6,672 $
(517)
—
23
6,178 $
839 $
724
(839)
—
724 $
859 $
433 $
48
—
3
(39)
—
—
910 $
394 $
566 $
(123)
(20)
2
425 $
969 $
127
—
—
1,096 $
15,099
500
(864)
264
14,999
3,056 $
(321)
(66)
168
2,837 $
2,012 $
(93)
—
5
1,924 $
6,196 $
431
—
45
6,672 $
633 $
314
(204)
96
839 $
875 $
317 $
(19)
—
3
116
—
—
859 $
433 $
629 $
(141)
(7)
85
566 $
506 $
463
—
—
969 $
14,224
750
(277)
402
15,099
4,100 $
(1,393)
(672)
1,021
3,056 $
1,313 $
615
—
84
2,012 $
4,372 $
1,940
(156)
40
6,196 $
611 $ 1,264 $
551 $
83
(62)
1
633 $
(223)
(176)
10
(234)
—
—
875 $
317 $
1,231 $
(535)
(88)
21
629 $
219 $
287
—
—
506 $
13,661
540
(1,154)
1,177
14,224
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 significant
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 our two
acquisitions 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 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.
The following table presents the fair value of purchased credit-impaired and other loans acquired from Bank of Alameda
as of the acquisition date:
(in thousands)
Contractually required payments including interest
Less: nonaccretable difference
Cash flows expected to be collected (undiscounted)
Accretable yield
Fair value of purchased loans
November 29, 2013
Purchased
credit-
impaired
loans
Other
purchased
loans
Total
$
$
5,706 $
211,769 $
217,475
(1,183)
4,523
(707)
—
211,769
(41,826)
(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.
Page-75
The following table reflects the outstanding balance and related carrying value of PCI loans as of the acquisition date:
PCI Loans
(in thousands)
Commercial and industrial
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:
• 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;
• 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
• 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.
The 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 $4 thousand, $3 thousand
and $203 thousand during 2015, 2014 and 2013 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 2015, 2014 and 2013, 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 $2 thousand, $238 thousand and $237 thousand, respectively.
The nonaccretable 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, 2015 and 2014:
PCI Loans
(dollars in thousands)
Commercial and industrial
Commercial real estate
Construction
Home equity
Total purchased credit-impaired loans
December 31, 2015
December 31, 2014
Unpaid principal
balance
Carrying value
Unpaid principal
balance
Carrying value
$
$
237 $
4,329
187
224
175 $
3,437
1
68
479 $
6,831
136
232
324
4,790
11
67
4,977 $
3,681 $
7,678 $
5,192
Page-76
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 from nonaccretable difference 2
Balance at end of period
Years ended
December 31, 2015
December 31, 2014
December 31, 2013
$
$
4,027 $
3,649 $
—
(914)
(495)
—
2,618 $
—
(273)
(613)
1,264
4,027 $
3,960
707
(793)
(725)
500
3,649
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 changes 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 $833.8 million and $868.1 million at December 31, 2015 and 2014, respectively. In
addition, we pledge a certain residential loan portfolio, which totaled $45.2 million and $27.7 million at December 31,
2015 and 2014, 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 shareholders 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.
An analysis of net loans to related parties for each of the three years ended December 31, 2015, 2014 and 2013 is as
follows:
(in thousands)
Balance at beginning of year
Additions
Advances
Repayments
Reclassified as unrelated-party loan due to a change in borrower status
Balance at end of year
$
$
2015
3,329 $
—
165
(390)
(542)
2014
3,749 $
—
—
(420)
—
2,562 $
3,329 $
Undisbursed commitments to related parties totaled $1.0 million as of December 31, 2015 and 2014.
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
$
$
2015
13,615 $
9,887
23,502
(14,197)
9,305 $
Page-77
2013
3,425
550
569
—
(795)
3,749
2014
13,866
9,040
22,906
(13,047)
9,859
The amount of depreciation and amortization totaled $2.0 million, $1.6 million, and $1.4 million for the years ended
December 31, 2015, 2014 and 2013, respectively.
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, 2015. Death benefits provided under the specific terms of these
programs are estimated to be $64.1 million at December 31, 2015 and the benefits to employees' beneficiaries are
limited to the employee's active service period. The investment in bank owned life insurance policies are reported in
interest receivable and other assets at their cash surrender value of $29.5 million and $28.6 million at December 31,
2015 and December 31, 2014, respectively. The cash surrender value includes both the original premiums paid for
the life insurance policies and the accumulated accretion of policy income since inception of the policies. Income of
$814 thousand, $841 thousand and $954 thousand was recognized on the life insurance policies in 2015, 2014 and
2013, respectively. 2013 BOLI income includes a $228 thousand benefit realized on the death of an insured employee.
We regularly monitor the credit ratings of our insurance carriers to ensure that they are in compliance with our policy.
Note 7: Deposits
A stratification of time deposits at December 31, 2015 and 2014 is presented in the following table:
(in thousands)
Time deposits of less than $100 thousand
Time deposits of $100 thousand to $250 thousand
Time deposits of more than $250 thousand
Total time deposits
December 31, 2015
December 31, 2014
$
$
39,534
$
67,352
54,571
161,457
$
44,130
58,240
47,344
149,714
Interest on time deposits was $853 thousand, $917 thousand and $922 thousand in 2015, 2014 and 2013, respectively.
Scheduled maturities of time deposits at December 31, 2015 are presented as follows:
(in thousands)
2016
2017
2018
2019
2020
Thereafter
Total
Scheduled maturities of time deposits
$ 113,232 $
23,482 $
9,317 $
7,482 $
7,944 $
— $ 161,457
As of December 31, 2015, $50.9 million in securities held-to-maturity and $36.2 million securities available-for-sale
were pledged as collateral for our local agency deposits.
Our deposit portfolio includes deposits offered through the Promontory Interfinancial Network that are comprised of
Certificate of Deposit Account Registry Service® ("CDARS") balances included in time deposits and Insured Cash
Sweep® ("ICS") balances included in money market deposits. Through this network, we are able to offer our customers
access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place
funds through CDARS and ICS on behalf of a customer, we typically receive matching deposits through the network's
reciprocal deposit program. We consider the reciprocal deposits to be in-market deposits as distinguished from
traditional out-of-market brokered deposits. We also have the ability to place deposits through the network for which
we receive no matching deposits. At December 31, 2015, we had $14.3 million in CDARS and $12.2 million in ICS
balances in the reciprocal deposit program. At December 31, 2014, we had no CDARS or ICS deposits in the reciprocal
deposit program. At December 31, 2015 and 2014 we had placed $355 thousand and $18.3 million, respectively, in
CDARS deposits for which we received no matching deposits.
The aggregate amount of deposit overdrafts that have been reclassified as loan balances was $84 thousand and $380
thousand at December 31, 2015 and 2014, 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 $8.3 million and $8.8 million at December 31, 2015 and 2014, respectively.
Page-78
Note 8: Borrowings
Federal Funds Purchased – We had unsecured lines of credit totaling $92.0 million and $72.0 million with correspondent
banks for overnight borrowings at December 31, 2015 and 2014, respectively. In general, interest rates on these lines
approximate the federal funds target rate. At December 31, 2015 and December 31, 2014, we had no overnight
borrowings outstanding under these credit facilities.
Federal Home Loan Bank Borrowings – As of December 31, 2015 and 2014, we had lines of credit with the FHLB
totaling $470.6 million and $450.6 million, respectively, based on asset size and eligible collateral of certain loans. At
December 31, 2015, FHLB overnight borrowings totaled $52.0 million at a rate of 0.27%. At December 31, 2014, there
were 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, 2015. 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, 2016 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, 2015 and 2014, $403.4 million and $435.3 million, respectively, was remaining as available for
borrowing from the FHLB, net of the overnight borrowings, term borrowings, and an unused standby letter of credit
totaling $241 thousand.
Federal Reserve Line of Credit – The Bank has a line of credit with the Federal Reserve Bank ("FRB") secured by
certain residential loans. At December 31, 2015 and 2014, the Bank had borrowing capacity under this line totaling
$37.8 million and $27.7 million, respectively, and had no outstanding borrowings with the FRB.
As part of the NorCal Acquisition, Bancorp assumed two subordinated debentures due to NorCal Community Bancorp
Trusts I and II (the "Trusts"), established for the sole purpose of issuing trust preferred securities on September 22,
2003 and December 29, 2005, respectively. The subordinated debentures were recorded at fair values totaling $4.95
million at acquisition date with 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. Accretion on
the subordinated debentures totaled $210 thousand, $216 thousand and $19 thousand in 2015, 2014 and 2013,
respectively. Bancorp has the option to defer payment of the interest on the subordinated debentures 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 Bancorp common stockholders are prohibited. 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 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 the Trusts as of December 31,
2015:
(in thousands)
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 (3.37% as of
December 31, 2015), 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 (1.91% as of
December 31, 2015), redeemable, in whole or in part, on any interest payment date
Total
$
$
4,124
4,124
8,248
Page-79
Borrowings at December 31, 2015 and 2014 are summarized as follows:
(dollars in thousands)
FHLB overnight borrowings
FHLB fixed-rate advances
Subordinated debentures
Carrying
Value
52,000 $
15,000 $
5,395 $
$
$
$
2015
Average
Balance
784
15,000
5,288
Average
Rate
Carrying
Value
0.38% $
— $
2.07% $
15,000 $
7.94% $
5,185 $
2014
Average
Balance
4
15,000
5,070
Average
Rate
—%
2.07%
8.36%
Note 9: Stockholders' Equity and Stock Plans
Warrant
Under the United States Department of the Treasury Capital Purchase Program (the “TCPP”), Bancorp issued to the
U.S. Treasury a warrant to purchase 154,242 shares of common stock at a per share exercise price of $27.23. The
warrant was immediately exercisable and had an expiration date of December 5, 2018. The warrant was subsequently
auctioned to two institutional investors in November 2011 and was exercised in September 2015. The warrant
represented the right to purchase 157,711 shares of common stock at $26.63 per share. The cashless exercise resulted
in the issuance of 70,591 shares of common stock in September 2015.
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 2015, 2014 and 2013, our directors were awarded a total of 5,295, 5,306 and
5,619 common shares, respectively, from the 2010 Director Stock Plan in addition to their cash compensation. As of
December 31, 2015, 118,965 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, 2015, there were 205,297 shares available for future grants under
the 2007 Equity Plan. The Compensation Committee of the Board of Directors has the discretion to determine which
employees, advisors and non-employee directors will receive an award, the timing of awards, the vesting schedule for
each award, the type of award to be granted, the number of shares of Bancorp stock to be subject to each option and
restricted stock award, and any other terms and conditions. Restricted or unrestricted whole-share awards are limited
to 250,000 of the total shares available under 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 193,586 shares
available for future grants under the plan as of December 31, 2015.
The inactive 1999 Stock Option Plan covered certain full-time employees and directors who had 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 have been
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 and restricted stock awarded during 2006 through 2014 vest 20% on each anniversary of the
grant date for five years. Beginning in 2015, options and restricted stock awards generally vest by approximately 33%
Page-80
on each anniversary of the grant date for three 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.
Beginning in 2015, performance-based stock awards were issued to a selected group of employees. Stock award
vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation
Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These
performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the
pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based
stock awards, an estimate is made of the number of shares expected to vest based on the probability that the
performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate
is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.
A summary of activity for stock options for the years ended December 31, 2015, 2014 and 2013 is presented below.
The intrinsic value of options outstanding and exercisable 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
Average
Aggregate
Exercise Intrinsic Value
Price
(in thousands)
Weighted
Average
Grant-Date
Fair Value
Number of
Shares
Weighted
Average
Remaining
Contractual
Term
(in years)
Options outstanding at December 31, 2012
285,533 $
31.73 $
1,661
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2013
30,000
(23,840)
(71,237)
220,456
39.99
35.12
31.13
32.74
664
2,349
$
10.59
Exercisable (vested) at December 31, 2013
163,301
31.09
2,008
Options outstanding at December 31, 2013
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2014
220,456
26,421
(2,790)
(49,415)
194,672
32.74
44.83
39.01
29.39
35.14
2,349
771
3,398
Exercisable (vested) at December 31, 2014
133,153
32.31
2,701
Options outstanding at December 31, 2014
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2015
194,672
28,320
(652)
(37,071)
185,269
35.14
50.70
48.38
30.72
38.35
3,398
755
2,788
Exercisable (vested) at December 31, 2015
114,581
34.12
2,209
12.04
12.21
4.43
4.05
2.56
4.05
4.48
2.88
4.48
5.00
3.21
Page-81
The following table shows the number, weighted average exercise price, intrinsic value, and weighted average remaining
contractual life of options outstanding, vested and expected to vest as of December 31, 2015.
Number of options
Weighted average exercise price
Aggregate intrinsic value (in thousands)
Weighted average remaining contractual term (in years)
$
$
179,883
38.14
2,745
4.91
The following table summarizes non-vested restricted stock awards and changes during the years ended December 31,
2015, 2014 and 2013.
Non-vested awards at December 31, 2012
Granted
Vested
Forfeited
Non-vested awards at December 31, 2013
Non-vested awards at December 31, 2013
Granted
Vested
Forfeited
Non-vested awards at December 31, 2014
Non-vested awards at December 31, 2014
Granted
Vested
Forfeited
Non-vested awards at December 31, 2015
Restricted Stock Awards
Weighted
Average
Grant-Date
Fair Value
34.05
39.96
31.42
36.19
37.59
Number of
Shares
21,610 $
11,850
(6,941)
(3,998)
22,521
22,521 $
8,523
(6,554)
(2,067)
22,423
22,423 $
15,970
(6,555)
(450)
31,388
37.59
45.36
34.65
39.32
41.25
41.25
50.75
40.00
48.45
46.24
As of December 31, 2015, there was $1.5 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 2.3 years. The total grant-date fair value of option shares vested during the years ended December 31,
2015, 2014 and 2013 was $202 thousand, $182 thousand and $187 thousand, respectively. The total grant-date fair
value of restricted stock awards vested during 2015, 2014 and 2013 was $262 thousand, $227 thousand and $218
thousand, respectively.
Page-82
A summary of the options outstanding and exercisable by price range as of December 31, 2015 is presented in the
following table:
Stock Options Outstanding as of
December 31, 2015
Stock Options Exercisable as of
December 31, 2015
Range of Exercise Prices
Outstanding
Remaining
Stock Options Contractual Life
Weighted
Average
(in years) Exercise Price
$20.01 - $25.00
$25.01 - $30.00
$30.01 - $35.00
$35.01 - $40.00
$40.01 - $45.00
$45.01 - $50.00
$50.01 - $55.00
13,138
10,180
41,270
50,630
29,551
12,550
27,950
185,269
3.3 $
2.3
1.3
4.8
6.9
8.3
9.2
5.0
22.25
28.75
33.67
37.50
41.95
45.88
50.70
38.35
Stock Options
Exercisable
13,138 $
10,180
41,270
35,663
11,220
2,510
600
114,581
Weighted
Average
Exercise Price
22.25
28.75
33.67
37.02
41.89
45.88
50.27
34.12
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 restricted stock awards
pursuant to the 2007 Equity Plan. The grant-date fair value of the restricted stock awards, which equals 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. Total compensation cost for these share-based payment arrangements
was $636 thousand, $446 thousand and $403 thousand during 2015, 2014 and 2013, respectively, and the total
recognized tax benefits related thereto were $194 thousand, $128 thousand and $109 thousand, respectively. In
addition, we record excess tax benefits, if any, on the exercise of non-qualified stock options, the disqualifying disposition
of incentive stock options and vesting of restricted stock awards as an addition to common stock with a corresponding
decrease in current taxes payable. The tax benefit realized from disqualifying dispositions of incentive stock options
recognized in the consolidated statements of comprehensive income during 2015, 2014 and 2013 was $49 thousand,
$76 thousand and $94 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 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 over the
most recent period that is generally commensurate with the expected life of the options. The weighted-average
assumptions used in the pricing model are noted in the table below.
Risk-free interest rate
Expected dividend yield on common stock
Expected life in years
Expected price volatility
Years ended December 31,
2015
1.67%
1.75%
6.0
28.06%
2014
2.04%
1.70%
6.0
30.32%
2013
1.60%
1.80%
6.8
30.01%
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 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
Page-83
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.
(in thousands except per share data)
Cash dividends to common stockholders
Cash dividends per common share
Years ended December 31,
2015
5,390 $
0.90 $
2014
4,733 $
0.80 $
$
$
2013
3,970
0.73
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, 2015, Bancorp's retained earnings and the amount
of assets that exceeds the total liabilities were $129.6 million and $214.5 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 $20.5 million of the Bank's retained earnings balance was available for payment of dividends
to Bancorp as of December 31, 2015. Bancorp held $3.8 million in cash at December 31, 2015. This cash, combined
with the $20.5 million dividends available to be distributed from the Bank, is expected to be adequate to cover Bancorp's
estimated operational needs and cash dividends to shareholders for 2016.
Preferred Stock and 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, 2015, 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 in connection with the Rights Agreement.
Page-84
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 unadjusted quoted prices in active markets for identical assets or liabilities.
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 may include significant Management judgment and estimation.
Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation
process in the reporting period during which the event or circumstances that caused the transfer occurred.
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
December 31, 2015
Securities available-for-sale:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Carrying
Value
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Mortgage-backed securities and collateralized mortgage
obligations issued by U.S. government-sponsored
agencies
Debentures of government-sponsored agencies
Privately-issued collateralized mortgage obligations
Obligations of state and political subdivisions
Corporate bonds
Derivative financial assets (interest rate contracts)
Derivative financial liabilities (interest rate contracts)
$ 190,093 $
$ 160,892 $
$
$
$
$
$
4,150 $
57,673 $
4,979 $
3 $
1,658 $
December 31, 2014
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage
obligations issued by U.S. government-sponsored
agencies
Debentures of government-sponsored agencies
Privately-issued collateralized mortgage obligations
Obligations of state and political subdivisions
Corporate bonds
Derivative financial assets (interest rate contracts)
Derivative financial liabilities (interest rate contracts)
$ 158,119 $
$
$
$
$
$
$
14,557 $
7,294 $
15,880 $
4,998 $
61 $
1,996 $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
188,381 $
160,892 $
4,150 $
57,673 $
4,979 $
3 $
1,658 $
1,712
—
—
—
—
—
—
155,421 $
2,698
14,557 $
7,294 $
15,771 $
5,437 $
61 $
1,996 $
—
—
—
—
—
—
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
Page-85
rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).
Level 2 securities include obligations of state and political subdivisions, 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, 2015 and 2014, there are no securities that are considered Level 1 securities.
As of December 31, 2015, we have one available-for-sale security that is considered Level 3 security. The security
is a U.S. government agency obligation collateralized by a small pool of business equipment loans guaranteed by the
Small Business Administration program. This security is not actively traded and is owned by a few investors. The
significant unobservable data reflected in the fair value measurement include dealer quotes, projected prepayment
speeds/average lives and credit information, among other things. It was transferred to Level 3 during the second
quarter of 2014. During 2015, the decrease in unrealized gain was $7 thousand.
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.
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 derivatives. Level 2 inputs for the valuations are limited to observable
market prices for London Interbank Offered Rate (“LIBOR”) and Overnight Index Swap ("OIS") rates (for the very short
term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS 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. We project spot rates at reset days specified by each swap
contract to determine future cash flows, then discount to present value using either LIBOR or OIS curves depending
on the collateral posted as of the measurement date. When the value of any collateral placed with counterparties is
less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk
we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite
rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar
credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the
counterparty does not fully cover their liability to Bank of Marin. For further discussion on our methodology in valuing
our derivative financial instruments, refer to Note 15.
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 impaired loans and other real estate owned ("OREO").
The following table presents the carrying value of financial instruments that were measured at fair value on a non-
recurring basis and 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, 2015 and 2014.
(in thousands)
Description of Financial Instruments
Carrying Value1
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3) 1
December 31, 2015
Other real estate
December 31, 2014
Impaired loans carried at fair value:
Installment and other consumer1
Other real estate
$
$
$
421
$
— $
— $
421
77
461
$
$
— $
— $
— $
— $
77
461
1Represents collateral-dependent loan principal balances that had been generally written down to the values of the underlying collateral, net of
specific valuation allowances. At December 31, 2014, the $77 thousand carrying value of a consumer loan was net of a $26 thousand specific
valuation allowance. The carrying value of loans fully charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero.
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
Page-86
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 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 and are generally unobservable valuation inputs as they
are specific to each underlying collateral. There have been no significant changes in the valuation techniques during
the period ended December 31, 2015.
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 classified as Level 3. There was a $40 thousand decline
in the estimated fair value of the OREO during the year ended December 31, 2015. The OREO was acquired from
Bank of Alameda as part of the NorCal Acquisition.
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of December 31, 2015 and 2014,
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, 2015
December 31, 2014
Carrying
Amounts
Fair Value
Fair Value
Hierarchy
Carrying
Amounts
Fair Value
Fair Value
Hierarchy
Cash and cash equivalents
$
26,343 $
Investment securities held-to-maturity
69,637
26,343
71,054
Loans, net
Interest receivable
Financial liabilities:
Deposits
Federal Home Loan Bank borrowing
Subordinated debentures
Interest payable
1,436,229
1,470,380
6,643
6,643
1,728,226
1,728,717
67,000
5,395
187
67,279
5,132
187
Level 1
$
41,367 $
41,367
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 2
116,437
118,643
1,348,252
1,361,244
5,909
5,909
1,551,619
1,552,446
15,000
15,484
5,185
213
5,290
213
Level 1
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
Level 2
Page-87
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, 2015 and 2014, 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 the portion of loan discount attributable 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.
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 NorCal Acquisition, we assumed two subordinated debentures. See Notes
2 and 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 forward 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 a liquidity premium. 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 - The value of unrecognized financial instruments is estimated based on the fee income associated with
the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The
fair value of commitment fees was not material as of December 31, 2015 and 2014, respectively.
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% on January 1, 2015, 2014 and 2013. In
January 2016, the crediting rate increased to 3.50%. Our deferred compensation obligation totaled $3.0 million and
$2.9 million at December 31, 2015 and 2014, respectively, and is included in interest payable and other liabilities.
Page-88
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 the 401(k) Plan, employees
can defer between 1% and 50% of their eligible compensation, up to the maximum amount allowed by the Internal
Revenue Code. Contributions to the 401 (k) Plan for the employer match are vested at a rate of 20% per year over a
five year period. The Bank matched 50% of each participant's contribution prior to 2013 at which time the Bank
increased the match to 60%, with a maximum of $4 thousand annually. Employer contributions totaled $555 thousand,
$548 thousand and $473 thousand for the years ended December 31, 2015, 2014 and 2013, 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 employee stock
ownership 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 percentage of their salaries, regardless of whether an employee is participating in the 401(k)
plan or not. In January 2010, the Bank of Marin Employee Stock Ownership and Savings Plan was split into two plans:
Bank of Marin 401(k) Plan and Bank of Marin Employee Stock Ownership Plan ("ESOP"). The same eligibility criteria
apply under the ESOP, while employees' contributions are not permitted. For all participants, employer contributions
vest over a five year period of service. After five years of service, all past and future employer contributions vest
immediately.
The Bank contributed cash in the amount of $1.1 million for the year ended December 31, 2015, $1.2 million in 2014,
and $886 thousand in 2013, to the ESOP, which purchased Bancorp stock from the open market or private parties.
Cash dividends paid on Bancorp stock held by the ESOP are used to purchase additional shares in the open market.
All shares of Bancorp stock held by the ESOP are included in the calculations of basic and diluted earnings per share.
The employer contributions to the ESOP and the 401(k) Plan are included in salaries and benefits expense.
On January 1, 2011, we established a Salary Continuation Plan for a select group of Executive Management, who will
receive twenty-five percent of their estimated salary at retirement as 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 $823 thousand and $644 thousand recorded in interest payable and
other liabilities at December 31, 2015 and 2014, 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 provision (benefit)
Federal
State
Total deferred
2015
2014
2013
$
7,097 $
8,523 $
2,931
10,028
3,195
11,718
382
80
462
(146)
126
(20)
6,717
2,574
9,291
(873)
(479)
(1,352)
7,939
Total income tax provision
$
10,490 $
11,698 $
Page-89
The following table shows the tax effect of our cumulative temporary differences as of December 31:
(in thousands)
Deferred tax assets:
2015
2014
Allowance for loan losses and off-balance sheet credit commitments
$
5,918 $
Net operating loss carryforwards from the NorCal Acquisition
Deferred compensation plan and salary continuation plan
Fair value adjustment on loans acquired from the NorCal Acquisition
Accrued but unpaid expenses
State franchise tax
Interest received on non-accrual loans
Deferred rent and other lease incentives
Other real estate owned
Stock-based compensation
Depreciation and disposals on premises and equipment
Accretion on loans and investment securities
Net unrealized loss on securities available-for-sale
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 the NorCal Acquisition
Net unrealized gain on securities available-for-sale
Total gross deferred tax liabilities
4,090
1,619
1,197
1,188
1,005
864
595
448
273
231
110
59
174
5,544
4,598
1,499
1,647
1,119
1,100
651
584
448
231
94
630
—
195
17,771
18,340
(2,567)
(1,309)
(1,200)
—
(5,076)
(2,385)
(1,569)
(1,288)
(498)
(5,740)
Net deferred tax assets
$
12,695 $
12,600
As of December 31, 2015, we had Federal and California net operating loss carryforwards ("NOLs") from the NorCal
Acquisition of approximately $7.6 million and $21.3 million, respectively. If not fully utilized, the federal NOLs will begin
to expire in 2029, and the California NOLs will begin to expire in 2028. The 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, $819 thousand of California NOLs are expected to expire unutilized in
2031. As a result, we wrote down $58 thousand of deferred tax assets associated with these California NOLs as part
of the purchase accounting adjustments 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, 2015 or 2014.
The effective tax rate for 2015, 2014 and 2013 differs from the current Federal statutory income tax rate as follows:
Federal statutory income tax rate
Increase (decrease) due to:
California franchise tax, net of federal tax benefit
Tax exempt interest on municipal securities and loans
Tax exempt earnings on bank owned life insurance
Low income housing tax credits
Other
Effective Tax Rate
2015
35.0 %
6.8 %
(4.2)%
(1.0)%
(0.2)%
(0.1)%
36.3 %
2014
35.0 %
6.8 %
(3.3)%
(0.9)%
(0.1)%
(0.3)%
37.2 %
2013
35.0 %
6.5 %
(4.0)%
(1.5)%
(0.3)%
— %
35.7 %
Page-90
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. There were no ongoing federal or state income tax examinations at the issuance of this report. In June
2015, the State of California completed its examination of the 2011 and 2012 corporate income tax returns, resulting
in a minor adjustment. At December 31, 2015 and 2014, neither the Bank nor Bancorp had accruals 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 2028. Most of the leases contain certain renewal options and escalation clauses. At December 31,
2015, the approximate minimum future commitments payable under non-cancelable contracts for leased premises are
as follows:
(in thousands)
Operating leases1
21,505
1 Minimum payments have not been reduced by minimum sublease rentals of $248 thousand due in the future under non-cancelable subleases.
3,526 $
3,018 $
3,763 $
3,755 $
3,784 $
3,659 $
$
Thereafter
2018
2019
2017
2020
2016
Total
Rent expense included in occupancy expense totaled $4.2 million in 2015 and 2014, and $3.3 million in 2013.
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 ("Covered Litigation").
Visa Inc. maintains an escrow account from which settlements of, or judgments in, the Covered Litigation are paid.
While the accrual related to the Covered Litigation could be higher or lower than the litigation escrow account balance,
Visa did not record an additional accrual for the Covered Litigation during 2015. At December 31, 2015, the balance
of the escrow account was $1.0 billion. According to the latest SEC Form 10-Q filed by VISA, Inc. on January 28,
2016, Visa has reached settlement agreements with a number of opt-out merchants. They represent approximately
49% of the Visa-branded payment card sales volume of merchants who opted out of interchange multidistrict litigation
class settlement agreement, under which an estimated $4.0 billion is due to the class plaintiffs. The conversion rate
of Visa Class B common stock held by us to Class A common stock (as discussed in Note 3) may decrease if Visa
makes more Covered Litigation settlement payments in the future, and the full effect on member banks is still uncertain.
However, we are not aware of significant future cash settlement payments required by us on the Covered Litigation.
As permitted or required under California law and to the maximum extent allowable under that law, we have certain
obligations to indemnify our current and former officers and directors for certain events or occurrences while the officer
or director is, or was, serving at our request in such capacity. These indemnification obligations are valid as long as
the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The maximum potential amount of future payments we could be required
to make under these indemnification obligations is unlimited; however, we have a director and officer insurance policy
that mitigates our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated
fair value of these indemnification obligations is minimal.
Page-91
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 ("GSEs"). Our exposure, which primarily
results from positions in securities issued by the U.S. Government, its agencies, and GSEs was $362.6 million, or 74%
of our total investment portfolio at December 31, 2015 and $185.4 million, or 58% at December 31, 2014.
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% of our loan portfolio at both December 31, 2015 and 2014.
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). 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.
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
forward swap and the yield maintenance agreement are recorded in interest income. When the fixed-rate loans are
originated, the forward swaps are designated to offset the change in fair value in the loans. 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. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap
values.
Page-92
As of December 31, 2015, we had seven interest rate swap agreements, which are scheduled to mature in June 2020,
August 2020, 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 $28 thousand and $41 thousand as of December 31, 2015 and December 31, 2014, respectively.
Information on our derivatives follows:
(in thousands)
Fair value hedges:
Asset derivatives
Liability derivatives
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
Interest rate contracts notional amount
Interest rate contracts fair value 1
$
$
4,407
3
$
$
4,589 $
61 $
22,187
1,658
$
$
26,899
1,996
(in thousands)
Increase (decrease) in value of designated interest rate swaps recognized
in interest income
Payment on interest rate swaps recorded in interest income
Decrease (increase) in value of hedged loans recognized in interest income
Decrease in value of yield maintenance agreement recognized against
interest income
Net loss on derivatives recognized against interest income 2
$
$
Years ended December 31,
2015
2014
280
$
(377) $
(918)
(308)
(52)
(1,002)
662
(91)
2013
3,680
(1,422)
(3,971)
(71)
(998) $
(808) $
(1,784)
1 See Note 10 for valuation methodology.
2 Includes hedge ineffectiveness loss of $80 thousand, gain of $194 thousand and loss of $362 thousand for the years December 31, 2015, 2014
and 2013, respectively. Changes in value of swaps were included in the assessment of hedge effectiveness. Hedge ineffectiveness is the measure
of the extent to which the change in the fair value of the hedging instruments does not offset the change in the fair value of the hedged item.
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-93
Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
Offsetting of Financial Assets and Derivative Assets
Gross Amounts Not Offset in
the Statements of Condition
Gross Amounts
Net Amounts
Gross Amounts
Offset in the
of Assets Presented
of Recognized
Assets1
Statements of
Condition
in the Statements
of Condition1
Financial
Cash Collateral
Instruments
Received
Net Amount
$
$
$
$
3 $
—
3 $
61 $
—
61 $
— $
—
— $
— $
—
— $
3 $
—
3 $
61 $
—
61 $
(3) $
—
(3) $
(61) $
—
(61) $
— $
—
— $
— $
—
— $
—
—
—
—
—
—
(in thousands)
As of December 31, 2015
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
As of December 31, 2014
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
1
Amounts exclude accrued interest totaling $1 thousand at both December 31, 2015 and December 31, 2014, respectively.
Offsetting of Financial Liabilities and Derivative Liabilities
Gross Amounts Not Offset in
the Statements of Condition
Gross Amounts
Net Amounts of
Gross Amounts
Offset in the
Liabilities Presented
of Recognized
Liabilities2
Statements of
Condition
in the Statements of
Condition2
Financial
Cash Collateral
Instruments
Pledged
Net Amount
$
$
$
$
1,390 $
268
1,658 $
1,616 $
380
1,996 $
— $
—
— $
— $
—
— $
1,390 $
268
1,658 $
1,616 $
380
1,996 $
(3)
—
(3) $
(61) $
—
(61) $
(1,387) $
(268)
(1,655) $
(1,360) $
(380)
(1,740) $
—
—
—
195
—
195
(in thousands)
As of December 31, 2015
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
As of December 31, 2014
Derivatives by Counterparty
Counterparty A
Counterparty B
Total
2 Amounts exclude accrued interest totaling $27 thousand and $39 thousand at December 31, 2015 and December 31, 2014, respectively.
Page-94
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 of capital, risk weightings and other factors.
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.
In July 2013, the Board of Governors of the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency,
finalized regulatory capital rules known as “Basel III.” The rules became effective beginning January 2015, and will
be phased-in and become fully implemented by January 2019. The guidelines, among other things, changed the
minimum capital requirements of bank holding companies, by increasing the Tier 1 capital to risk-weighted assets ratio
to 6%, and introducing a new requirement to maintain a minimum ratio of common equity Tier 1 capital to risk-weighted
assets of 4.5%. By 2019, when fully phased in, the rules will require further increases to certain minimum capital
requirements and a capital conservation buffer of an additional 2.5% of risk-weighted assets. Basel III permits certain
banks such as us to exclude accumulated other comprehensive income or loss from regulatory capital through a one-
time election in the first quarter of 2015. As it was consistent with our existing treatment, there were no changes to
our capital ratios as a result of making this election. The changes that affected us most significantly include:
•
shifting off-balance sheet items with an original maturity of one year or less from 0% to 20% risk weight,
• moving past due loan balances from 100% to 150% risk weight,
•
•
deducting deferred tax assets associated with NOLs and tax credits from common equity Tier 1 capital, and
subjecting deferred tax assets related to temporary timing differences that exceed certain thresholds to 250%
risk-weighting, beginning in 2018.
We have modeled our ratios under fully phased-in Basel III rules and, based on present facts, we do not expect that
we will be required to raise additional capital as a result of the fully phased-in rules.
To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1
leverage, and common equity Tier 1 ratios as set forth in the second table below. The most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of
December 31, 2015. There are no conditions or events since that notification that Management believes have changed
the Bank’s categories and we expect the Bank to remain well capitalized under the minimum requirements for capital
adequacy in accordance with Basel III rules for prompt corrective action pursuant to Section 38 of the Federal Deposit
Insurance Act on a fully phased-in basis.
The Bancorp’s and Bank's capital adequacy ratios as of December 31, 2015 and 2014 are presented in the following
tables. Bancorp's Tier 1 capital includes the subordinated debentures, which are not included at the Bank level. We
continued to deploy capital in 2015 accumulated from net income into lending and investing.
Page-95
Capital Ratios for Bancorp
(dollars in thousands)
As of December 31, 2015
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Common Equity Tier 1 (to risk-weighted assets)
As of December 31, 2014
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Capital Ratios for the Bank
(dollars in thousands)
As of December 31, 2015
Total Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
Common Equity Tier 1 (to risk-weighted
assets)
As of December 31, 2014
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
227,269
211,521
211,521
206,724
210,067
193,956
193,956
$
$
$
$
$
$
$
Ratio
13.37%
12.44%
10.67%
12.16%
13.94%
12.87%
10.62%
Amount
135,996
101,997
79,296
76,498
120,580
60,290
73,079
Ratio
%
%
%
%
%
%
%
Ratio for Capital
Adequacy Purposes
Ratio to be Well
Capitalized under
Prompt Corrective Action
Provisions
Actual Ratio
Amount
Ratio
222,830
13.11%
207,082
12.18%
207,082
10.45%
Amount
135,968
101,976
79,268
207,082
12.18%
76,482
206,465
13.70%
120,553
190,354
12.63%
190,354
10.42%
60,277
73,064
Ratio
%
%
%
%
%
%
%
Amount
169,960
135,968
99,085
110,474
150,692
90,415
91,330
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 some 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 creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by us, is based on Management's credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and real property.
The contractual amount of loan commitments and standby letters of credit not reflected on the consolidated statements
of condition was $376.6 million and $349.3 million at December 31, 2015 and 2014, respectively. This amount included
$191.3 million and $173.3 million under commercial lines of credit (these commitments are contingent upon customers
maintaining specific credit standards), $130.4 million and $115.6 million under revolving home equity lines, $39.4 million
and $46.7 million under undisbursed construction loans, $11.1 million and $11.6 million under personal and other lines
of credit, and a remaining $4.4 million and $2.1 million under standby letters of credit at December 31, 2015 and 2014,
respectively. We record an allowance for losses on these off-balance sheet commitments based on an estimate of
probabilities of these commitments being drawn upon according to our historical utilization experience on different
types of commitments and expected loss severity. In 2015 we refined our methodology used in the calculation of the
Page-96
loss reserve on off-balance sheet commitments to more appropriately reflect the inherent credit risks, which totaled
$749 thousand and $1.0 million as of December 31, 2015 and 2014, respectively. Approximately 42% of the
commitments expire in 2016, approximately 41% expire between 2017 and 2023 and approximately 17% expire
thereafter.
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
December 31, 2015 and 2014
(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
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
2015
2014
$
$
$
$
3,796
215,722
770
220,288
5,395
109
311
5,815
214,473
220,288
$
$
$
$
3,228
201,609
454
205,291
5,185
80
—
5,265
200,026
205,291
CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2015, 2014 and 2013
(in thousands)
Income
2015
2014
2013
Dividends from bank subsidiary
$
6,500
$
— $
28,000
Miscellaneous Income
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 greater (less) than dividends received
from bank subsidiary
Net income
Page-97
6
6,506
420
973
1,393
5,113
583
5,696
8
8
421
851
1,272
(1,264)
532
(732)
—
28,000
34
1,313
1,347
26,653
382
27,035
12,745
18,441
$
20,503
19,771
$
(12,765)
14,270
$
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2015, 2014 and 2013
(in thousands)
Cash Flows from Operating Activities:
Net income
2015
2014
2013
$
18,441
$
19,771
$
14,270
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Earnings of bank subsidiary (greater) less than
dividends received from bank subsidiary
Net change in operating assets and liabilities:
Accretion of discount on subordinated debentures
Other assets
Intercompany receivable
Other liabilities
Net cash provided by (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 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
$
$
$
$
$
(12,745)
(20,503)
12,765
210
(298)
(18)
368
5,958
(1,156)
—
(1,156)
1,156
(5,390)
(4,234)
568
3,228
3,796
275
$
$
216
(88)
—
(99)
(703)
(1,475)
—
(1,475)
1,475
(4,733)
(3,258)
(5,436)
8,664
3,228
236
$
$
— $
— $
— $
— $
— $
— $
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
End of 2015 Audited Consolidated Financial Statements
Page-98
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
Bank of Marin Bancorp and its subsidiary (the "Company") 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 1934 Act) as of December 31, 2015.
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, 2015.
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 1934 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 1934 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.
(B)
Management's Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting
(as defined in Rules 13a-15(f) promulgated under the 1934 Act). The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the Company's financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2015, utilizing the framework established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this
assessment, management has concluded that the Company maintained effective internal control over financial
reporting as of December 31, 2015.
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 that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management's report on internal control over financial reporting is set forth in Item 8 and is incorporated herein
by reference.
(C)
Attestation Report of the Registered Public Accounting Firm
The Company's independent registered public accounting firm, Moss Adams, LLP, has audited the effectiveness
of internal control over financial reporting as of December 31, 2015 as stated in their attestation report, which
is included in item 8 and incorporated herein by reference.
Page-99
(D)
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2015, 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 2016 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. During 2015 there were
no changes in the procedures for the election or nomination of directors.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from our Proxy Statement for the 2016 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 2016 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 2016 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 2016 Annual
Meeting of Shareholders.
Page-100
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, 2015, 2014 and 2013
Management's Report on Internal Control over Financial Reporting
Consolidated Statements of Condition as of December 31, 2015 and 2014
Consolidated Statements of Comprehensive Income for the Years Ended December 31,
2015, 2014 and 2013
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
December 31, 2015, 2014 and 2013
Consolidated Statement of Cash Flows for the Years Ended December 31, 2015, 2014 and
2013
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-101
Exhibit
Number
2.01
2.02
3.01
3.02
3.02a
4.01
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10a
10.10b
10.10c
10.11
10.12
11.01
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
Bylaws, as amended
Bylaw Amendment
Rights Agreement dated as of July 2, 2007
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
Intentionally left blank
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
Salary Continuation Agreement with executive
officers, Tani Girton, Chief Financial Officer, dated
October 18, 2013 and Elizabeth Reizman, Chief
Credit Officer, dated July 20, 2014
Salary Continuation Agreement for executive
officer Timothy Myers, Executive Vice President
and Commercial Banking Manager, dated May 28,
2015
2007 Form of Change in Control Agreement
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
Herewith
Filing Date
February 28,
2011
8-K
001-33572
2.1
July 5, 2013
10-Q
001-33572
3.01
10-Q
8-K
8-A12B
S-8
S-8
S-8
S-8
S-8
10-Q
001-33572
001-33572
001-33572
333-144810
333-144807
333-144808
333-144809
333-167639
001-33572
3.02
3.03
4.1
4.1
4.1
4.1
4.1
4.1
10.06
8-K
001-33572
10.1
November 7,
2007
May 9, 2011
July 6, 2015
July 2, 2007
July 24, 2007
July 24, 2007
July 24, 2007
July 24, 2007
June 21, 2010
November 7,
2007
January 26,
2009
8-K
8-K
001-33572
99.1
001-33572
10.1
10.4
October 21,
2010
January 6,
2011
8-K
001-33572
10.2
10.3
November 4,
2014
8-K
001-33572
10.4
June 2, 2015
8-K
8-K
001-33572
10.1
001-33572
10.1
October 31,
2007
July 17, 2012
14.02
Code of Ethical Conduct, dated October 17, 2014
10-K
001-33572
14.02
March 12,
2015
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-102
Pursuant to the requirements of Section 13 or 15(d) 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 11, 2016
Date
March 11, 2016
Date
March 11, 2016
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-103
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 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
Dated: March 11, 2016
/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/ Brian M. Sobel
Brian M. Sobel
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/ J. Dietrich Stroeh
J. Dietrich Stroeh
Page-104
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-105
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 11, 2016, 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, 2015.
/s/ Moss Adams LLP
San Francisco, California
March 11, 2016
[THIS PAGE INTENTIONALLY LEFT BLANK]
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 11, 2016
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 11, 2016
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, 2015, 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 11, 2016
Date
March 11, 2016
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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www.bankofmarin.com
001CSN1F6B