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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, 2020
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)
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
California
20-8859754
504 Redwood Blvd.
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:
Title of each class
Common Stock, No Par Value, and
attached Share Purchase Rights
Trading symbol
BMRC
Name of each exchange on which registered
The Nasdaq Stock Market
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller
reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued its audit report.
☒
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, 2020, 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 $426 million. For the purpose of this response, directors and
certain officers of the Registrant are considered affiliates at that date.
As of February 28, 2021, there were 13,359,479 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 11, 2021 are incorporated
by reference into Part III.
TABLE OF CONTENTS
PART I
BUSINESS
Forward-Looking Statements
ITEM 1.
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
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
Critical Accounting Policies
Executive Summary
RESULTS OF OPERATIONS
Net Interest Income
Provision for Loan Losses
Non-Interest Income
Non-Interest Expense
Provision for Income Taxes
FINANCIAL CONDITION
Investment Securities
Loans
Allowance for Loan Losses
Other Assets
Deposits
Borrowings
Deferred Compensation Obligations
Off Balance Sheet Arrangements and Commitments
Capital Adequacy
Liquidity
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Note 2: Investment Securities
Note 3: Loans and Allowance for Credit Losses
Note 4: Bank Premises and Equipment
Note 5: Bank Owned Life Insurance
Note 6: Deposits
Note 7: Borrowings
Note 8: Stockholders' Equity and Stock Plans
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Note 9: Fair Value of Assets and Liabilities
Note 10: Benefit Plans
Note 11: Income Taxes
Note 12: Commitments and Contingencies
Note 13: Concentrations of Credit Risk
Note 14: Derivative Financial Instruments and Hedging Activities
Note 15: Regulatory Matters
Note 16: Financial Instruments with Off-Balance Sheet Risk
Note 17: 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
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16.
FORM 10-K SUMMARY
SIGNATURES
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3
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; costs or effects of acquisitions; competition; changes in accounting principles, policies
or guidelines; changes in legislation or regulation (including the Tax Cuts and Jobs Act of 2017, Coronavirus Aid,
Relief and Economic Security Act of 2020, as amended, and the Economic Aid to Hard-Hit Small Businesses,
Nonprofits and Venues Act of 2020); our borrowers’ actual payment performance as loan deferrals related to the
COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals
implemented consistent with recent regulatory guidance; natural disasters (such as wildfires and earthquakes in our
area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other
economic, competitive, governmental, regulatory and
fraud and
cybersecurity threats) affecting our operations, pricing, products and services.
factors (including external
technological
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 Department of Financial Protection and Innovation or "DFPI") and commenced operations in
January 1990. The Bank is an insured bank by the Federal Deposit Insurance Corporation (“FDIC”). Bank of Marin
Bancorp (“Bancorp”) was formed in 2007 and the Bank became its sole subsidiary when each share of Bank
common stock was exchanged for one share of Bancorp common stock. Bancorp is listed on the Nasdaq Stock
Market under the symbol BMRC. Upon formation of the holding company, Bancorp became subject to regulation
under the Bank Holding Company Act of 1956, as amended, and reporting and examination requirements by the
Board of Governors of the Federal Reserve System ("Federal Reserve"). Bancorp files periodic reports and proxy
statements with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as
amended.
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, we operate twenty-five offices in Alameda, Contra Costa, Marin,
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Napa, San Francisco, San Mateo and Sonoma counties, with a strong emphasis on supporting the local
communities. Our customer base is made up of commercial, business, not-for-profit and personal banking
relationships from the communities within the seven Bay Area counties that we serve. 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
(including small business loans), construction financing, consumer loans, and home equity lines of credit. Through
third-party vendors, we offer merchant and payroll services, a commercial equipment leasing program and
consumer credit cards. Other products and services include Apple Pay®, Samsung Pay®, Google Pay®, Positive Pay
(fraud detection tool), and solutions for clients with cash management needs such as Cash Vault and SafePoint®.
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
("HSA"), Certificate of Deposit Account Registry Service® ("CDARS"), Insured Cash Sweep® ("ICS"), and Demand
Deposit MarketplaceSM ("DDM Sweep") accounts. CDARS, ICS and DDM Sweep accounts are networks through
which we offer full FDIC insurance coverage in excess of the regulatory maximum by placing deposits in multiple
banks participating in the networks. We also offer deposit options including mobile deposit, remote deposit capture,
Automated Clearing House (“ACH”) services, wire transfers, and image lockbox services. A valet pick-up service is
available for non-cash deposits to our professional and business clients.
Automated teller machines (“ATM's”) are available at most branch locations. 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 digital
banking services 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 and custody services. 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.
Market Area
Our primary market area consists of Marin, Sonoma, Napa, San Francisco, Alameda, Contra Costa, and San Mateo
counties. Our customer base is primarily made up of commercial, business, not-for-profit and personal banking
relationships within these market areas.
We attract deposit relationships from small to medium-sized businesses, not-for-profit organizations and
professionals, merchants and individuals who live and/or work in the communities comprising our market areas. As
of December 31, 2020, the majority of our deposits were in Marin County and southern Sonoma County, and
approximately 60% of our deposits were from businesses and 40% 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
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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 seven counties, we
have significant competition from nationwide banks with much larger branch networks and greater financial
resources, as well as credit unions and other local and regional banks. Nationwide banks have the competitive
advantages of national advertising campaigns. Large commercial banks also have substantially greater lending
limits and the ability to offer certain services which are not offered directly by us. Other competitors for depositors'
funds are money market mutual funds and non-bank financial institutions such as brokerage firms and insurance
companies.
We differentiate ourselves from the numerous, and often larger, financial institutions in our primary market area with
a business model built on relationship banking, disciplined fundamentals and commitment to the communities we
serve. The Bank's experienced professionals deliver innovative and custom financing, with a deep local market
knowledge and a personal understanding of each customer's unique needs.
In Marin County, we have the third largest market share of total deposits at 12.3%, based upon FDIC deposit market
share data as of June 30, 20201. A significant driver of our franchise value is the growth and stability of our
deposits, a low-cost funding source for our loan portfolio.
Human Capital Resources
At December 31, 2020, we employed 289 full-time equivalent staff. The actual number of employees, including part-
time employees, at year-end 2020 included seven executive officers, 132 other corporate officers and 169 staff.
None of our employees are presently represented by a union or covered by a collective bargaining agreement.
We offer a competitive total compensation package including a comprehensive benefits program to our employees
designed to attract, retain and motivate employees, as well as to align with our performance, including employee
ownership through our Employee Stock Ownership Plan. We regularly compare compensation and benefits with
peer companies and market data, making adjustments as needed to ensure compensation stays competitive. We
are continually investing in our workforce through employee development, education and training.
We strive to attract, develop, retain and plan for succession of key talent and executives to achieve our strategic
objectives. We pride ourselves on creating an open, diverse, and transparent culture that celebrates collaboration
and recognizes employees at all levels. We believe that the wide array of perspectives that result from such
diversity promotes Legendary Service and business success. We continue to learn and grow, and our current
initiatives reflect our ongoing efforts around a more diverse, inclusive and equitable workplace.
In order to develop a workforce that aligns with our corporate values, we regularly sponsor local community events
so that our employees can better integrate themselves in and support our communities. We believe that our
employees’ well-being and personal and professional development is fostered by our outreach to the communities
we serve. Our employees’ desire for active community involvement enables us to sponsor a number of local
community events and initiatives, including funding and volunteering for youth mentorship and financial literacy
programs to enhance educational opportunities and sponsoring local chambers of commerce and economic
development corporations to foster economic vitality.
We recognize that employees who are engaged and committed to their work and workplace contribute meaningfully
to our success. On a regular basis, we solicit employee feedback through a confidential, company-wide survey on
culture, management, career opportunities, compensation, and benefits. The results of this survey are reviewed and
used to update employee programs, initiatives, and communications. We believe that our employee relations are
good. We have consistently been recognized as one of the “Best Places to Work” by the North Bay Business
Journal.
COVID-19 Pandemic-Related Response
Since the onset of the pandemic and national emergency, we have taken actions to ensure the health and safety of
employees and customers. To protect the health of everyone, many employees are working remotely and strict
social distancing and cleaning protocols have been enhanced across all locations. Working hours for customer
1
Source: S&P Global Market Intelligence of New York, New York
6
facing employees have been reduced while maintaining employee’s regular pay. No employees have been laid off
and no employees have had their pay reduced.
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 reporting and
examination requirements. Under the Federal Reserve law and regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks. Under this requirement, Bancorp is
expected to commit resources to support the Bank, including at times when Bancorp may not be in a financial
position to provide such resources, and it may not be in Bancorp's, or Bancorp's shareholders’ or creditors’, best
interests to do so. In addition, any capital loans Bancorp makes 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 DFPI.
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 DFPI. We are also
subject to regulation, supervision and periodic examination by the FDIC. If, as a result of an examination of the
Bank, the FDIC or the DFPI 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.
Safety and Soundness Standards (Risk Management)
The federal banking agencies have adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for
internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk
management processes and strong internal controls when evaluating the activities of the financial institutions they
supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking
activities and has become even more important as new technologies, product innovation, and the size and speed of
financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of
risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and
reputational. In particular, recent regulatory pronouncements have focused on operational risk, which arises from
the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or
unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management
and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the
current environment. The Board of Directors and various sub-committees oversee Bancorp's consolidated
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enterprise risk management program that ensures the adequacy of policies, procedures, tolerance levels, risk
measurement systems, monitoring processes, management information systems and internal controls.
Dividends and Stock Repurchases
Bancorp's ability to pay dividends to its shareholders may be affected by both general corporate law considerations
and the policies of the Federal Reserve applicable to bank holding companies. As a California corporation, Bancorp
is subject to the limitations of California law, which allows a corporation to distribute cash or property to
shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets certain tests
based on its performance and financial condition. Bancorp's primary source of cash is dividends received from the
Bank. Prior to any distribution from the Bank to Bancorp, we ensure that the dividend computations comply with the
provisions of the California Financial Code and regulations set forth by the DFPI and the FDIC. Refer to Note 8 to
the Consolidated Financial Statements, under the heading “Dividends” in ITEM 8 of this report for more information.
FDIC Insurance Assessments
The FDIC insures our customers' deposits 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”).
FDIC insurance coverage is funded by the FDIC's assessment on insured depository institutions like us and FDIC's
annual base assessment rates are currently between 1.5 and 40 basis points on the depository institution's quarterly
average consolidated total assets minus average tangible equity. Base assessment rates for banks vary depending
on whether a depository institution is small or large and highly complex per FDIC's definition. In deriving the base
assessment rate, the FDIC applies financial ratios, scorecards, and other financial measures to determine a bank's
ability to withstand financial stress.
Community Reinvestment Act
Congress enacted the Community Reinvestment Act (“CRA”) in 1977 to encourage financial institutions to meet the
credit needs of the communities in which they are located. 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
projects 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, invest
in and volunteer with organizations that serve the communities in which we do business, especially low- and
moderate-income individuals. These organizations offer educational and health programs to economically
disadvantaged students and families, community development services and affordable housing programs. We offer
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. This 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 assigned a “Satisfactory” rating to its CRA performance examination based on their
most recent examination completed in January 2018, which was performed under the large bank requirements.
In December 2019, the FDIC and the OCC announced a proposal to modernize the agencies’ regulations under the
CRA that have not been substantively updated for nearly 25 years. In order to increase transparency for CRA
exams, the proposal clarifies what qualifies for credit under the CRA, enabling banks and their partners to better
implement lending and deposit activities that can benefit communities. The proposal also updates the definition of
a small business loan and creates an additional definition of “assessment area” tied to where deposits are located,
in part to address changes that have occurred due to the rise in digital banking, ensuring that banks continue to
provide loans and other services to low- and moderate-income individuals and businesses in their communities. On
May 20, 2020, FDIC Chairman Jelena McWilliams released a statement that the FDIC strongly supports the efforts
8
to make the CRA rules clearer, more transparent, and less subjective. However, the agency is not prepared to
finalize a proposal at this time. Chairman McWilliams recognized the "herculean effort" community banks are
making to support small businesses and families during the coronavirus, and encouraged financial institutions to
work constructively with borrowers affected by the COVID-19 pandemic.
Anti-Money-Laundering Regulations
A series of banking laws and regulations beginning with the Bank Secrecy Act in 1970 requires banks to prevent,
detect, and report illicit or illegal financial activities to the federal government to prevent money laundering,
international drug trafficking, and terrorism. Under the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, financial institutions are subject to prohibitions
against specified financial transactions and account relationships, requirements regarding the Customer
Identification Program, as well as enhanced due diligence and “know your customer” standards in their dealings
with high risk customers, foreign financial institutions, and foreign individuals and entities. In 2016, Customer Due
Diligence Rules under the Bank Secrecy Act clarified and strengthened customer due diligence requirements.
These rules contained explicit customer due diligence requirements, which included a new requirement to identify
and verify the identity of beneficial owners of legal entity customers.
Privacy and Data Security
The Gramm-Leach Bliley Act (“GLBA”) of 1999 imposes requirements on financial institutions with respect to
consumer privacy and the disclosure of non-public personal information about individuals who apply for or obtain a
financial product to be used for personal, family or household purposes. The GLBA generally prohibits disclosure of
consumer information to most nonaffiliated 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 and the conditions under which an institution may disclose non-public information about a
consumer to a nonaffiliated third party. 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. We notify our customers when unauthorized
disclosure involves sensitive customer information that may be misused. Effective January 2020, the California
Consumer Privacy Act (“CCPA”) added required notice about personal information we collect, use, share, and
disclose for business purposes. The CCPA provides California residents rights regarding their personal information
specifically related to exercising access, data portability and deletion rights. There are also California breach
notification and disclosure requirements.
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, Fair Debt Collection Practices
Act, Flood Disaster Protection Act, eSign Act, Equal Credit Opportunity Act, the Fair Housing Act, Truth-in-Lending
Act ("TILA"), the Real Estate Settlement Procedures Act ("RESPA"), Protecting Tenants at Foreclosure, and the
Secure and Fair Enforcement for Mortgage Licensing Act ("SAFE"). Our deposit operations are also subject to laws
and regulations that protect consumer rights including Expedited Funds Availability, Truth in Savings Act ("TISA"),
and Electronic Funds Transfers. Other regulatory requirements include the Unfair, Deceptive or Abusive Acts and
Practices ("UDAAP"), Dodd-Frank Act, Right to Financial Privacy, Telephone Consumer Protection Act 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
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transactions, be on market terms and conditions. Federal Reserve Regulation W combines statutory restrictions on
transactions between the Bank and Bancorp with Federal Reserve interpretations in an effort to simplify compliance
with Sections 23A and 23B.
Capital Requirements
The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take prompt
corrective action (“PCA”) with respect to depository institutions that do not meet minimum capital requirements. The
FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend
upon how its capital levels compare with various relevant capital measures and certain other factors, as established
by regulation. 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. Banks that are categorized as "critically undercapitalized" are subject to dividend restrictions.
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, which became effective
January 1, 2015 (subject to a phase-in period). The final rule strengthened the definition of regulatory capital,
increased risk-based capital requirements, made selected changes to the calculation of risk-weighted assets, and
adjusted the prompt corrective action thresholds. We have implemented the fully phased-in capital rules as of
January 1, 2019 and have been in compliance throughout the implementation period of Basel III. For additional
information on our risk-based capital positions, refer to the Capital Adequacy section within ITEM 7 to
Management's Discussion and Analysis and Note 15 of the Consolidated Financial Statements within ITEM 8 of this
report.
Effective January 1, 2020, the federal banking agencies' jointly-issued final rule on the community bank leverage
ratio ("CBLR") provides for an optional, simplified measure of capital adequacy for qualifying community banking
organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection
Act (the "Economic Growth Act"). Qualifying community banking organizations are defined as having less than $10
billion in total consolidated assets that meet risk-based qualifying criteria, a CBLR of greater than 9 percent, off-
balance sheet exposure of 25 percent or less of total consolidated assets, trading assets and liabilities of 5 percent
or less of total consolidated assets, and cannot be an advanced approaches institution. Such a community banking
organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and
Basel IV requirements) and would be considered to have met the "well capitalized" ratio requirements. The CBLR is
determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets. The
rule further describes what is included in tangible equity capital and average total consolidated assets. Qualifying
banks may opt in and out of the CBLR framework at any time. While we are a qualifying community banking
organization, we have not opted into the CBLR framework at this time. See below, for further discussion of the
Economic Growth Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Economic Growth, Regulatory Relief,
and Consumer Protection Act
The Dodd-Frank Act, a landmark financial reform bill comprised of voluminous new rules and restrictions on bank
operations, included 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.
Among other things, the Dodd-Frank Act established new government oversight responsibilities, enhanced capital
adequacy requirements for certain institutions, established consumer protection laws and regulations, and placed
limitations on certain banking activities.
In an attempt to reduce the regulatory burden on U.S. companies, including financial institutions, in May 2018, the
Presidential Administration signed the Economic Growth Act, which repealed or modified certain provisions of the
Dodd-Frank Act and eased regulations on all but the largest banks. The Economic Growth Act’s highlights included
improving consumer access to mortgage credit, added certain protections for consumers, included veterans and
active duty military personnel, expanded credit freezes and created an identity theft protection database.
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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: 1) control of any other bank or bank holding company or all or substantially all the assets thereof; or 2)
more than 5% of the voting shares of a bank or bank holding company that is not already a subsidiary.
Incentive Compensation
The Dodd-Frank Act required federal bank regulators and the Securities and Exchange Commission ("SEC") to
establish joint regulations or guidelines prohibiting incentive-based payment arrangements 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. These regulations apply to
institutions having at least $1 billion in total assets. In addition, regulators must establish regulations or guidelines
requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies have
not finalized regulations proposed in April 2016. If adopted, the proposed regulations could place limits on the
manner in which we structure our executive compensation.
The Federal Reserve reviews, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations. The Federal Reserve tailors its reviews for 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 are included in reports of examination. Deficiencies, if any, are
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. 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
These materials are also available at the SEC’s internet website (https://www.sec.gov).
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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 and in ITEM 7A, Quantitative and
Qualitative Disclosure about Market Risk. 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 include but are 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.
Strategic, Financial, and Reputational Risks
Our Business, Results of Operations, and Financial Condition Have Been, and Will Likely Continue to be,
Adversely Affected by the Ongoing COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, which has spread globally
including in the United States. On March 13, 2020, the President of the United States declared the COVID-19
pandemic a national emergency. The pandemic has caused significant economic disruption and many states and
local governments have continued to order non-essential businesses to close or scale back services. The extent to
which the pandemic impacts our business, results of operations and financial condition will depend on future
developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and
spread of the outbreak, its severity, actions to contain the virus including the timely deployment of an effective
vaccination program, and how quickly and to what extent normal economic and operating conditions resume,
particularly in California. As a result, we are subject to the following risks, which could have a material effect on our
business, financial condition, results of operations, capital position and liquidity:
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The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains,
created significant volatility and disruption in financial markets and equity market valuations, and increased
unemployment levels. This may lead to an increase in loan delinquencies, problem assets and foreclosures,
which may increase loan losses, particularly if businesses remain closed, the impact on the global economy
worsens, or more customers draw on their lines of credit or seek additional loans to help finance their
businesses.
Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and
necessitate increases in the allowance for credit losses on loans.
The commercial real estate ("CRE") loan demand could be adversely affected longer-term by the pandemic
due to structural changes relating to remote work trends, migration of the workforce outside of metropolitan
areas, and transition to more online purchases rather than in brick-and-mortar retail space. These trends
could increase vacancy rates and reduce commercial real estate values.
Demand for our products and services, including deposits, may decline making it increasingly difficult to grow
assets and income.
The decline in the target federal funds rate to a range of 0.0% to 0.25% has resulted in decreases in yields on
our interest-earning assets that exceed the decline in our cost of interest-bearing liabilities. A prolonged low
interest rate environment could compress our net interest margin further.
Net interest margin in future periods may be significantly impacted by the timing of the Small Business
Administration's ("SBA's") forgiveness of Paycheck Protection Program ("PPP") loans, which will affect the
recognition of the remaining net deferred PPP loan fees of $5.4 million as of December 31, 2020.
The adoption of the current expected credit loss accounting standard, which is highly dependent on
unemployment rate forecasts over the life of our loans, could result in significant volatility in our allowance for
credit losses, which is highly sensitive to changes in unemployment rates and other assumptions impacted by
the pandemic and economic recovery actions.
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• Our business operations may be disrupted if significant portions of our workforce are unable to work
effectively because of illness, quarantines, government actions, and other restrictions in connection with the
pandemic.
• Our borrowers' actual payment performance may be worse than anticipated, as the pandemic-related
payment deferrals expire. Additionally, we may experience potential adverse impact from loan modifications
and payment deferrals despite their implementation consistent with recent regulatory guidance. While
approximately 90% of the payment relief loans have resumed or are scheduled to resume normal payments,
we have no assurance that these borrowers will not require additional payment relief in the future due to the
continued impact of the pandemic.
Government actions to provide substantial financial support to businesses (e.g., two rounds of the Paycheck
Protection Program) could partially mitigate the financial impact to us and our borrowers. However, the success of
these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing
pandemic. Additional relief packages could mitigate the negative effects of the pandemic, but the impact cannot be
quantified at this time.
Impact of the COVID-19 Pandemic will Continue to Negatively Affect Our Traditional Service Delivery
Channels Over an Unknown Protracted Period
The Board of Directors and senior management are continuously monitoring the COVID-19 pandemic situation,
providing frequent communications, and making adjustments and accommodations for both our clients and
employees. All branches remain open to serve our customers and local communities, with modified hours and strict
social distancing protocols in place as well as limits on the number of customers allowed in a branch at one time.
Our customers have been encouraged to utilize alternative banking options including ATM, digital and telephone
banking. Many employees are working remotely, and travel as well as face-to-face meeting restrictions are in effect.
In addition, given the increasing risk of cybersecurity incidents during the pandemic, we have enhanced our
cybersecurity protocols. If the duration of the pandemic extends over a protracted period of time or conditions
worsen, we may need to enact further precautionary measures to help minimize the risks to our employees and
customers, thus potentially altering our service delivery channels and operations. These changes to our traditional
service delivery channels may continue to negatively impact our customers' experience of banking with us, and
therefore negatively impact our financial condition and results of operations.
Growth Strategy or Potential Mergers and 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 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 have and may continue to 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 the merger may affect our stock price and 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:
•
unexpected problems with operations, personnel, technology or credit;
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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.
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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 may be offset by
losses in revenues or other charges to earnings.
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, savings institutions, credit unions, non-bank financial
services companies, including financial technology firms, 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 legislation, regulation and technology. National and regional banks much larger than our size have
entered 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 pressure for loan rate concessions and 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
our core markets. Further, our customers may withdraw deposits to pursue alternative investment opportunities in
the recent bullish equity market. 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. Based on our current strong liquidity position, our adjustment to deposit pricing has
lagged the market in a rising interest rate environment. If 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 funding sources, such as federal funds or FHLB borrowings.
We May Not Be Able to Attract and Retain Key Employees
Our success depends in large part on our ability to attract qualified personnel and to retain key employees, as well
as the prompt replacement of retiring executives. The loss of key personnel and/or our inability to secure qualified
candidates to replace retiring executives could have an unfavorable effect on our business due to the required skills
and knowledge of our market and years of industry experience.
Bancorp Relies on Dividends from the Bank to Pay Cash Dividends to its Shareholders as Well as to Meet
Other Financial Obligations
Bancorp is a separate legal entity from its subsidiary, the Bank. Bancorp receives substantially all of its cash stream
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. As a result, it could have an adverse effect on Bancorp's stock price and investment
value.
Federal law would prohibit capital distributions from the Bank, with limited exceptions, if the Bank were categorized
as "undercapitalized" under applicable Federal Reserve 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 8 to the Consolidated Financial Statements in ITEM 8 of this report.
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The Value of Goodwill and Other Intangible Assets May Decline in the Future
As of December 31, 2020, we had goodwill totaling $30.1 million and a core deposit intangible asset totaling $3.8
million from business acquisitions. A significant decline in expected future cash flows, a significant adverse change
in the business climate, 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 Tax Filing Positions or Follow Tax Strategies That May Be Subject to Challenge
We provide for current and deferred tax provision 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 and
interpretations, 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 significantly affected.
Credit Risks
We are Subject to Significant Credit Risk and Loan Losses May Exceed Our Allowance for Credit Losses in
the Future
The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our
borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of
their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any
loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper
loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing
with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain
disciplined and prudent underwriting standards and ensure that our bankers follow those standards. The weakening
of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or
diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt
policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our
loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we
significantly increase our allowance for credit losses on loans, each of which could adversely affect our net income.
As a result, any inability to successfully manage credit risk could have a material adverse effect on our business,
financial condition or results of operations.
We maintain an allowance for credit losses on loans and unfunded loan commitments that represents
management's best estimate of expected credit losses over the contractual lives of our loans under the current
expected credit loss method. The level of the allowance reflects management's continuing evaluation of specific
credit risks, loan loss experience, current loan portfolio quality and present and forecasted economic, political and
regulatory conditions. The determination of the appropriate level of the allowances inherently involves a high
degree of subjectivity and requires us to make significant estimates of current credit risks and trends and future
economic forecasts, all of which may undergo material changes. Inaccurate assumptions in appraisals or an
inappropriate choice of the valuation techniques may lead to an inadequate level of specific reserve or charge-offs.
If charge-offs in future periods exceed the allowance for credit losses, we may need to increase our allowance for
credit losses.
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
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,
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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.
Negative Conditions Affecting Real Estate May Harm Our Business and Our Commercial Real Estate
Concentration May Heighten Such Risk
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. 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 portfolios. As of
December 31, 2020, approximately 77% of our loans were secured by real estate, with CRE comprising 73% and
residential real estate the remaining 27%. Real estate valuations are influenced by demand, and demand is driven
by economic factors such as employment rates and interest rates.
Loans secured by CRE include those secured by office buildings, owner-user office/warehouses, mixed-use
commercial and retail properties. There can be no assurance that properties securing our loans will generate
sufficient cash flows to allow borrowers to make full and timely loan payments to us. During the COVID-19
pandemic, many small businesses closed and may not reopen. Some pandemic-driven activity, such as shifts from
in-person to online shopping and from office-based to remote work, may prove to be permanent. These shifts could
impact the demand for CRE and also put persistent downward pressure on CRE valuations.
Rising CRE lending concentrations may expose institutions to unanticipated earnings and capital volatility in the
event of adverse changes in the CRE market. Concentration risk exists when financial institutions deploy too many
assets to any one industry or segment. Concentration stemming from commercial real estate is one area of
regulatory concern. The CRE Concentration Guidance provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate
loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300%
of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans
exceeding 100% of capital. The CRE Concentration Guidance does not limit banks’ levels of commercial real estate
lending activities, but rather guides institutions in developing risk management practices and levels of capital that
are commensurate with the level and nature of their commercial real estate concentrations. As of December 31,
2020 and 2019, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 314%
and 330%, respectively, of our total risk-based capital. We are actively working to manage our CRE concentration
and we have discussed the CRE Concentration Guidance with the regulatory agencies and believe that our
underwriting policies, management information systems, independent credit administration process, and monitoring
of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance.
Accounting Estimates and Risk Management Processes Rely on Analytical and Forecasting Models
The processes we use to estimate expected credit losses on loans and investment securities, 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
volatility 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 factors. If the models we use for determining our expected
credit losses on loans and investment securities are inadequate, the allowance for credit 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.
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Investment Securities May Lose Value due to Credit Quality of the Issuers
We invest in significant portions of investment securities issued by government-sponsored enterprises ("GSE"),
such as Federal Home Loan Bank ("FHLB"), Federal National Mortgage Association (“FNMA”), and Federal Home
Loan Mortgage Corporation ("FHLMC"). We also hold mortgage-backed securities (“MBS”) issued by FNMA and
FHLMC, both of which have been under U.S. government conservatorship since 2008. While we consider FNMA
and FHLMC securities to have low credit risk as they carry the explicit backing of the U.S. government due to the
conservatorship, they are not direct obligations of the U.S. government. The fair value of our securities issued or
guaranteed by these two GSE entities may be negatively impacted if the U.S. government ceases to provide
support to the conservatorship or phases out its current practice of purchasing treasury and agency mortgage-
backed securities. GSE debt is sponsored but not guaranteed by the federal government and carries implicit
backing, 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 U.S. government.
Although Congress has taken steps to improve regulation and consumer protection related to the housing finance
system (e.g., Dodd-Frank Act), FNMA and FHLMC have entered their thirteenth year of U.S. government
conservatorship via the Federal Housing Finance Agency (the "FHFA"). In September 2019, the U.S. Department of
the Treasury issued a Housing Finance Reform Plan that, among other things, directed the Secretary of the
Treasury to develop a Roadmap to begin the process of responsibly ending the GSEs' conservatorships. While
proposals to end the conservatorship have considered solutions such as an initial public offering, at the date of this
report, its future and ultimate impact on the financial markets and our investments in GSEs are uncertain.
While we generally seek to minimize our exposure by strategically diversifying our credit exposure to obligations of
issuers in various geographic locations throughout California and the U.S., investing in investment grade securities
and actively monitoring the credit worthiness of the issuers and/or credit guarantee providers, there is no guarantee
that the issuers will remain financially sound or continue their payments on these debentures.
Market, Interest Rate, and Liquidity Risks
Earnings are Significantly Influenced by General Business and Economic Conditions
Our success depends, to a certain extent, on local, national and global economic and political conditions. Unlike
larger national or other regional banks that are more geographically diversified, we provide banking and financial
services to customers primarily in the State of California with particular focus on the local markets in the San
Francisco Bay Area. The local economic conditions in this area have a significant impact on the demand for our
products and services as well as the ability of our customers to repay loans, the value of the collateral securing
loans and the stability of our deposits as our primary funding source. Economic pressure on consumers and
uncertainty regarding the economy and local business climate may result in changes in consumer and business
spending, borrowing and saving habits, which may affect the demand for loans and other products and services we
offer. Further, loan defaults that adversely affect our earnings correlate highly with deteriorating economic
conditions (such as the unemployment rate), which impact our borrowers' creditworthiness. In addition, health
epidemics or pandemics (or expectations about them) such as the novel coronavirus (aka "COVID-19"),
international trade disputes, inflation risks, oil price volatility, the level of U.S. debt and global economic conditions
could destabilize financial markets in which we operate. Lastly, actions of the Federal Open Market Committee
("FOMC") of the Federal Reserve could cause financial market volatility, which will affect the pricing of our loan and
deposit products.
Interest Rate Risk is Inherent in Our Business
Our earnings are largely dependent upon our net interest income, which 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 FOMC, 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 duration of our securities and loan portfolios. Our
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portfolio of loans and securities will generally decline in value if market interest rates increase, and increase in value
if market interest rates decline. In addition, our loans and callable mortgage-backed securities are also subject to
prepayment risk when interest rates fall, and the borrowers' credit risk may increase in rising rate environments.
Factors such as inflation, productivity, oil prices, unemployment rates, and global demand play a role in the FOMC's
consideration of future rate adjustments. In March 2020, in response to the evolving risks to economic activity
posed by the COVID-19 pandemic, the FOMC made two emergency cuts to the federal funds rate totaling 150 basis
points to a current target range of 0.0% to 0.25%. This will continue to put downward pressure on our asset yields
and net interest margin. Our net interest income is vulnerable to low interest rates and will benefit if prevailing
market rates increase. See the Net Interest Income section of 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.
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, securities sales,
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 funding consists of deposits. Deposit balances can decrease when
customers perceive alternative investments as providing a better risk/return trade-off. If customers move money out
of bank deposits and into other investments, then 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, loan
repayments, 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.
Based on 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, and pay dividends to our shareholders or 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.
Activities of Our Large Borrowers and Depositors May Cause Unexpected Volatilities in Our Loan and
Deposit Balances, as well as Net Interest Margin
Loans originated at higher interest rates may be paid off and replaced by new loans with lower interest rates,
causing downward pressure on our net interest margin. In addition, our top ten depositor relationships accounted
for approximately 10% and 16% of our total deposit balances at December 31, 2020 and 2019, respectively. Since
the start of the pandemic in 2020, the banking industry in general has experienced abundant liquidity driven by
pandemic-related government programs such as PPP and consumer stimulus checks as well as elevated savings
by depositors. This trend may reverse as the economy recovers. The larger percentage in 2019 was primarily
driven by a customer whose deposits increase leading up to and during an election year. In addition, the business
models and cash cycles of some of our large commercial depositors may also cause short-term volatility in their
deposit balances held with us. As our customers' businesses grow, the dollar value of their daily activities may also
grow leading to larger fluctuations in daily balances. Any long-term decline in deposit funding would adversely
affect our liquidity. For additional information on our management of deposit volatility, refer to the Liquidity section of
ITEM 7, Management's Discussion and Analysis, of this report.
18
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 interest rate risk that causes fluctuations in the fair value of specified long-term fixed-rate loans or firm
commitments to originate long-term fixed rate loans. 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.
The Trading Volume of Bancorp's Common Stock May Be 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.
Failure to Prepare for Changes to, or Elimination of, the London Interbank Offered Rate (“LIBOR”) Could
Adversely Affect our Reputation with Our Customers and/or Counterparties
In 2017, the Financial Conduct Authority of the United Kingdom (the “FCA”) announced its intention to cease
sustaining LIBOR after 2021. While the FCA came to an agreement with panel banks to continue receiving
submissions to LIBOR until the end of 2021, it is not possible to predict whether and how credible LIBOR will be as
an acceptable market benchmark. While there is no consensus on what rate or rates may become accepted
alternatives to LIBOR, the Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of
U.S. financial market participants selected by the Federal Reserve Bank of New York, published recommended fall-
back language for LIBOR-linked financial instruments and identified recommended alternatives for certain LIBOR
rates (e.g., Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of overnight borrowings
collateralized by Treasury securities, for U.S. Dollar LIBOR). The federal banking agencies have issued guidance
strongly encouraging banking organizations to cease using LIBOR as a reference rate in new contracts as soon as
practicable and in any event by December 31, 2021. Banks like us may need to amend contracts to reference
SOFR and identify an acceptable spread to LIBOR or amend the definition of LIBOR through a specific
grandfathering protocol.
As of December 31, 2020, we had a small number of loans and fewer than ten investment securities indexed to
LIBOR that mature after December 31, 2021. In addition, our interest rate swap agreements, all of which mature
after December 31, 2021, are indexed to LIBOR and subject to modification to either the fallback index rate
stipulated by the ISDA protocol or other reference rates mutually agreed to by us and our counterparty. Refer to
Notes 7 and 14 to the Consolidated Financial Statements in ITEM 8 of this report for more information on our swap
agreements and subordinated debenture. The transition from LIBOR could result in additional costs, as well as
economic and reputation risk. While management has identified financial instruments indexed to LIBOR and
evaluated contracts and index alternatives, we cannot predict any favorable or unfavorable effects the chosen
alternative index may have on financial instruments that are currently indexed to LIBOR after its termination date.
Operational Risks
Risks Associated with Cybersecurity Could Negatively Affect Our Earnings and Reputation
Our business requires the secure management of sensitive client and bank information. We work diligently to
implement security measures that intend to 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 designed to
disrupt operations, corrupt data, release sensitive information or cause denial-of-service attacks. A cybersecurity
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
19
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. If a material security breach were to occur, the Bank has policies and procedures
in place to ensure timely disclosure.
The Financial Services Industry is Undergoing Rapid Technological Changes and, As a Result, We Have a
Continuing Need to Stay Current with Those Changes to Compete Effectively and Increase Our Efficiencies.
We May Not Have the Resources to Implement New Technology to Stay Current with These Changes
The financial services industry is undergoing technological changes with frequent introductions of new technology-
driven products and services. In addition to providing better client service, the effective use of technology increases
efficiency and reduces operational costs. Our future success will depend in part upon our ability to use technology
to provide products and services that will satisfy client demands securely and cost-effectively. In connection with
implementing new technology enhancements and/or products, we may experience operational challenges (e.g.
human error, system error, incompatibility) which could result in us not fully realizing the anticipated benefits from
such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Affect Our
Business
Our primary market is located in both earthquake and wildfire-prone zones in Northern California, which is also
subject to other weather or disasters, such as severe rainstorms, drought or flood. These events have interrupted
our business operations unexpectedly (e.g., PG&E power shutoff's in the North Bay). 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 areas at risk of wildfires, or coastal areas at risk to rising sea levels and erosion,
or subject to the risk of drought in California. The properties pledged as collateral on our loan portfolio could also be
damaged by tsunamis, landslides, 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 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. For example, we outsource core processing to Fidelity Information Services ("FIS") and wire
processing to Finastra, which are leading financial services solution providers that allow us access to competitive
technology offerings without having to 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.
Regulatory and Compliance Risks
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, dividend policy, and compliance costs among
other things. 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
20
potential and an inability to enforce contracts. The Bank manages these risks through its extensive compliance
plan, policies and procedures. For further information on supervision and regulation, see the section captioned
“SUPERVISION AND REGULATION” in ITEM 1 of this report.
ITEM 1B UNRESOLVED STAFF COMMENTS
None
ITEM 2 PROPERTIES
We lease our corporate headquarters building in Novato, California, which houses loan production, operations,
Wealth Management & Trust and administration. We lease branch and office facilities within our primary market
areas in the cities of Corte Madera, San Rafael, Novato, Sausalito, Mill Valley, Tiburon, Greenbrae, Petaluma, Santa
Rosa, Healdsburg, Sonoma, Napa, San Francisco, Alameda, Oakland, Walnut Creek, and San Mateo. For
additional information on properties, Refer to Note 4, Bank Premises and Equipment, and Note 12, Commitment
and Contingencies, in ITEM 8 of this report.
ITEM 3 LEGAL PROCEEDINGS
For information on litigation matters, see Note 12, Commitment and Contingencies, in ITEM 8 of this report.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Bancorp's common stock trades on the Nasdaq Capital Market under the symbol BMRC. At February 28, 2021,
13,359,479 shares of Bancorp's common stock, no par value, were outstanding and held by approximately 2,400
holders of record and beneficial owners. On October 22, 2018, Bancorp announced a two-for-one stock split, which
occurred on November 27, 2018. All 2018 share and per share data have been adjusted to reflect the stock split.
Five-Year Stock Price Performance Graph
The following graph, compiled by S&P Global Market Intelligence of New York, New York, shows a comparison of
cumulative total shareholder return on our common stock during the five fiscal years ended December 31, 2020
compared to the Russell 2000 Stock index and the SNL Bank $1B - $5B Index. The comparison assumes the
investment of $100 in our common stock on December 31, 2015 and the reinvestment of all dividends. The graph
represents past performance and does not indicate future performance. In addition, total return performance results
vary depending on the length of the performance period.
Bank of Marin Bancorp (BMRC)
100.00
133.31
132.18
162.91
181.33
2015
2016
2017
2018
2019
Russell 2000 Index
SNL Bank $1B - $5B Index 1
Source: S&P Global Market Intelligence
100.00
121.31
139.08
123.76
155.35
100.00
143.87
153.37
134.37
163.35
2020
141.98
186.36
138.81
1 Includes all major exchange (NYSE, NYSE MKT, and Nasdaq) banks in S&P Global's coverage universe with $1 billion to $5 billion in assets as
of the most recent available financial data.
22
Shareholder Rights Agreement
On July 6, 2017, Bancorp executed a shareholder rights agreement (“Rights Agreement”), which is designed to
discourage takeovers that involve abusive tactics or do not provide fair value to shareholders. For further
information, see Note 8 to the Consolidated Financial Statements, under the heading “Preferred Stock and
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, 2020, with respect to equity compensation plans.
Shares to be issued
upon exercise of
outstanding options1
Weighted average
exercise price of
outstanding options
Shares remaining
available for future
issuance 2
Equity compensation plans approved by shareholders
371,584 $
29.92
1,187,059
1 Represents shares of common stock issuable upon exercise of outstanding options under the Bank of Marin Bancorp 2017 Equity Plan and 2007 Equity Plan.
2 Represents remaining shares of common stock available for future grants under the 2017 Equity Plan and the 2020 Director Stock Plan, excluding 371,584 shares
to be issued upon exercise of outstanding options and 380,123 shares available to be issued under the Employee Stock Purchase Plan.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under
which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019.
Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.
A new Share Repurchase Program was approved by the Board of Directors on January 24, 2020, which began on
March 1, 2020 and allows Bancorp to repurchase up to $25.0 million of its outstanding common stock through
February 28, 2022. The new Share Repurchase Program was temporarily suspended on March 20, 2020 in
response to the COVID-19 pandemic and reactivated on October 23, 2020.
Shares repurchased pursuant to our common stock share repurchase programs during 2020, 2019, and 2018, were
as follows.
Total number of common shares repurchased
2020
2019
2018
Cumulative
Totals
203,709
356,000
171,217
730,926
Total purchase price of common shares repurchased (in millions)
$
7.2 $
15.0 $
7.0 $
29.2
The following table reflects purchases under the Share Repurchase Program for the months presented in 2020.
For further information, see Note 8 to the Consolidated Financial Statements, under the heading “Share
Repurchase Program” in ITEM 8 of this report.
(in thousands, except per share data)
Period
January 1-31, 2020
February 1-28, 2020
March 1-31, 2020
October 1-30, 2020
November 1-30, 2020
December 1-31, 2020
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
13,283 $
20,855
58,526
100
44,815
66,130
203,709 $
44.42
42.17
30.00
30.00
34.73
36.48
35.33
Approximate
Dollar Value That
May yet Be
Purchased Under
the Program 1
2,376
13,283 $
20,855
58,526
100
44,815
66,130
203,709
1,495
23,241
23,238
21,680
19,264
1 On February 28, 2020, the 2018 Share Repurchase Program expired with approximately $1.5 million remaining from the $25.0 million authorized for repurchases.
The new $25.0 million Share Repurchase Program began March 1, 2020.
23
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, except per share data)
Selected financial condition data:
Total assets
Loans, net allowance for credit losses 1
Deposits
Borrowings and other obligations
Stockholders' equity
Selected operating data:
Net interest income
Provision for (reversal of) credit losses
Non-interest income
Non-interest expense 2
Net income 2
Net income per common share: 3
Basic
Diluted
Performance and other financial ratios:
Return on average assets
Return on average equity
Tax-equivalent net interest margin 4
Cost of deposits
Efficiency ratio
Loan-to-deposit ratio
Cash dividend payout ratio on common stock 5
Cash dividends per common share 3
Asset quality ratios:
Allowance for credit losses to total loans
Allowance for credit losses to total loans, excluding
acquired and SBA PPP loans 6
Allowance for credit losses to non-performing loans 7
Non-performing loans to total loans 7
Capital ratios:
Equity to total assets ratio
Tangible common equity to tangible assets 8
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 branches
Full time equivalent employees
At or for the Years Ended December 31,
2020
2019
2018
2017
2016
$ 2,911,926
2,065,682
2,504,249
2,835
358,253
$ 2,707,280
1,826,609
2,336,489
2,920
336,788
$ 2,520,892
1,748,043
2,174,840
9,640
316,407
$ 2,468,154
1,663,246
2,148,670
5,739
297,025
$ 2,023,493
1,471,174
1,772,700
5,586
230,563
$
96,659
4,594
8,550
60,028
30,242
$
95,680
900
9,084
57,970
34,241
$
91,544
—
10,139
58,266
32,622
$
74,852
500
8,268
53,782
15,976
$
73,161
(1,850)
9,161
47,692
23,134
$
$
2.24
2.22
$
$
2.51
2.48
$
$
2.35
2.33
$
$
1.29
1.27
$
$
1.90
1.89
1.04 %
8.60 %
3.55 %
0.11 %
57.06 %
83.40 %
41.07 %
0.92
$
1.34 %
10.49 %
3.98 %
0.20 %
55.33 %
78.89 %
31.87 %
0.80
$
1.31 %
10.73 %
3.90 %
0.10 %
57.30 %
81.10 %
27.23 %
0.64
$
0.75 %
6.49 %
3.80 %
0.07 %
64.70 %
78.14 %
43.41 %
0.56
$
1.15 %
10.23 %
3.91 %
0.08 %
57.93 %
83.86 %
26.84 %
0.51
$
1.10 %
0.90 %
0.90 %
0.94 %
1.04 %
1.27 %
2.48x
0.44 %
12.30 %
11.27 %
16.03 %
14.82 %
10.80 %
14.69 %
22
289
0.96 %
73.86x
0.01 %
12.44 %
11.30 %
15.07 %
14.24 %
11.66 %
14.11 %
22
290
0.98 %
22.71x
0.04 %
12.55 %
11.29 %
14.93 %
14.10 %
11.54 %
13.98 %
23
290
1.06 %
38.88x
0.02 %
12.03 %
10.71 %
14.91 %
14.04 %
12.13 %
13.75 %
23
291
1.10 %
106.50x
0.01 %
11.39 %
11.00 %
14.32 %
13.37 %
11.39 %
13.07 %
20
262
1 Includes SBA PPP loans of $291.6 million at December 31, 2020. There were no SBA PPP loans prior to 2020.
2 2018 and 2017 included $962 thousand and $2.2 million, respectively, in merger-related expenses.
3 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
4 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt
loans and securities based on federal statutory rate of 21% in 2020, 2019 and 2018 and 35% in years prior to 2018, by total average interest-earning assets.
5 Calculated as dividends on common shares divided by basic net income per common share.
6 The allowance for credit losses to total loans, excluding non-impaired acquired loans and guaranteed SBA PPP loans, is considered a meaningful non-GAAP
financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses. Due to the adoption of CECL on
December 31, 2020, all loans previously considered "acquired" are now included in the calculation of the allowance for credit losses. Acquired loans that were not
impaired totaled $108.8 million, $151.8 million, $196.5 million, and $86.4 million, at December 31, 2019, 2018, 2017, and 2016, respectively. Refer to footnote 1
above for SBA PPP loan totals.
7 Non-performing loans include loans on non-accrual status. There were no loans past due 90 days or more and still accruing interest as of the end of any of the
years presented.
8 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess
Bancorp's ability to absorb potential losses. Tangible common equity of $324 million, $302 million, $281 million, $260 million, and $222 million at December 31,
2020, 2019, 2018, 2017, and 2016, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax,
less goodwill and intangible assets of $34 million, $35 million, $36 million, $37 million, and $9 million at December 31, 2020, 2019, 2018, 2017, and 2016,
respectively. Tangible assets excludes goodwill and core deposit intangible assets.
24
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition as of December 31, 2020 and 2019 and results of operations for each
of the years in the two-year period ended December 31, 2020 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. All share
and per share data have been adjusted to reflect the stock split effective November 27, 2018.
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.
Critical Accounting Policies and Estimates
The SEC requires us to disclose "critical accounting policies" defined as those that are both most important to the
presentation of our financial condition and results of operations and require management's most difficult, subjective,
or complex judgments, often because of the need to make estimates about the effect of matters that are inherently
uncertain and imprecise. We consider accounting estimates to be critical to our financial results if (i) the accounting
estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could
have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are
reasonably likely to occur in the future and could have a material impact on our financial statements.
Management has determined the following accounting policies to be critical:
Allowance for Credit Losses on Loans and Unfunded Commitments - For information regarding critical
estimates related to our allowance methodology, the provision for credit losses, and risks to asset quality and
lending activity, including the transition from the incurred loss method to the current expected credit loss ("CECL")
method under ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) and related amendments, which
we adopted as of December 31, 2020, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM
7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Note 1 - Summary of
Significant Accounting Policies, and Note 3 - Loans and Allowance for Credit Losses in ITEM 8 - Financial
Statements and Supplementary Data of this Form 10‑K.
Allowance for Credit Losses on Investment Securities - For information regarding our investment securities and
risks associated with identifying impairment and estimating the allowance for credit losses under the new CECL
method, see ITEM 1A - Risk Factors, Note 1 - Summary of Significant Accounting Policies, and Note 2 - 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 11 - 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 9 - Fair Value of Assets and
Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K.
25
Executive Summary
Annual earnings were $30.2 million in 2020 compared to $34.2 million in 2019. Diluted earnings were $2.22 per
share in 2020, compared to $2.48 per share in 2019.
The following are highlights of operating and financial performance for the year ended December 31, 2020:
•
•
•
•
•
•
•
•
The Bank achieved total loan growth of $245.3 million, or 13% in 2020, to $2.089 billion at December 31,
2020, from $1.843 billion at December 31, 2019. SBA PPP loans outstanding at December 31, 2020 were
$291.6 million.
Credit quality remains strong with non-accrual loans representing 0.44% of the Bank's loan portfolio as of
December 31, 2020. The adoption of CECL in the fourth quarter of 2020 resulted in an increase to the
allowance for credit losses on loans of $748 thousand and a $1.1 million increase to the allowance for
unfunded loan commitments. See Note 1, Summary of Significant Accounting Policies, for additional
information.
Deposits grew $167.8 million, or 7%, to $2.504 billion at December 31, 2020, compared to $2.336 billion at
December 31, 2019. Non-interest bearing deposits grew by $225.8 million in 2020, or 20%, and made up
54% of total deposits at year-end. Cost of deposits remained low at 0.11% in 2020, compared to 0.20% in
2019.
Net interest income totaled $96.7 million and $95.7 million in 2020 and 2019, respectively. The $1.0 million
increase in 2020 was primarily due to SBA PPP loans and lower rates on interest-bearing deposits, largely
offset by lower yields on earning-assets. The tax-equivalent net interest margin decreased to 3.55% in
2020, compared to 3.98% in 2019. The 43 basis point decrease was primarily due to lower yields across
interest-earning asset categories, partially offset by lower rates on interest-bearing deposits.
The efficiency ratio was 57.06% in 2020, up from 55.33% in 2019. Contributing to this increase was the
decrease in net interest margin, higher provision for credit losses on unfunded loan commitments, and
lower income from service charges on deposit accounts and ATM fees in 2020.
For the year ended December 31, 2020, return on assets and return on equity were 1.04% and 8.60%,
respectively, compared to 1.34% and 10.49% in the prior year.
All capital ratios exceeded regulatory requirements. The total risk-based capital ratio for Bancorp was
16.0% at December 31, 2020 up from 15.1% at December 31, 2019. Tangible common equity to tangible
assets was 11.3% at both December 31, 2020 and December 31, 2019 (See footnote 8, ITEM 6, Selected
Financial Data, for the definition of this non-GAAP financial measure). The total risk-based capital ratio for
the Bank was 15.8% at December 31, 2020 and 14.6% at December 31, 2019.
The Board of Directors declared a cash dividend of $0.23 per share on January 22, 2021. This was the 63rd
consecutive quarterly dividend paid by Bank of Marin Bancorp. The cash dividend was paid on
February 12, 2021 to shareholders of record at the close of business on February 5, 2021.
• Our strong capital and liquidity position afforded us the opportunity to eliminate a high cost funding source.
On March 15, 2021 we redeemed the $2.8 million subordinated debenture, which carried a rate of 5.68% in
2020. The redemption consisted of $4.1 million principal balance, quarterly interest due, and $1.3 million in
accelerated accretion of purchase discount. The contractual interest rate on the subordinated debenture
was 3-month LIBOR plus 1.40%, or 1.62% as of December 31, 2020.
COVID-19 Pandemic-Related Response Update - We have remained open and responded to customer needs
throughout 2020. We more than doubled our charitable contributions to non-profit organizations in our community
to over $1.0 million in 2020. In March 2020, we began waiving all ATM and overdraft fees and cancelling early
withdrawal penalties for time certificate of deposits when allowed by law. We accommodated loan payment relief
requests for borrowers with financial hardships and lowered interest rate floors on commercial Prime Rate loans.
Under the provisions of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") of 2020, Bank of
Marin originated over 1,800 PPP loans to small businesses, reaching nearly 28,000 employees in our markets. In
2021, we are once again diligently working with our customers to accommodate requests for round two of PPP
26
loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act ("Economic Aid Act"),
which became law in December of 2020.
Paycheck Protection Program - While the PPP affords us an opportunity to assist our customers and community
and requires a large of amount of human resources, the PPP loans do not pose a significant amount of risk of loss
to the Bank as they are 100% guaranteed by the SBA. As of December 31, 2020, there were 1,777 PPP loans
outstanding totaling $291.6 million, net of $5.4 million in unearned fees. During the fourth quarter Bank of Marin
opened a secure PPP loan forgiveness application portal and gave all PPP borrowers access to apply. As of
December 31, 2020 we received SBA loan forgiveness payments totaling $10.9 million for 35 loans that were
forgiven. Of the total PPP loans remaining, 74% (1,309 loans) totaling $58.7 million are less than or equal to $150
thousand and have access to streamlined forgiveness processing. On January 19, 2021, the Bank launched the
application process and began accepting loan requests for the second round of PPP, as revised by the Economic
Aid Act. As of March 11, 2021, we have received 974 loan applications totaling $131.6 million.
Payment Relief - During 2020, in accordance with section 4013 of the CARES Act, subsequently amended by the
Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met
certain criteria, which would otherwise be designated as TDRs under existing GAAP. Of the 269 loans totaling
$402.9 million granted payment relief since the onset of the pandemic, 222 loans or $324.2 million have resumed
normal payments and 18 loans or $7.7 million paid off. As of December 31, 2020, 21 borrowing relationships with
29 loans totaling $71.0 million had requested additional payment relief. We know each of these clients very well
and monitor their loans closely, and anticipate that the vast majority will work through current adverse conditions
and resume making full payments. The following table summarizes these loans by industry or collateral type.
Payment Relief by Type
Industry/Collateral Type
Education
Health Clubs
Office and Mixed Use
Hospitality
Retail Related CRE
Auto Dealership
Non-CRE Related
Residential Real Estate
Payment Relief Totals
Outstanding
Loan Balance
(in thousands)
17,580
16,551
15,883
12,439
6,899
393
121
1,130
70,996
$
$
Weighted
Average LTV
26 %
38 %
44 %
49 %
52 %
49 %
N/A
60 %
40 %
Looking forward into the new year, with a low cost and stable deposit base, opportunities for loan growth, and our
unwavering commitment to relationship banking, we believe we are well-positioned to navigate the remaining stages
of the pandemic and build new capabilities. We have ample liquidity and capital to support organic growth and
acquisitions in coming years. Acquisitions remain a component of our strategic plan and we will continue to
evaluate merger and acquisition opportunities that fit with our culture and add value for our shareholders. Our
disciplined credit culture and relationship-focused banking continue to be critical components of our success.
27
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the interest earned on loans, investment securities and other interest-earning assets minus
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 net interest income and/or 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 income.
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 compares interest income, average interest-earning assets, interest expense, and average
interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin
and net interest rate spread for the years indicated.
Table 1 Average Statements of Condition and Analysis of Net Interest Income
Year ended
Year ended
Year ended
December 31, 2020
December 31, 2019
December 31, 2018
Interest
Interest
Interest
Average
Income/
Balance
Expense
Yield/
Rate
Average
Income/
Balance
Expense
Yield/
Rate
Average
Income/
Balance
Expense
Yield/
Rate
$ 153,794 $
461
0.29 % $ 67,192 $
1,321
1.94 % $ 78,185 $
1,461
533,186
15,025
2.82 % 555,618
15,102
2.72 % 566,883
14,512
2,023,203
85,398
4.15 % 1,775,193
85,062
4.73 % 1,704,390
80,406
2,710,183 100,884
3.66 % 2,398,003 101,485
4.17 % 2,349,458
96,379
1.84 %
2.56 %
4.65 %
4.05 %
(dollars in thousands; unaudited)
Assets
Interest-earning deposits with banks 1
Investment securities 2, 3
Loans 1, 3, 4
Total interest-earning assets 1
Cash and non-interest-bearing due from
banks
Bank premises and equipment, net
Interest receivable and other assets, net
131,780
Total assets
$ 2,897,165
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts
$ 148,817 $
184,146
49,676
5,526
35,956
6,911
109,837
$ 2,550,707
41,595
8,021
86,709
$ 2,485,783
186
68
0.13 % $ 133,922 $
0.04 % 172,273
347
70
0.26 % $ 143,706 $
0.04 % 178,907
226
72
Savings accounts
Money market accounts
Time accounts, including CDARS
Borrowings and other obligations 1
Subordinated debentures 1
Total interest-bearing liabilities
Demand accounts
Interest payable and other liabilities
Stockholders' equity
Total liabilities & stockholders' equity
Tax-equivalent net interest income/margin 1
Reported net interest income/margin 1
Tax-equivalent net interest rate spread
763,689
2,009
0.26 % 680,296
3,439
0.51 % 612,372
1,355
96,558
174
2,741
554
4
158
0.57 % 106,783
2.16 %
2,935
5.68 %
2,673
595
77
229
0.56 % 137,339
2.57 %
105
8.44 %
5,025
1,196,125
2,979
0.25 % 1,098,882
4,757
0.43 % 1,077,454
542
2
1,339
3,536
1,308,199
41,347
351,494
$ 2,897,165
1,094,806
30,578
326,441
$ 2,550,707
1,085,870
18,514
303,945
$ 2,485,783
$ 97,905
$ 96,659
3.55 %
3.51 %
3.41 %
$ 96,728
$ 95,680
3.98 %
3.94 %
3.74 %
$ 92,843
$ 91,544
3.90 %
3.84 %
3.72 %
0.16 %
0.04 %
0.22 %
0.39 %
2.03 %
26.29 %
0.33 %
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 day 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 21%.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans,
representing an adjustment to the yield.
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
tax-equivalent 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.
2020 compared to 2019
2019 compared to 2018
(in thousands, unaudited)
Interest-earning deposits with banks
Investment securities 1
Loans 1
Total interest-earning assets
Interest-bearing transaction accounts
Savings accounts
Money market accounts
Time accounts, including CDARS
Borrowings and other obligations
Subordinated debentures
Total interest-bearing liabilities
Volume
Yield/
Rate
$ 1,702 $ (1,120) $ (1,442) $
Mix
(610)
555
11,884 (10,337)
12,976 (10,902)
(180)
(7)
(1,655)
15
(12)
(76)
(1,915)
39
5
422
(56)
(72)
6
344
(22)
(1,211)
(2,675)
(20)
—
(197)
—
11
(1)
(207)
Total Volume
(860) $
(77)
336
(601)
(161)
(2)
(1,430)
(41)
(73)
(71)
(1,778)
(204) $
(288)
3,340
2,848
(15)
(3)
150
(120)
58
(627)
(557)
Yield/
Rate
75 $
897
1,263
2,235
147
1
1,741
223
1
(909)
1,204
Tax-equivalent net interest income
$ 12,632 $ (8,987) $ (2,468) $ 1,177 $ 3,405 $ 1,031 $
Total
Mix
(140)
(11) $
590
(19)
4,656
53
5,106
23
121
(11)
(2)
—
2,084
193
53
(50)
75
16
(1,110)
426
574
1,221
(551) $ 3,885
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
2020 Compared to 2019
Net interest income totaled $96.7 million and $95.7 million in 2020 and 2019, respectively. The $1.0 million increase
in 2020 was primarily due to SBA PPP loans and lower rates on interest-bearing deposits, largely offset by lower
yields on earning-assets, except for investment securities where we collected prepayment penalties on called
securities in 2020. Notable balance increases occurred in interest-earning deposits with other banks, commercial
real estate loans and deposits. The tax-equivalent net interest margin decreased 43 basis points to 3.55% in 2020,
from 3.98% in 2019 for the reasons already mentioned and as shown in the above table. Additionally, the SBA PPP
loans lowered the 2020 net interest margin by 6 basis points.
On March 15, 2021, we redeemed the $2.8 million subordinated debenture. The redemption consisted of $4.1
million principal balance, quarterly interest due, and $1.3 million in accelerated accretion of purchase discount. The
contractual interest rate on the subordinated debenture was 3-month LIBOR plus 1.40%, or 1.62% as of
December 31, 2020.
2019 Compared to 2018
Net interest income totaled $95.7 million and $91.5 million in 2019 and 2018, respectively. The increase of $4.2
million in 2019 was primarily due to higher average loan balances and assets yields across all categories and the
early redemption of a high-rate subordinated debenture in the fourth quarter of 2018. Positive variances were
partially offset by higher balances and rates on money market accounts. The tax-equivalent net interest margin
increased eight basis points to 3.98% in 2019 compared to 3.90% in 2018 for the same reasons.
Market Interest Rates
Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each
other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").
In response to the evolving risks to economic activity posed by the COVID-19 pandemic, the FOMC made two
emergency cuts totaling 150 basis points to the federal funds rate in March 2020. The federal funds target rate
range resided between 0.0% to 0.25% for the majority of 2020, putting downward pressure on our asset yields and
net interest margin. In each of its July, September and October 2019 meetings, the FOMC lowered the federal
29
funds target rate by 0.25% to a range of 1.50% to 1.75% at the end of 2019. During 2018, the FOMC made four 25-
basis-point increases to a range of 2.25% to 2.50% as of December 2018.
A low interest rate environment will continue to put downward pressure on asset yields and net interest margin to be
fully seen in future periods. See ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk for further
information.
Provision for Credit Losses on Loans
Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors
including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to
estimate expected losses over the contractual terms of our loans. The allowance for credit losses is increased by
provisions charged to expense and loss recoveries and decreased by loans charged off. For additional information
about the allowance for credit losses and transition from the incurred loss method to the CECL method in 2020, see
Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.
We recorded a $4.6 million provision for credit losses in 2020, compared to a $900 thousand provision in 2019 and
no provision for credit losses in 2018. The provision for credit losses in 2020 was largely due to the impact of the
COVID-19 pandemic and its effect on the local and regional economies and economic outlook. In addition, under
the CECL method, we increased our allowance for credit losses by approximately $925 thousand for previously
acquired loans (i.e., non-purchased credit deteriorated or "non-PCD" loans); whereas, under previous GAAP
(incurred loss method) we did not record an allowance on our unimpaired previously acquired non-PCD loans. Our
allowance model is particularly sensitive to current and forecasted California unemployment rates, which increased
from 3.7% at December 31, 2019 to 8.8% at December 31, 2020. The pandemic also negatively affected the
financial condition of many of our borrowers, which was partially alleviated by our payment relief program under the
CARES Act and the SBA PPP. Additionally, with the adoption of ASC 326 in 2020, our provision for credit losses
may become more volatile in the future due to changes in macroeconomic conditions and forecasts, CECL model
assumptions, and loan composition, which affect the allowance for credit losses balance. The provision for credit
losses in 2019 was consistent with loan growth. The lack of a provision for credit losses in 2018 was primarily due
to a $15.3 million decrease in classified loans, resulting from two borrowing relationships whose risk grades were
upgraded from substandard to special mention in the second quarter of 2018.
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)
Service charges on deposit accounts
Wealth Management and Trust Services
Debit card interchange fees
Earnings on bank-owned life insurance, net
Gains on investment securities, net
Dividends on FHLB stock
Merchant interchange fees
Other income
Total non-interest income
2020 Compared to 2019
2020
2019
$ 1,314 $ 1,865 $ 1,891 $
2018
1,851
1,438
973
915
654
239
1,166
1,907
1,586
1,196
55
799
331
1,345
1,919
1,561
913
876
959
378
1,642
$ 8,550 $ 9,084 $ 10,139 $
2020 compared to 2019
Percent
Increase
(Decrease)
Amount
Increase
(Decrease)
Amount
Increase
(Decrease)
2019 compared to 2018
Percent
Increase
(Decrease)
(1.4) %
(26)
(0.6) %
(12)
1.6 %
25
283
23.7 %
(821) (1,492.7) %
(20.0) %
(160)
(14.2) %
(47)
(22.1) %
(297)
(11.6) %
(1,055)
(551)
(56)
(148)
(223)
860
(145)
(92)
(179)
(534)
(29.5) % $
(2.9) %
(9.3) %
(18.6) %
1,563.6 %
(18.1) %
(27.8) %
(13.3) %
(5.9) % $
Non interest income totaled $8.6 million and $9.1 million in 2020 and 2019, respectively. The $534 thousand decline
was primarily due to $551 thousand lower service charges on deposit accounts and ATM fees, as these fees were
waived during the pandemic, lower income from bank-owned life insurance ("BOLI") policies due to a $562
thousand benefit collected on BOLI policies in the third quarter of 2019 (partially offset by $283 thousand
underwriting expenses for two new BOLI policies in the first quarter of 2019), $182 thousand lower fee income from
30
one-way deposit sales to third-party deposit networks and $145 thousand lower dividends on FHLB stock, partially
offset by $860 thousand net gains on the sale of investment securities.
2019 Compared to 2018
Non-interest income totaled $9.1 million and $10.1 million in 2019 and 2018, respectively. The decrease compared
to the prior year primarily related to a $956 thousand pre-tax gain on the sale of 6,500 shares of Visa Inc. Class B
restricted common stock, a $180 thousand Federal Home Loan Bank special dividend, and higher fee income from
one-way deposit sales to third-party networks in 2018. The decrease in non-interest income was partially offset by a
$562 thousand gain from the settlement of death benefits on bank-owned life insurance in 2019, net of underwriting
costs associated with two new bank-owned life insurance policies.
Non-interest Expense
The table below details the components of non-interest expense.
Table 4 Components of Non-Interest Expense
Years ended December 31,
(dollars in thousands; unaudited)
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional services
Depreciation and amortization
Provision for credit losses on unfunded loan
commitments
Information technology
Charitable contributions
Amortization of core deposit intangible
Directors' expense
Federal Deposit Insurance Corporation
insurance
Other non-interest expense:
2020
2019
$ 34,393 $ 34,253 $ 33,335 $
2018
2020 compared to 2019
Percent
Increase
(Decrease)
Amount
Increase
(Decrease)
140
800
(533)
49
(79)
5,976
4,358
3,317
2,143
2019 compared to 2018
Percent
Increase
(Decrease)
2.8 %
2.8 %
(14.7) %
(35.7) %
4.0 %
Amount
Increase
(Decrease)
918
167
(641)
(1,185)
85
0.4 % $
13.0 %
(14.3) %
2.3 %
(3.5) %
—
1,023
463
921
700
1,441
(15)
526
(34)
(22)
1,117.1 %
(1.4) %
103.5 %
(3.8) %
(3.0) %
129
42
45
(34)
35
100.0 %
4.1 %
9.7 %
(3.7) %
5.0 %
6,943
3,184
2,181
2,149
1,570
1,050
1,034
853
713
6,143
3,717
2,132
2,228
129
1,065
508
887
735
474
361
756
113
31.3 %
(395)
(52.2) %
Advertising
Other expense
Total other non-interest expense
Total non-interest expense
769
4,715
5,484
775
5,037
5,812
666
4,608
5,274
$ 60,028 $ 57,970 $ 58,266 $
(6)
(322)
(328)
2,058
(0.8) %
(6.4) %
(5.6) %
3.6 % $
109
429
538
(296)
16.4 %
9.3 %
10.2 %
(0.5) %
2020 Compared to 2019
Non-interest expense increased $2.1 million to $60.0 million in 2020 from $58.0 million in 2019. The largest
increases came from the provision for unfunded loan commitments, occupancy expenses (primarily due to lease
renewals for our existing headquarters offices and new lease for a loan production office in San Mateo, common
area maintenance and janitorial expenses), and charitable contributions due to our outreach to nonprofit
organizations in our community during the pandemic. The decrease in data processing costs was due to our digital
platform conversion in 2019. While salaries and related benefits were relatively unchanged year-over-year, annual
merit and related increases were mostly offset by $915 thousand in SBA PPP-related deferred loan origination
costs.
The increase in the provision for credit losses on unfunded loan commitments was mainly attributed to a $75.3
million increase in unfunded loan commitments, an increase in expected loss rates due to the COVID-19 pandemic,
and changes in certain allowance model assumptions in the transition from the incurred loss method to the CECL
method in 2020 (refer to Note 1, Summary of Significant Accounting Policies, for additional information).
31
2019 Compared to 2018
In 2019, non-interest expense decreased by $296 thousand to $58.0 million. The decrease was primarily due to
$1.0 million in consulting expenses related to core processing contract negotiations in 2018, lower data processing
expenses in 2019 as a result of the renegotiation of the Bank's core systems contract, and lower Federal Deposit
Insurance Corporation ("FDIC") deposit insurance expenses due to the FDIC Deposit Insurance Fund reserve
exceeding its billing threshold in 2019. The decreases in non-interest expense were partially offset by $918
thousand higher salaries and related benefits as a result of annual merit increases, three additional full-time
equivalent employees (on average), and personnel severance, as well as higher recruiting fees recorded in other
expenses.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California
franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income
for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-
income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying
dispositions of incentive stock options and vesting of restricted stock awards).
The provision for income taxes totaled $10.3 million at an effective tax rate of 25.5% in 2020, compared to $11.7
million at an effective tax rate of 25.4% in 2019 and $10.8 million at an effective tax rate of 24.9% in 2018. The
decrease in the provision in 2020 compared to 2019 reflected lower pre-tax income and higher tax-exempt interest
income on municipal securities. The slight increase in the effective tax rate in 2020 as compared to 2019 was due
to a favorable deferred tax liability true-up recognized in 2019 and a lower tax benefit from BOLI income in 2020.
The increase in the effective tax rate in 2019 compared to 2018 was due to a higher level of tax benefits in 2018
from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options by former
employees of Bank of Napa post-acquisition.
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. At
December 31, 2020 and 2019, neither the Bank nor Bancorp had accruals for interest or penalties related to
unrecognized tax benefits.
FINANCIAL CONDITION
Our assets increased $204.6 million from December 31, 2019 to December 31, 2020, mainly due to loan growth of
$245.3 million, primarily driven by PPP loan originations, which were offset by a $68.3 million decrease in
investment security balances.
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 interest rate risk position, 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,
2020 and 2019. 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 life of
the investment portfolio at December 31, 2020 and 2019 was approximately five and six years, respectively.
32
Table 5 Investment Securities
December 31, 2020
(dollars in thousands;
unaudited)
Held-to-maturity:
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1 Fair Value
Average
Yield2
MBS/CMOs issued by U.S.
government agencies
$
SBA-backed securities
Obligations of state and
political subdivisionsl3
Total held-to-maturity
Available-for-sale:
MBS/CMOs issued by U.S.
government agencies
—
—
— % $ 76,378
1.89 % $ 24,444
2.51 % $
—
—
—
6,547
3.17
1,461
5.46
206
4.58
$ 1,461
5.46
$ 76,584
1.89
$ 30,991
2.65
$
$ 4,765
1.60
$ 94,844
2.36
$ 117,657
2.72
$
SBA-backed securities
—
—
16,994
2.40
13,947
3.43
—
—
—
—
—
—
— % $ 100,822 $ 106,550
2.04 %
—
—
—
—
—
6,547
6,947
3.17
1,667
1,688
5.35
$ 109,036 $ 115,185
2.16
$ 217,266 $ 228,651
2.54
30,941 32,862
2.86
Obligations of state and
political subdivisions3
Debentures of government
sponsored agencies
3,653
2.68
18,616
3.01
82,618
2.73
—
—
104,887 110,652
2.78
9,993
2.18
5,984
2.62
1,976
1.42
1,991
1.39
19,944 20,186
2.16
Total available-for-sale
$ 18,411
2.13
$ 136,438
2.46
$ 216,198
2.76
$ 1,991
1.39
$ 373,038 $ 392,351
2.61
Total
$ 19,872
2.37 % $ 213,022
2.26 % $ 247,189
2.74 % $ 1,991
1.39 % $ 482,074 $ 507,536
2.51 %
Within 1 Year
1-5 Years
5-10 Years
After 10 Years
Total
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1
Average
Yield2
Amortized
Cost1 Fair Value
Average
Yield2
December 31, 2019
(dollars in thousands;
unaudited)
Held-to-maturity:
MBS/CMOs issued by U.S.
government agencies
$ 3,763
2.47 % $ 72,861
2.12 % $ 49,277
2.54 % $
SBA-backed securities
—
—
—
—
7,999
3.19
Obligations of state and
political subdivisions3
1,807
4.45
1,706
5.36
—
—
Total held-to-maturity
$ 5,570
3.11
$ 74,567
2.19
$ 57,276
2.63
$
Available-for-sale:
MBS/CMOs issued by U.S.
government agencies
$ 4,157
1.97
$ 126,702
2.67
$ 141,462
3.01
$
SBA-backed securities
—
—
5,280
2.54
30,394
2.88
—
—
—
—
—
—
— % $ 125,901 $ 127,790
2.30 %
—
—
—
—
—
7,999
8,264
3.19
3,513
3,588
4.89
$ 137,413 $ 139,642
2.41
$ 272,321 $ 278,144
2.83
35,674 36,286
2.83
Obligations of state and
political subdivisionsl3
Debentures of government
sponsored agencies
2,082
2.67
16,619
2.82
47,341
3.03
—
—
66,042 67,282
2.96
498
2.05
16,040
2.92
21,881
2.75
9,970
2.91
48,389 49,046
2.83
Corporate bonds
1,497
3.54
—
—
—
—
—
—
1,497
1,502
3.54
Total available-for-sale
$ 8,234
2.44
$ 164,641
2.70
$ 241,078
2.97
$ 9,970
2.91
$ 423,923 $ 432,260
2.85
Total
$ 13,804
2.71 % $ 239,208
2.54 % $ 298,354
2.91 % $ 9,970
2.91 % $ 561,336 $ 571,902
2.75 %
1 Book value reflects cost, adjusted for accumulated amortization and accretion.
2 Weighted average calculation is based on amortized cost of securities.
3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using federal tax rate of 21%.
The amortized cost of our investment securities portfolio decreased $79.3 million or 14% during 2020. We
purchased $97.5 million in securities in 2020 designated as available-for-sale to provide flexibility for liquidity and
interest rate risk management. These purchases were offset by $143.1 million of paydowns, calls and maturities,
and $32.8 million of sales during 2020.
During 2020, we purchased $57.6 million in obligations of state and political subdivisions, $31.0 million in
collateralized mortgage obligations ("CMOs") and $9.0 million in debentures of government sponsored agencies.
We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as
they carry the credit support of the U.S. federal government. The debentures, CMOs and MBS issued by U.S.
government sponsored agencies, state and municipal securities, and SBA-backed securities made up 70.1%,
22.1% and 7.8% of the portfolio at December 31, 2020, compared to 79.6%, 12.4% and 7.8%, respectively at
December 31, 2019. See the discussion in the section captioned “Securities May Lose Value due to Credit Quality
of the Issuers” in ITEM 1A Risk Factors above.
33
At December 31, 2020, distribution of our investment in obligations of state and political subdivisions was as follows:
(dollars in thousands; unaudited)
Within California:
General obligation bonds
Revenue bonds
Tax allocation bonds
Total within California
Outside California:
General obligation bonds
Revenue bonds
Total outside California
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Percent of
State and
Municipal
Securities
Amortized
Cost
Fair Value
Percent of
State and
Municipal
Securities
$
3,327 $
2,352
2,832
8,511
3,565
2,448
2,876
8,889
3.1 % $
2.2
2.7
8.0
4,597 $
2,928
3,376
10,901
78,299
19,744
98,043
82,100
21,351
103,451
73.5
18.5
92.0
45,974
12,680
58,654
4,813
2,977
3,456
11,246
46,976
12,648
59,624
6.6 %
4.2
4.9
15.7
66.1
18.2
84.3
Total obligations of state and political
subdivisions
$ 106,554 $ 112,340
100.0 % $
69,555 $
70,870
100.0 %
The portion of the portfolio outside the state of California is distributed among 10 states. The largest concentrations
outside California are in Texas (55.3%), Washington (9.3%), and Maryland (6.4%). During March 2020, we
strategically increased our credit exposure to obligations issued by high credit quality issuers in Texas that are either
guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential
services such as utilities and transportation. We have $6.0 million in obligations of Texas school district issuers
having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We
believe the healthy level of reserves and excess guarantee capacity at the PSF sufficiently mitigates any potential
credit issues posed by the issuers' exposure to the oil and gas industry, as well as the negative effects of the recent
winter storms in Texas. In addition, we have little or no exposure to municipal sectors such as higher education or
health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.
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 taxpayers and employers,
income indices and home values
For revenue bonds, the source and strength of revenue for municipal authorities including obligors' 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
34
Loans
Table 6 Loans Outstanding by Class at December 31
(in thousands; unaudited)
Commercial and industrial loans
Real estate
Commercial owner-occupied
Commercial investor-owned
Construction
Home equity
Other residential
Installment and other consumer loans
Total loans, at amortized cost
Allowance for credit losses on loans
Total loans, net of allowance for credit losses
2020
498,408 $
2019
246,687 $
2018
230,739 $
2017
235,835 $
2016
218,615
$
304,963
961,208
73,046
104,813
123,395
22,723
2,088,556
(22,874)
247,713
724,228
74,809
117,207
78,549
25,495
1,486,616
(15,442)
$ 2,065,682 $ 1,826,609 $ 1,748,043 $ 1,663,246 $ 1,471,174
313,277
873,410
76,423
124,696
117,847
27,472
1,763,864
(15,821)
308,824
946,317
61,095
116,024
136,657
27,682
1,843,286
(16,677)
300,963
822,984
63,828
132,467
95,526
27,410
1,679,013
(15,767)
Loans increased $245.3 million in 2020, or 13%, to $2.089 billion at December 31, 2020, from $1.843 billion at
December 31, 2019. SBA PPP loans outstanding at December 31, 2020 totaled $291.6 million and were included in
commercial and industrial loans. For the year ended December 31, 2020, new non-PPP-related loan originations
were $165.5 million, compared to $259.6 million in 2019. The decrease in non-PPP loan originations was largely
due a decrease in conventional loan demand as a result of the pandemic and shelter-at-home orders. New loan
originations were more than offset by payoffs of $180.1 million and reduction in line usage. Loan payoffs were
concentrated in consumer and retail loans (mostly tenant in common and HELOC) and commercial loans on which
underlying assets were sold, loans refinanced with other banks, or loans that were paid off with cash. Payoffs as a
percentage of beginning of the year loan balances were 9.8%, 8.3% and 9.4% in 2020, 2019 and 2018,
respectively. Approximately 77% and 88%, of total loans were secured by real estate at December 31, 2020 and
2019, respectively. The decrease in the percentage in 2020 was due to PPP loans, which are not secured by real
estate. For additional information on loan concentration risk, see ITEM 1A, Risk Factors.
The following table summarizes our commercial real estate loan portfolio by the county in which the property was
located as of December 31, 2020 and 2019.
Table 7 Commercial Real Estate Loans Outstanding by County
(dollars in thousands; unaudited)
December 31, 2020
December 31, 2019
County
Marin
Sonoma
Napa
San Francisco
Alameda
Contra Costa
San Mateo
Solano
Other
Total
$
$
Amount
348,106
208,745
181,054
169,902
164,921
49,155
26,306
21,380
96,602
1,266,171
Percent of
Commercial Real
Estate Loans
27.5 % $
16.5
14.3
13.4
13.0
3.9
2.1
1.7
7.6
100.0 % $
Amount
339,917
199,717
175,170
165,205
175,664
46,933
22,278
23,710
106,547
1,255,141
Percent of
Commercial Real
Estate Loans
27.1 %
15.9
14.0
13.2
14.0
3.7
1.8
1.9
8.4
100.0 %
Commercial real estate loans increased $11.0 million in 2020, compared to a $68.5 million increase in 2019. Of the
commercial real estate loans at December 31, 2020, 76% were investor-owned and 24% were owner-occupied.
Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of
repayment is either the cash flow from the leasing activities of the real estate collateral or the operating cash flow of
the owner occupant.
35
We occasionally provide interest-only term loans to borrowers who exhibit strong financial capacity and/or for
commercial real estate loans during the occupancy stabilization period. After the initial interest-only payment
period, these loans will normally require principal and interest payments. In addition, we may make interest-only
concessions in a modified troubled debt restructuring ("TDR"). At December 31, 2020 and 2019, approximately
3.4% and 3.7%, respectively, of our commercial real estate 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, 2020. Except for two TDR
loans to one borrowing relationship totaling $7.1 million as of December 31, 2020, all were considered to have low
credit risk (graded "Pass").
The following table shows an analysis of construction loans by type and county as of December 31, 2020 and 2019.
Table 8 Construction Loans Outstanding by Type and County
(dollars in thousands; unaudited)
December 31, 2020
December 31, 2019
Loan Type
Commercial real estate
Apartments and multifamily
1-4 Single family residential
Land - improved
Land - unimproved
Total
(dollars in thousands; unaudited)
County
San Francisco
Sonoma
Solano
Marin
Alameda
San Mateo
Napa
Other
Total
Percent of
Construction
Loans
40.8 % $
30.6
25.1
1.9
1.6
100.0 % $
Amount
29,788
22,331
18,308
1,371
1,248
73,046
Percent of
Construction
Loans
48.4 %
21.6
21.7
6.2
2.1
100.0 %
Amount
29,568
13,202
13,257
3,775
1,293
61,095
December 31, 2020
December 31, 2019
Percent of
Construction
Loans
57.1 % $
13.8
12.3
12.1
2.5
—
—
2.2
100.0 % $
Amount
41,707
10,058
9,020
8,858
1,862
—
—
1,541
73,046
Percent of
Construction
Loans
31.7 %
14.4
3.2
30.5
3.4
8.7
7.0
1.1
100.0 %
Amount
19,374
8,808
1,952
18,600
2,092
5,323
4,284
662
61,095
$
$
$
$
Construction loans increased by $12.0 million in 2020, compared to a $15.3 million decrease in 2019. The increase
in 2020 primarily resulted from additional borrowings under existing construction loans as well as advances on six
new construction loans to well-known, experienced builders. The increase was partially offset by the successful
completion of projects, one of which converted to a permanent commercial real estate loan. The decrease in 2019
was primarily due to a $14.8 million loan that converted to a commercial real estate loan and one payoff from a
completed apartment building construction project.
The following table presents the maturity distribution of our commercial and construction loans as of December 31,
2020 based on their contractual maturity dates and does not include scheduled payments or potential prepayments.
Table 9A Commercial and Industrial and Construction Loan Maturity Distribution
(in thousands; unaudited)
Commercial and industrial 1
Construction 2
Total
571,454
105,988 $
1 Commercial and industrial due after 1 but within 5 years includes SBA PPP loans totaling $291.6 million, the majority of which are expected to
be forgiven by the SBA in 2021.
2 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period.
373,463 $
21,862
Total
498,408
73,046
395,325 $
70,141 $
$
$
Due after 1 but
within 5 years
Due within
1 year
77,534 $
28,454
Due after
5 years
47,411 $
22,730
36
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 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 three, five or seven years. These loans are included in variable-rate
balances below.
Table 9B Commercial and industrial and Construction Loan Interest Rate Sensitivity
(in thousands; unaudited)
Commercial and industrial 1
Construction
Fixed
Variable
$
395,619 $
102,789 $
43,851
29,195
Total
498,408
73,046
Total
571,454
1 Commercial and industrial includes SBA PPP 1% fixed rate loans totaling $291.6 million, the majority of which are expected to be forgiven by
the SBA in 2021.
131,984 $
439,470 $
$
Allowance for Credit Losses on Loans
As of December 31, 2020, we calculated the allowance for credit losses using the current expected loss
methodology, or CECL, which required us to estimate credit losses over the expected life of a loan and consider
future changes in macroeconomic conditions. All specifically identifiable and quantifiable losses are charged off
against the allowance. 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 and reasonable and supportable forecasts, management believes that
the $22.9 million allowance for credit losses at December 31, 2020 is adequate to absorb expected credit losses in
our loan portfolio, but provides no assurance that adverse changes in economic conditions or other circumstances
over the remaining terms of our loans will not result in increased losses in the portfolio. For information on our
allowance for credit losses methodology and adoption of FASB ASU No. 2016-13, Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, effective December 31, 2020, refer to
Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.
The allowance for credit losses to loans was 1.10% at December 31, 2020 and 0.90% at both December 31, 2019
and 2018. The allowance for credit losses to loans, excluding SBA PPP loans and previously acquired loans was
1.27%, 0.96% and 0.98% at year-end 2020, 2019, and 2018, respectively (for a discussion of this non-GAAP
financial measure, refer to ITEM 6, Selected Financial Data of this report). As stated in the Provision for Credit
Losses section above, the increase in allowance for credit losses in 2020 was almost entirely due to the impact of
the COVID-19 pandemic and its effect on the local and regional economies and economic outlook coupled with the
transition to the CECL method. Due to the high credit quality of our loan portfolio, net charge-offs have been
minimal for the past several years. Net charge-offs totaled $1 thousand in 2020 and $44 thousand in 2019,
compared to net recoveries of $54 thousand in 2018.
37
Table 10 shows the allocation of the allowance by loan class as well as the percentage of total loans in each of the
same loan classes.
Table 10 Allocation of Allowance for Credit Losses
(dollars in thousands; unaudited)
December 31, 2020
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
Allowance
balance
allocation
Loans as
a percent
of total
loans
Allowance
balance
allocation
Loans as
a percent
of total
loans
Allowance
balance
allocation
Loans as
a percent
of total
loans
Allowance
balance
allocation
Loans as
a percent
of total
loans
Allowance
balance
allocation
Loans as
a percent
of total
loans
Commercial and industrial
$ 2,530
23.9 % $ 2,334
13.4 % $ 2,436
13.1 % $ 3,654
14.0 % $ 3,248
14.7 %
Real estate:
Commercial, owner-occupied
2,778
Commercial, investor-owned
12,682
Construction
Home Equity
Other residential
Installment and other consumer
1,557
738
998
291
14.6
46.0
3.5
5.0
5.9
1.1
Unallocated allowance
1,300
N/A
2,462
8,483
16.8
51.3
2,407
7,703
17.8
49.5
638
850
973
284
653
3.3
6.3
7.4
1.5
N/A
756
915
800
310
494
4.3
7.1
6.7
1.5
N/A
2,294
6,475
681
1,031
536
378
718
17.9
49.1
3.8
7.9
5.7
1.6
N/A
1,753
6,320
16.7
48.7
781
973
454
372
5.0
7.9
5.3
1.7
1,541
N/A
Total allowance for credit losses $ 22,874
$ 16,677
$ 15,821
$ 15,767
$ 15,442
Total percent
100.0%
100.0%
100.0%
100.0%
100.0%
Table 11 shows the activity in the allowance for credit losses for each of the five years presented below.
Table 11 Allowance for Credit Losses Rollforward
(dollars in thousands; unaudited)
Beginning balance
Impact of CECL adoption
Provision for (reversal of) credit losses
Loans charged-off:
Commercial and industrial
Real estate:
Commercial real estate, owner-occupied
Installment and other consumer
Total loans charged-off
Loans recovered:
Commercial and industrial
Real estate:
Commercial, investor-owned
Construction
Home equity
Installment and other consumer
Total loans recovered
Net loans (charged-off) recovered
Ending balance
Total loans, at amortized cost
Average total loans outstanding during year
Ratio of allowance for credit losses to total loans at end of year
Net (charge-offs) recoveries to average loans
NM - Not meaningful.
$
2020
16,677
1,604
4,594
2019
$ 15,821
—
900
2018
$ 15,767
—
—
2017
$ 15,442
—
500
2016
$ 14,999
—
(1,850)
(30)
—
(1)
(31)
27
(75)
—
(3)
(78)
22
(3)
—
(2)
(5)
17
(289)
—
(4)
(293)
(11)
(20)
(5)
(36)
111
143
—
3
—
—
30
(1)
$
22,874
$ 2,088,556
$ 2,023,203
12
—
—
—
34
(44)
$ 16,677
$ 1,843,286
$ 1,775,193
—
—
—
42
59
54
$ 15,821
$ 1,763,864
$ 1,704,390
—
—
—
7
118
(175)
$ 15,767
$ 1,679,013
$ 1,511,503
2,156
—
3
27
2,329
2,293
$ 15,442
$ 1,486,616
$ 1,452,357
1.10 %
NM
0.90 %
NM
0.90 %
NM
0.94 %
(0.01) %
1.04 %
0.16 %
Net charge-offs and recoveries for the years ended December 31, 2020, 2019 and 2018 were considered
insignificant. Charge-offs in 2017 primarily included a $283 thousand unsecured commercial loan. Recoveries in
2016 primarily resulted from the resolution and pay-off of a commercial real estate credit.
38
Table 12 shows non-performing assets and loans modified in a troubled debt restructuring ("TDR") for each of the
years in the five-year period ended December 31, 2020.
Table 12 Non-Performing and Underperforming Assets and Troubled Debt Restructurings
(dollars in thousands; unaudited)
Non-accrual loans:
Commercial and industrial
Real estate:
Commercial, owner-occupied
Commercial, investor-owned
Home equity
Installment and other consumer
Total non-accrual loans
Other real estate owned1
Total non-performing assets
Accruing TDR loans:2
Commercial and industrial
Real estate:
Commercial, owner-occupied
Commercial, investor-owned
Construction
Home equity
Other residential
Installment and other consumer
Total accruing TDR loans
Total non-performing assets and accruing TDR loans
Criticized and classified loans:
Special mention
Substandard
2020
2019
2018
2017
2016
$
—
$
—
$
319
$
—
$
—
7,147
1,610
459
17
9,233
—
9,233
$
$
—
—
168
58
226
—
226
$
—
—
313
65
697
—
697
$
—
—
406
—
406
—
406
$
—
—
91
54
145
408
553
$
1,021
$
1,223
$
1,506
$
2,165
$
2,207
—
3,305
—
10
—
735
$
5,071
$ 14,304
6,998
1,770
—
251
452
580
$ 11,274
$ 11,500
6,993
1,821
2,688
251
462
620
$ 14,341
$ 15,038
6,999
2,171
2,969
347
1,148
721
$ 16,520
$ 16,926
6,993
2,256
3,245
625
1,965
877
$ 18,168
$ 18,721
$ 86,852
$ 25,829
$ 73,391
9,934
$
$ 17,340
$ 12,608
$ 21,242
$ 27,906
$ 15,937
$ 19,630
73.86x
Allowance for credit losses to non-accrual loans
Non-accrual loans to total loans
0.01 %
1 Other real estate owned decreased in 2017 from the sale of two properties obtained in a bank acquisition in 2013.
2 Excludes TDR loans on non-accrual status that are included above.
2.48x
0.44 %
22.71x
0.04 %
38.88x
0.02 %
106.50x
0.01 %
Non-Accrual and TDR
Non-accrual loans increased $9.0 million in 2020, primarily due to the placement of two existing well-secured
owner-occupied commercial real estate TDR loans, secured by one property, totaling $7.1 million on non-accrual, as
well as two well-secured investor-owned commercial loans totaling $1.6 million that were placed on non-accrual in
2020. In addition, we designated five loans totaling $2.1 million as TDRs during 2020, resulting in an overall
increase of $2.8 million in total non-accrual and accruing TDR loans from 2019 to 2020. These increases were
partially offset by approximately $1.0 million in paydowns and payoffs of non-accrual and TDR loans. The decrease
in total non-accrual and accruing TDR loans from 2018 to 2019 primarily related to payoffs (including a $2.7 million
TDR land development loan) and paydowns, partially offset by advances on existing impaired loans and the addition
of one non-accrual home equity loan. The decrease in total non-accrual and accruing TDR loans from 2017 to 2018
primarily related to payoffs, paydowns, and two loans that were removed from TDR status.
Total accruing TDR loans were $5.1 million and $11.3 million as of December 31, 2020 and 2019, respectively. The
$6.2 million decrease from 2019 to 2020 primarily related to the two existing well-secured commercial real estate
TDR loans totaling $7.1 million that were transferred to non-accrual status coupled with payoffs and paydowns,
partially offset by the $2.1 million in new TDR loans mentioned above. The decreases from 2018 to 2019 and from
2017 to 2018 primarily related to the same reasons mentioned in the preceding paragraph.
For information regarding temporary relief from TDR accounting afforded by the CARES Act, refer to the Executive
Summary section above and Note 3 to the Consolidated Financial Statements in ITEM 8, under “Troubled Debt
Restructuring."
39
Criticized and Classified Loans
Loans designated special mention increased by $13.5 million in 2020, driven by loan downgrades totaling $31.0
million. Of these downgrades, approximately $24.5 million were loans to borrowers that were impacted by the
pandemic, all of which were well-secured by commercial real estate. These additions to special mention were
mostly offset by $15.8 million in upgrades to pass risk ratings, paydowns and payoffs, and $2.2 million in loans
downgraded from special mention to substandard in 2020. Loans designated special mention increased by $56.1
million during 2019 due primarily to new commercial loan originations to three borrowing relationships totaling $17.7
million that were experiencing temporary financial conditions that warranted the initial designation, and downgrades
of existing commercial real estate loans to two borrowing relationships totaling $26.7 million. Loans designated as
special mention exhibit potential weakness that deserve close attention.
Loans classified substandard increased by $15.9 million in 2020, primarily due to downgrades totaling $18.5 million.
Of these loans, $13.4 million were to borrowers that requested payment relief due to the pandemic, all of which
were well-secured by commercial real estate. These downgrades to substandard were partially offset by
approximately $2.8 million in payoffs and risk rating upgrades. Loans classified substandard decreased by $2.7
million during 2019 primarily due to the payoff of a land development loan.
Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and
classified loans by loan class.
Other Assets
BOLI totaled $43.6 million at December 31, 2020, compared to $41.6 million at December 31, 2019, and is recorded
in other assets. The increase of $1.9 million was due to the purchase of $943 thousand in new policies and a $973
thousand increase in the cash surrender value from net investment earnings.
Other assets also included net deferred tax assets of $6.9 million and $8.2 million at December 31, 2020 and 2019,
respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to
temporary differences such as the allowances for credit losses and unfunded loan commitments, net operating loss
carryforwards, and deferred compensation and salary continuation plans. The $1.2 million decrease in net deferred
tax assets in 2020 was primarily due to an increase in deferred tax liabilities related to unrealized gains on
available-for-sale investment securities, partially offset by an increase in deferred tax assets related to the change in
allowance for credit losses on loans and unfunded loan commitments. Management believes deferred tax assets
will 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 was established as of December 31, 2020 or
2019. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report.
In addition, we held $11.9 million and $11.7 million of FHLB stock recorded at cost in other assets at December 31,
2020 and 2019, respectively. The increase in 2020 resulted from the purchase of $176 thousand in FHLB stock.
The FHLB paid $654 thousand, $799 thousand and $959 thousand in cash dividends in 2020, 2019 and 2018,
respectively. FHLB dividends in 2018 included a special dividend of $180 thousand. For additional information,
refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.
Deposits
Deposits grew by $167.8 million, to $2.504 billion at December 31, 2020, compared to $2.337 billion at
December 31, 2019. Non-interest bearing deposits grew by $225.8 million in 2020 and made up 54% of total
deposits at year end. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations
and volatility due to activity of our large deposit customers and impact of the PPP.
Table 13 Distribution of Average Deposits
Table 13 shows the relative composition of our average deposits for 2020 and 2019. 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.
40
Years ended December 31,
2020
2019
(dollars in thousands; unaudited)
Non-interest bearing
Interest bearing transaction
Savings
Money market 1
Time deposits, including CDARS:
1.5
Less than $100,000
3.4
$100,000 or more
4.9
Total time deposits
100.0 %
Total average deposits
1 Money market balances include Insured Cash Sweep® ("ICS") in both 2020 and 2019. Demand Deposit Marketplace SM ("DDM") and ICS
balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report.
Percent
Amount
52.4 % $ 1,094,806
133,922
172,273
680,296
32,035
74,748
106,783
100.0 % $ 2,188,080
Amount
$ 1,308,199
148,817
184,146
763,689
28,643
67,914
96,557
$ 2,501,408
Percent
50.0 %
6.1
7.9
31.1
5.9
7.4
30.5
1.1
2.7
3.8
Table 14 Maturities of Time Deposits of $100,000 or More
Table 14 below shows the maturity groupings for time deposits of $100,000 or more at December 31, 2020 and
2019.
(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,
2020
$
18,018 $
12,655
21,006
17,737
$
69,416 $
2019
15,720
11,308
17,033
23,818
67,879
As of December 31, 2020 and 2019, respectively, our available borrowing capacity included $642.5 million and
$648.0 million in secured lines of credit with FHLB and $78.7 million and $80.3 million with the Federal Reserve
Bank of San Francisco (“FRBSF”). We also had $135.0 million and $92.0 million in unsecured lines with
correspondent banks to cover any short or long-term borrowing needs at December 31, 2020 and 2019,
respectively. There were no FHLB overnight borrowings at December 31, 2020 and 2019. The FRBSF and
correspondent bank lines were not utilized at December 31, 2020 or 2019.
As part of a bank acquisition in 2013, we assumed two subordinated debentures due to the NorCal Community
Bancorp Trusts I and II at fair values totaling $5.0 million at the acquisition date and contractual balances totaling
$8.2 million. On October 7, 2018, Bancorp redeemed in full the subordinated debenture due to NorCal Community
Bancorp Trust I. The remaining subordinated debenture due to Trust II had been accreted up to $2.8 million and
$2.7 million as of December 31, 2020 and 2019, respectively. On March 15, 2021, we redeemed the $2.8 million
subordinated debenture due to Trust II, which carried an average interest rate of 5.68% in 2020.
For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.
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, 2020 and
2019, our aggregate payment obligations under this plan totaled $4.7 million and $4.4 million, respectively.
Our Salary Continuation Plan ("Plan") provides 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, 2020 and 2019, our liability under the Plan was $3.2 million and $3.0 million, respectively, and is
41
recorded in interest payable and other liabilities in the Consolidated Statements of Condition. The 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 10 to the Consolidated Financial Statements in ITEM 8 of this report.
Table 15 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 16 to the Consolidated Financial Statements in ITEM 8 of this
report.
(in thousands; unaudited)
Operating leases
Finance leases
Certificates of deposit
Other long term liabilities (salary continuation payments)1
Total
Payments due by period
<1 year
1-3 years
4-5 years
>5 years
Total
$
4,612 $
8,428 $
6,179 $
9,869 $
29,088
42
17
—
71,852
15,934
9,646
—
—
113
377
404
1,341
59
97,432
2,235
$
76,577 $
24,739 $
16,229 $
11,210 $ 128,755
1 Represents future benefit payments under executive salary continuation agreements for retired Bank of Marin employees and for agreements
assumed in a bank acquisition whereby participants receive payments upon reaching retirement age. Amounts exclude future benefit payment
obligations totaling $3.6 million under Bank of Marin executive salary continuation agreements whereby participants will begin receiving
payments upon reaching retirement age and fulfilling their service requirements. Salary continuation obligations are based on retirement date
assumptions and may be adjusted upon actual retirement. For additional information, see Note 10 to the Consolidated Financial Statements in
ITEM 8 of this report.
The contractual amount of unfunded loan commitments not reflected on the consolidated statements of condition
was $604.4 million and $529.1 million at December 31, 2020 and 2019, 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 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios
were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required
minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements refer to the
SUPERVISION AND REGULATION section in ITEM 1 of this report.
The Bank's total risk-based capital ratio increased from 14.6% at December 31, 2019 to 15.8% at December 31,
2020, primarily due to the Bank's $31.3 million net income in 2020, partially offset by $16.2 million in dividends paid
to Bancorp to cover share repurchases, quarterly common stock dividends, and operating costs. Bancorp's total
risk-based capital ratio was 15.1% at December 31, 2019 and 16.0% at December 31, 2020. Bancorp's 2020 Tier 1
capital included a subordinated debenture due to NorCal Community Bancorp Trust II, which was recorded only at
the parent company level and accounted for approximately 18 basis points of the total risk-based capital ratio as of
December 31, 2020. This subordinated debenture was early redeemed on March 15, 2021.
Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the
Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not
42
expect that we will be required to raise additional capital in 2021. Our anticipated sources of capital in 2021 include
future earnings and shares issued under the stock-based compensation program.
Liquidity
The goal of liquidity management is to provide adequate funds to meet loan demand and to 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 discussed in Note
7 to the Consolidated Financial Statement in ITEM 8 of this report. Our Asset Liability Management Committee
("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible
for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency funding plan
that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses
that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts
our position based on current and future liquidity needs. We also have relationships with third-party deposit
networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash
management strategy, as discussed in Note 6 to the consolidated financial statements in ITEM 8 of this report.
We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and
paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations. Our
primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits,
maturity of certificates of deposit, repayment of borrowings, and dividends to common stockholders.
The most significant component of our daily liquidity position is customer deposits. The attraction and retention of
new deposits depends upon the variety and effectiveness of our customer account products, service and
convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of
some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.
In 2020 the banking industry experienced abundant liquidity driven by pandemic-related government programs such
as PPP and stimulus checks as well as an elevated savings rate system-wide.
Our cash and cash equivalents increased $16.9 million from December 31, 2019. Significant sources of liquidity
during 2020 included $176.9 million in paydowns, maturities and sales of investment securities, an increase in
deposits of $167.8 million, and $40.8 million in net cash provided by operating activities (including $10.7 million in
processing fees received from the SBA for the origination of PPP loans).
Significant uses of liquidity during 2020 were $249.3 million in loan originations and advances, net of principal
collected, $97.5 million in investment securities purchased, $12.5 million in cash dividends paid on common stock to
our shareholders, and $6.9 million in common stock repurchases. Refer to the Consolidated Statement of Cash
Flows in this Form 10-K for additional information on our sources and uses of liquidity. Management anticipates that
our current strong liquidity position and core deposit base are adequate to fund our operations.
Undrawn credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this
report, totaled $604.4 million at December 31, 2020. We expect to fund these commitments to the extent utilized
primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months,
$71.9 million of time deposits will mature. We expect to replace these funds with new deposits. Our emphasis on
local deposits, combined with our liquid investment portfolio, 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 net profits from the previous three fiscal years less the amount of dividends paid during that
period.
for Bancorp are shareholder dividends and ordinary operating
expenses. Bancorp held $5.3 million of cash at December 31, 2020. In January 2021, Bancorp obtained a dividend
distribution from the Bank totaling $30.0 million, which is deemed sufficient to cover Bancorp's operational needs,
share repurchases, repayment of a subordinated debenture and cash dividends to shareholders through the end of
2021. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to
meet its funding requirements for the foreseeable future.
The primary uses of
funds
43
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
Interest income
Interest expense
Net interest income
$ 24,088 $ 25,169 $ 24,997 $ 25,384 $ 25,233 $ 25,332 $ 24,941 $ 24,931
489
603
622
1,265
1,339
1,181
1,152
1,085
23,599
24,566
24,375
24,119
23,894
24,151
23,789
23,846
2020 Quarters Ended
2019 Quarters Ended
(Reversal of) provision for credit losses
on loans
Net interest income after provision for
credit losses
Non-interest income
Non-interest expense
(856)
1,250
2,000
2,200
500
400
—
—
24,455
23,316
22,375
21,919
23,394
23,751
23,789
23,846
1,827
1,790
1,813
3,120
2,318
2,721
2,274
1,771
15,180
15,238
14,141
15,469
13,326
14,200
14,916
15,528
Income before provision for income taxes
11,102
9,868
10,047
Provision for income taxes
2,985
2,377
2,641
9,570
2,342
12,386
12,272
11,147
10,089
3,307
2,824
2,912
2,610
Net income
$
8,117 $
7,491 $
7,406 $
7,228 $
9,079 $
9,448 $
8,235 $
7,479
Net income available to common
stockholders
Net income per common share:
Basic
Diluted
$
8,117 $
7,491 $
7,406 $
7,228 $
9,079 $
9,448 $
8,235 $
7,479
$
$
0.60 $
0.60 $
0.55 $
0.55 $
0.55 $
0.55 $
0.53 $
0.53 $
0.67 $
0.66 $
0.70 $
0.69 $
0.60 $
0.60 $
0.54
0.54
Refer to the Executive Summary section above for a discussion of items that affected the financial results for the
quarter ended December 31, 2020.
ITEM 7A. Quantitative and Qualitative Disclosures 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. Refer to Note 14 to the Consolidated Financial Statements in ITEM 8 of this report.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation
models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement
of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans,
investments, borrowings and deposits as inputs. 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 or take other
actions. At December 31, 2020, interest rate risk was within policy guidelines established by ALCO and the Board.
One set of interest rates modeled and evaluated against flat interest rates is a series of immediate parallel shifts in
the yield curve. These are provided in the following table as an example rather than an expectation of likely interest
rate movements.
44
Table 16 Effect of Interest Rate Change on Net Interest Income (NII)
Immediate Changes in Interest Rates (in basis points)
up 400
up 300
up 200
up 100
down 100
Estimated Change
in NII in Year 1 (as
percent of NII)
Estimated Change
in NII in Year 2 (as
percent of NII)
8.9%
6.7%
4.4%
1.8%
(1.2)%
23.3%
17.6%
11.3%
4.6%
(2.3)%
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 including the
simulations mentioned above. 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, if we choose to pay interest on
certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in
the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may
react differently to changes in market interest rates in terms of both timing and responsiveness to market rate
movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which
interest-bearing deposit rates increase or decrease when market interest rates change. Further, the actual rates
and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied
in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield
curve could produce different results from those presented in the table. Accordingly, the results presented should
not be relied upon as indicative of actual results in the event of changing market interest rates.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Bank of Marin Bancorp
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and subsidiary
(the “Company”) as of December 31, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). We also have
audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of
its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,
based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for
credit losses effective December 31, 2020, due to the adoption of Accounting Standards Codification Topic 326:
Financial Instruments – Credit Losses (“Topic 326”). The Company adopted the new credit loss standard using the
modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in
accordance with previously applicable generally accepted accounting principles. The adoption of the new credit
loss standard and it subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
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 Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. 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.
46
Definition and Limitations of Internal Control Over Financial Reporting
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (1)
relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Allowance for Credit Losses - Loans
As discussed in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses on loans at
December 31, 2020, was $22.9 million on a total loan portfolio of $2.1 billion. The Company adopted the current
expected credit losses standard, and all related amendments as of December 31, 2020, and has an established
process to determine the appropriateness of the allowance for credit losses on loans receivable. The allowance for
credit losses provides an estimate of lifetime expected losses in the loan portfolio. The measurement of expected
credit losses is based on relevant available information, from internal and external sources, relating to past events,
current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.
We identified the allowance for credit losses on loans as a critical audit matter. The principal considerations for our
determination of allowance for credit losses on loans as a critical audit matter are subjectivity of the estimation and
application of forecasted economic conditions, probabilities of default, loss given default, prepayments and
curtailments over the contractual terms of the loan, and qualitative internal and external risk factors used in the
calculation of the allowance for credit losses. The economic forecast component of the allowance for credit losses
on loans is used to compare the conditions that existed during the historical period to current conditions and future
expectations. The probabilities of default and loss given default are used to establish estimated losses at the loan
portfolio segment level. Prepayments and curtailments over the contractual terms of the loans are used to estimate
future cash flows. The qualitative internal and external risk factors are used to adjust for differences in segment-
specific risk characteristics or to reflect the extent to which expected current conditions and reasonable and
supportable forecasts of economic conditions differ from conditions that existed during the historical period included
in the probability of default and loss given default development. Auditing management’s judgements regarding
forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the
contractual terms of the loan, and qualitative internal and external risk factors applied to the allowance for credit
losses involved a high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included:
a. Test the design, implementation, and operating effectiveness of controls related to management’s
calculation of the allowance for credit losses on loans, including controls over the forecasted economic
conditions used, probabilities of default, loss given default, prepayments and curtailments, and qualitative
internal and external risk factors used.
47
b. Obtaining management’s analysis and supporting documentation related to the forecasted economic
conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses on
loans are reasonable and supportable based on the analysis provided by management.
c. Obtaining management’s analysis and supporting documentation related to the probabilities of default, and
loss given default, and testing whether factors used in the calculation of the allowance for credit losses on
loans are reasonable and supportable based on the analysis provided by management.
d. Obtaining management’s analysis and supporting documentation related to prepayments and curtailments,
and testing whether factors used in the calculation of the allowance for credit losses on loans are
reasonable and supportable based on the analysis provided by management.
e. Obtaining management’s analysis and supporting documentation related to the qualitative factors, and
testing whether the environmental and qualitative factors used in the calculation of the allowance for credit
losses on loans are supported by the analysis provided by management.
f.
Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance
for credit losses on loans, as well as testing completeness and accuracy of the data used in the calculation,
application of the forecasted economic conditions, probabilities of default, loss given default, prepayments
and curtailments over the contractual terms of the loan, and factors determined by management and used
in the calculation, and verifying calculations in the allowance for credit losses on loans.
Los Angeles, California
March 15, 2021
We have served as the Company’s auditor since 2004.
48
March 15, 2021
Management's Report on Internal Control over Financial Reporting
Management of Bank of Marin Bancorp and subsidiary, (the "Company") is responsible for establishing and
maintaining adequate internal control over financial reporting. 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 U.S. generally accepted accounting principles
("GAAP"). The 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 Company's assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of management and board of directors; and (3)
provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition,
use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management conducted an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2020, 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, 2020.
The Company's independent registered public accounting firm, Moss Adams LLP, has issued an attestation report
on our internal control over financial reporting, 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
49
2020
2019
$
200,320 $
183,388
109,036
392,351
501,387
137,413
432,260
569,673
2,088,556
1,843,286
(22,874)
(16,677)
2,065,682
1,826,609
4,919
30,140
3,831
25,612
80,035
6,070
30,140
4,684
11,002
75,714
$
2,911,926 $
2,707,280
$
1,354,650 $
1,128,823
183,552
201,507
667,107
97,433
142,329
162,817
804,710
97,810
2,504,249
2,336,489
58
2,777
27,062
19,527
212
2,708
12,615
18,468
2,553,673
2,370,492
—
—
125,905
219,747
12,601
358,253
129,058
203,227
4,503
336,788
$
2,911,926 $
2,707,280
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2020 and 2019
(in thousands, except share data)
Assets
Cash, cash equivalents and restricted cash
Investment securities:
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at December 31, 2020 1)
Available-for-sale, at fair value (net of zero allowance for credit losses at December 31, 2020 1)
Total investment securities
Loans, at amortized cost
Allowance for credit losses
Loans, net of allowance for credit losses 1
Bank premises and equipment, net
Goodwill
Core deposit intangible
Operating lease right-of-use assets
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
Borrowings and other obligations
Subordinated debenture
Operating lease liabilities
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 - 30,000,000 shares;
Issued and outstanding - 13,500,453 and 13,577,008 at December 31, 2020 and 2019, respectively
Retained earnings
Accumulated other comprehensive income, net of taxes
Total stockholders' equity
Total liabilities and stockholders' equity
1 Refer to Note 1, Summary of Accounting Policies, for information on the adoption of ASU 2016-13 in 2020.
The accompanying notes are an integral part of these consolidated financial statements.
50
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2020, 2019 and 2018
(in thousands, except per share amounts)
Interest income
Interest and fees on loans
Interest on investment securities
Interest on federal funds sold and due from banks
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 borrowings and other obligations
Interest on subordinated debentures
Total interest expense
Net interest income
Provision for credit losses on loans
Net interest income after provision for credit losses
Non-interest income
Service charges on deposit accounts
Wealth Management and Trust Services
Debit card interchange fees
Earnings on bank-owned life Insurance, net
Gains on investment securities, net
Dividends on FHLB stock
Merchant interchange fees
Other income
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional services
Depreciation and amortization
Provision for credit losses on unfunded loan commitments
Information technology
Charitable contributions
Amortization of core deposit intangible
Directors' expense
Federal Deposit Insurance Corporation insurance
Other expense
Total non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
1
Net income per common share:1
Basic
Diluted
Weighted average common shares:1
Basic
Diluted
Comprehensive income:
Net income
Other comprehensive income (loss):
2020
2019
2018
$
84,674 $
14,503
461
99,638
84,331 $
14,785
1,321
100,437
186
68
2,009
554
4
158
2,979
96,659
4,594
92,065
1,314
1,851
1,438
973
915
654
239
1,166
8,550
34,393
6,943
3,184
2,181
2,149
1,570
1,050
1,034
853
713
474
5,484
60,028
40,587
10,345
30,242 $
347
70
3,439
595
77
229
4,757
95,680
900
94,780
1,865
1,907
1,586
1,196
55
799
331
1,345
9,084
34,253
6,143
3,717
2,132
2,228
129
1,065
508
887
735
361
5,812
57,970
45,894
11,653
34,241 $
2.24 $
2.22 $
2.51 $
2.48 $
$
$
$
79,527
14,092
1,461
95,080
226
72
1,355
542
2
1,339
3,536
91,544
—
91,544
1,891
1,919
1,561
913
876
959
378
1,642
10,139
33,335
5,976
4,358
3,317
2,143
—
1,023
463
921
700
756
5,274
58,266
43,417
10,795
32,622
2.35
2.33
13,525
13,617
13,620
13,794
13,864
14,029
$
30,242 $
34,241 $
32,622
11,891
11,839
(1,707)
Change in net unrealized gains or losses on available-for-sale securities
Reclassification adjustment for (gains) losses on available-for-sale securities in net
income
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity
Amortization of net unrealized losses on securities transferred from available-for-sale to
held-to-maturity
Other comprehensive income (loss), before tax
Deferred tax expense (benefit)
Other comprehensive income (loss), net of tax
524
11,500
3,402
8,098
38,340 $
1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
Comprehensive income
$
(915)
—
(55)
—
445
12,229
3,624
8,605
42,846 $
79
(278)
516
(1,390)
(412)
(978)
31,644
The accompanying notes are an integral part of these consolidated financial statements.
51
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2020, 2019 and 2018
(in thousands, except share data)
Balance at December 31, 2017
Net income
Other comprehensive loss
Reclassification of stranded tax effects in AOCI
Stock options exercised, net of shares surrendered for cashless
exercises and tax withholdings
Stock issued under employee stock purchase plan
Stock issued under employee stock ownership plan
Restricted stock granted
Restricted stock surrendered for tax withholdings upon vesting
Restricted stock forfeited / cancelled
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock ($0.64 per share) 1
Stock purchased by directors under director stock plan
Stock issued in payment of director fees
Stock repurchased, net of commissions
Balance at December 31, 2018
Net income
Other comprehensive income
Common Stock
Shares1
Amount
Retained
Earnings
13,843,084 $ 143,967 $ 155,544 $
—
—
—
111,714
1,036
29,600
37,040
(1,316)
(12,056)
—
—
—
998
5,470
(171,217)
—
—
—
538
32,622
—
638
—
39
1,173
—
(45)
—
651
1,013
—
37
204
(7,012)
—
—
—
—
—
—
—
(8,860)
—
—
—
13,844,353 $ 140,565 $ 179,944 $
—
—
45,553
—
—
669
34,241
—
—
—
—
—
—
—
—
—
(10,958)
—
—
—
54
1,245
—
(220)
—
495
1,017
—
24
231
(15,022)
1,355
30,075
29,110
(5,240)
(18,333)
—
—
—
591
5,544
(356,000)
Stock options exercised, net of shares surrendered for cashless
exercises and tax withholdings
Stock issued under employee stock purchase plan
Stock issued under employee stock ownership plan
Restricted stock granted
Restricted stock surrendered for tax withholdings upon vesting
Restricted stock forfeited / cancelled
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock ($0.80 per share)
Stock purchased by directors under director stock plan
Stock issued in payment of director fees
Stock repurchased, net of commissions
Balance at December 31, 2019
Net income
Other comprehensive income
Cumulative effect of change in accounting principle ASU 2016-13 2
Stock options exercised, net of shares surrendered for cashless
exercises and tax withholdings
Stock issued under employee stock purchase plan
Stock issued under employee stock ownership plan
Restricted stock granted
Restricted stock surrendered for tax withholdings upon vesting
Restricted stock forfeited / cancelled
Stock-based compensation - stock options
Stock-based compensation - restricted stock
Cash dividends paid on common stock ($0.92 per share)
Stock purchased by directors under director stock plan
Stock issued in payment of director fees
Stock repurchased, net of commissions
Balance at December 31, 2020
1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
2 Refer to Note 1, Summary of Accounting Policies, for information on the adoption of ASU 2016-13 in 2020.
The accompanying notes are an integral part of these consolidated financial statements.
2,392
39,900
29,100
(2,200)
(14,314)
—
—
—
1,146
5,723
(203,709)
72
1,289
—
(73)
—
319
884
—
43
217
(7,208)
—
—
—
—
—
—
—
(12,506)
—
—
—
—
—
—
65,407
30,242
—
(1,216)
—
—
—
—
1,304
13,500,453 $ 125,905 $ 219,747 $
13,577,008 $ 129,058 $ 203,227 $
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
Total
(2,486) $ 297,025
32,622
(978)
—
(978)
(638)
—
538
—
—
—
—
—
—
—
—
—
—
—
39
1,173
—
(45)
—
651
1,013
(8,860)
37
204
(7,012)
(4,102) $ 316,407
34,241
8,605
669
—
8,605
—
—
—
—
—
—
—
—
—
—
—
—
54
1,245
—
(220)
—
495
1,017
(10,958)
24
231
(15,022)
4,503 $ 336,788
30,242
8,098
(1,216)
1,304
—
8,098
—
—
—
—
—
—
—
—
—
—
—
—
—
72
1,289
—
(73)
—
319
884
(12,506)
43
217
(7,208)
12,601 $ 358,253
52
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2020, 2019 and 2018
(in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Provision for credit losses on unfunded loan commitments
Noncash contribution expense to employee stock ownership plan
Noncash director compensation expense
Stock-based compensation expense
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 change in deferred loan origination costs/fees
Gain on sale of investment securities
Depreciation and amortization
Earnings on bank-owned life insurance policies
Net changes in:
Interest receivable and other assets
Interest payable and other liabilities
Total adjustments
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 paydowns/maturities of held-to-maturity securities
Proceeds from paydowns/maturities of available-for-sale securities
Proceeds from sale of Visa Inc. Class B restricted common stock
Loans originated and principal collected, net
Purchase of bank-owned life insurance policies
Cash receipts from bank-owned life insurance policies
Purchase of premises and equipment
Purchase of Federal Home Loan Bank stock
Cash paid for low income housing tax credit investment
Net cash used in investing activities
Cash Flows from Financing Activities:
Net increase in deposits
Proceeds from stock options exercised
Payment of tax withholdings for vesting of restricted stock
Federal Home Loan Bank (repayment) borrowings
Repayment of subordinated debenture including execution costs
Repayment of finance lease obligations
Cash dividends paid on common stock
Stock repurchased, net of commissions
Proceeds from stock issued under employee and director stock purchase plans
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Supplemental disclosure of cash flow information:
Cash paid in interest
Cash paid in income taxes
Supplemental disclosure of noncash investing and financing activities:
2020
2019
2018
$
30,242 $
34,241 $
32,622
4,594
1,570
1,289
301
1,203
853
1,354
(165)
69
5,040
(915)
2,149
(973)
(5,135)
(631)
10,603
40,845
—
(97,544)
33,756
28,144
114,991
—
(249,337)
(941)
—
(981)
(176)
(1,355)
(173,443)
167,760
1,304
(73)
—
—
(172)
(12,506)
(6,898)
115
149,530
16,932
183,388
200,320 $
900
129
1,245
301
1,512
887
1,633
(353)
68
(348)
(55)
2,228
(1,196)
(329)
70
6,692
40,933
(3,549)
(110,934)
66,081
23,005
86,044
—
(77,827)
(2,997)
1,533
(542)
(616)
(952)
(20,754)
161,649
669
(220)
(7,000)
—
(168)
(10,958)
(15,062)
78
128,988
149,167
34,221
183,388 $
2,948 $
13,065 $
4,659 $
12,738 $
11,891 $
1,289 $
(1,216) $
11,839 $
1,245 $
— $
—
—
1,173
227
1,664
921
2,695
(807)
1,025
183
(876)
2,143
(913)
1,148
902
9,485
42,107
(1,988)
(235,873)
16,972
22,891
57,662
956
(84,598)
—
—
(907)
—
(418)
(225,303)
26,170
537
(45)
7,000
(4,137)
—
(8,860)
(6,869)
76
13,872
(169,324)
203,545
34,221
2,599
8,380
(1,707)
1,173
—
$
$
$
$
$
$
Change in net unrealized gain or loss on available-for-sale securities
Stock issued to employee stock ownership plan
Cumulative effect of change in accounting principle ASU 2016-13
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-
maturity
Repurchase of stock not yet settled
Stock issued in payment of director fees
Securities transferred from available-for-sale to held-to-maturity
Subscription in low income housing tax credit investment
516
143
204
27,422
3,000
Restricted cash 1
5,971
1Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco. In response to the COVID-19 pandemic,
the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.
The accompanying notes are an integral part of these consolidated financial statements.
445 $
103 $
231 $
— $
— $
4,806 $
524 $
413 $
217 $
— $
— $
— $
$
$
$
$
$
$
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Nature of Operations - Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts
business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered
commercial bank that 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, Alameda, Contra Costa and San Mateo counties. Besides its headquarters located in
Novato, CA, the Bank operates ten branches in Marin County, two in Napa County, one in San Francisco, five in
Sonoma County, three in Alameda County, and one loan production office in both Contra Costa County and San
Mateo County.
Basis of Presentation - The consolidated financial statements include the accounts of Bancorp and the Bank.
References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes.
Our accounting and reporting policies conform to U.S. generally accepted accounting principles ("GAAP"), general
practice, and regulatory guidance within the banking industry. A summary of our significant policies follows. All
material intercompany transactions have been eliminated. We evaluated subsequent events through the date of
filing with the Securities and Exchange Commission (“SEC”) and determined that, other than the early redemption of
the subordinated debenture mentioned below, there were no subsequent events that require additional recognition
or disclosure.
The NorCal Community Bancorp Trusts I and II, respectively (the "Trusts"), 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. Bancorp's investments
in these Trusts are accounted for under the equity method and included in interest receivable and other assets and
the subordinated debenture and related accrued interest payable are recorded as liabilities in our consolidated
statements of condition. Refer to Note 7, Borrowings and Other Obligations, for detail on the early redemption on
October 7, 2018 of the subordinated debenture due to Trust I and early redemption on March 15, 2021 of the
subordinated debenture due to Trust II.
Accounting Changes and Reclassifications - Certain items in prior financial statements have been reclassified to
conform to the current presentation. In addition, on December 31, 2020, we adopted Accounting Standards Update
(“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments and all applicable amendments as subsequently updated for certain clarifications, targeted relief and
codification improvements. Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the incurred
loss method for measuring credit losses with a current expected credit loss ("CECL") method for financial assets
recorded at amortized cost (i.e., loans originated by us and held-to-maturity investment securities). The previous
incurred loss method included a general allowance on loans for known and inherent losses within the portfolio,
which reflected adjusted historical loss rates and a specific allowance component for impaired loans. The CECL
method requires the measurement of all expected credit losses for financial assets measured at amortized cost and
certain off-balance-sheet credit exposures to consider credit losses expected to be incurred over the life of the
financial asset based on past events, current conditions, and reasonable and supportable forecasts. ASC 326 also
requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses,
as well as the credit quality and underwriting standards. In addition, ASC 326 includes certain changes to the
accounting for available-for-sale investment securities including the requirement to recognize an allowance when
management intends to sell or believes that it is more likely than not they will be required to sell the security before
recovery of its amortized cost.
ASC 326 was effective January 1, 2020. However, in accordance with the accounting relief provisions of the
Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of
the CECL standard to the earlier of the end of the national emergency or December 31, 2020. Therefore, we
adopted this standard using the modified retrospective method for all financial assets measured at amortized cost,
and off-balance-sheet credit exposures, effective October 1, 2020 (the beginning of the first reporting period in
which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained
earnings. Results for reporting periods beginning after September 30, 2020 will be presented under the new
standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon
54
adoption, we recorded a cumulative adjustment to retained earnings, net of taxes, based on economic forecasts and
other assumptions as of December 31, 2019. That adjustment resulted in an increase to our allowance for credit
losses of $1.6 million and an increase to the allowance for unfunded loan commitments of $122 thousand. In
addition, we recognized the remaining difference between the allowance for credit losses calculated under the
CECL model as of December 31, 2020 and the allowance for credit losses calculated under the incurred loss model
as of September 30, 2020 as a reversal of the provision for credit losses and a provision for credit losses on
unfunded loan commitments, as showed in the tables below.
The following tables show the impact to our financial statement line items due to adoption of ASC 326 as of and
during the quarter ended December 31, 2020.
(in thousands)
Impact to allowance for credit losses on loans:
Allowance for credit losses on loans
Retained earnings (cumulative transition adjustment)
Net income (reversal of provision for credit losses on loans)
Impact to allowance for credit losses on unfunded loan commitments:
Allowance for credit losses on unfunded commitments
Retained earnings (cumulative transition adjustment)
Net income (provision for credit losses on unfunded commitments)
Pre-Tax
Increase
(Decrease)
Upon the
Adoption of
CECL
$
$
$
$
$
$
748
(1,604) $
856 $
1,082
(122) $
(960) $
After Tax
Impact of
Adoption of
CECL
Deferred
Tax Effect
474 $
(253) $
(1,130)
603
36 $
284 $
(86)
(676)
The following table shows the impact on the allowance for credit losses due to the transition from the incurred loss
method to the CECL method by loan class.
(in thousands)
Allowance for credits losses on loans:
Commercial and industrial
Real estate:
Commercial owner-occupied
Commercial investor-owned
Construction
Home equity
Other residential
Installment and other consumer loans
Unallocated
Total
Pre-Adoption
Balance at
September 30, 2020
Cumulative
Transition
Adjustment 1
Post Adoption
Adjusted Balance at
October 1, 2020
$
2,525 $
(278) $
2,247
3,135
11,624
860
1,038
1,260
406
1,265
22,113 $
138
1,755
201
(361)
(212)
(125)
486
1,604 $
3,273
13,379
1,061
677
1,048
281
1,751
23,717
$
Allowance for credit losses on unfunded commitments
1,819
1 The cumulative transition adjustment resulted from applying the CECL method, which was based on economic forecasts and other
assumptions as of December 31, 2019. Refer to Note 3, Loans and Allowance for Credit Losses, for more information.
1,697 $
122 $
$
The Bank did not record an allowance for credit losses on available-for-sale or held-to-maturity investment
securities upon the adoption of CECL as the investment portfolio consisted primarily of debt securities explicitly or
implicitly backed by the U.S. government and high credit quality obligations of state and political subdivisions. Refer
to Note 2, Investment Securities, for more information.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant accounting estimates reflected in the consolidated financial statements include the allowance
for credit losses, income taxes, and fair value measurements (including fair values of acquired assets and assumed
liabilities at acquisition dates) as discussed in the Notes herein.
55
Cash, Cash Equivalents and Restricted Cash - include cash, due from banks, federal funds sold and other short-
term investments with maturities of less than three months at the time of purchase. Restricted cash includes
reserve requirements held with the Federal Reserve Bank of San Francisco.
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 taxes, 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 9, Fair Value of Assets and
Liabilities.
Purchase premiums and discounts on investment securities are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method. For certain callable debt securities purchased
at a premium, we amortize the premium to the earliest call date.
Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are
included in non-interest income. The specific identification method is used to calculate realized gains and losses on
sales of securities.
Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value
at the date of transfer. Unrealized holding gains or losses on the dates of the transfer of securities from available-
for-sale to held-to-maturity are included in the balance of accumulated other comprehensive income (loss), net of
tax, in the consolidated balance sheets. These unrealized holding gains or losses on the dates of transfer are
amortized over the remaining life of the securities as yield adjustments in a manner consistent with the amortization
or accretion of the original purchase premium or discount on the associated security.
Allowance for Credit Losses on Investment Securities - The allowance for credit losses on held-to-maturity
securities is a contra-asset valuation account determined in accordance with ASC 326, which is deducted from the
securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net
amount expected to be collected. The allowance is measured on a pooled basis for securities with similar risk
characteristics using historical credit loss information, adjusted for current conditions and reasonable and
supportable forecasts. Securities that are determined to be uncollectible are written off against the allowance.
For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend
to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its
amortized cost basis. Under either of these conditions, the security's amortized cost is written down to fair value
through a charge to previously recognized allowances or earnings, as applicable. For impaired securities that do
not meet these conditions, we assess whether the decline in fair value was due to credit loss or other factors. This
assessment considers, among other things: 1) the extent to which the fair value is less than amortized cost, 2) the
financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating
agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any
anticipated recovery in fair value. If the present value of cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss
component. Any impairment due to non-credit-related factors that has not been recorded through an allowance for
credit losses is recognized in other comprehensive income. The discount rate used in determining the present
value of the expected cash flows is based on the effective interest rate implicit in the security at the date of
purchase.
Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and
available-for-sale securities and included in interest receivable and other assets on the consolidated statements of
condition. Investment securities are placed on non-accrual status when principal or interest is contractually past
due more than ninety days, or management does not expect full payment of principal and interest. We do not
record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off
56
when the investment is placed on non-accrual status. There were no non-accrual investment securities in any of
the years presented in the consolidated financial statements.
Originated Loans - are reported at amortized cost, which is the principal amount outstanding net of deferred fees
(costs), purchase premiums (discounts) and net charge-offs (recoveries). Amortized cost excludes accrued interest,
which is reflected in interest receivable and other assets in the consolidated statements of condition. We do not
measure an allowance for credit losses on accrued interest receivable balances because these balances are written
off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed
below. Interest income is accrued daily using the simple interest method. Fees collected upon loan origination and
certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as
yield adjustments using the interest method or straightline method, as applicable. Upon prepayment or other
disposition of the underlying loans before their contractual maturities, any associated unearned fees or unamortized
costs are recognized.
Acquired Loans - ASC 326 modified the accounting for purchased loans and requires that an allowance for credit
losses be established at the date of acquisition. However, for purchased financial assets with a more-than-
insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the
initial allowance for credit losses is added to the purchase price rather than reported as a provision for credit losses.
Subsequent changes in the allowance for credit losses on PCD assets are recognized through the provision for
credit losses.
Past-Due and Non-Accrual Loan Policy - A loan is considered past due when a payment has not been received
by the contractual due date. Loans are placed on non-accrual status when management believes that there is
substantial doubt as to the collection of principal or interest, generally when they become contractually past due by
90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of
collection. When loans are placed on non-accrual status, any accrued but uncollected interest is reversed from
current-period interest income and the amortization of deferred loan origination fees and costs is suspended.
Interest payments received on nonaccrual loans are either applied against principal or reported as interest income,
according to management’s judgment as to the ultimate collectability of principal. We may return non-accrual loans
to accrual status when one of the following occurs:
•
The borrower has resumed paying the full amount of the principal and interest and we are satisfied with the
borrower's financial position. In order to meet this test, we must have received repayment of all past due
principal and interest, unless the amounts contractually due are reasonably assured of repayment within a
reasonable period of time, and there has been a sustained period of repayment performance (generally, six
consecutive monthly payments), according to the original contractual terms or 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”).
•
The loan has become well secured and is in the process of collection.
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. Overdraft accounts are generally charged off when they exceed 60
days past due.
Troubled Debt Restructured Loans - Our loan portfolio includes certain loans modified in a troubled debt
restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties.
These concessions typically result from our loss mitigation activities and may 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. Additionally, we may remove a loan from TDR designation if it meets all of the following conditions:
•
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;
57
•
•
•
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.
Section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid to Hard-Hit Small
Businesses, Nonprofits, and Venues Act of 2020 ("Economic Aid Act"), provided optional, temporary relief from
evaluating loans that may have been considered TDRs under GAAP. This relief applies to loan modifications
executed between March 1, 2020 and the earlier of 60 days after the national emergency is terminated or January
1, 2022. The Bank elected to apply these temporary accounting provisions to payment relief loans beginning in
March 2020. Accordingly, modifications that met certain criteria of the CARES Act were not categorized as troubled
debt restructurings during 2020.
Collateral Dependent Loans - A loan is collateral dependent when the borrower is experiencing financial difficulty
and repayment is expected to be provided substantially through the sale or operation of the collateral. For collateral
dependent loans, including those for which management determines foreclosure is probable, the allowance for
credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is
expected from the sale of the collateral, less the loan's amortized cost. In determining the fair value, management
considers such information as the appraised value of the collateral, observed and potential future changes in
collateral value, and historical loss experience for loans that were secured by similar collateral. 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 affected the collateral, or if we believe foreclosure is imminent.
Allowance for Credit Losses on Loans ("ACL") - is a valuation account that is deducted from the amortized cost
basis at the balance sheet date to present the net amount of loans expected to be collected. Amortized cost does
not include accrued interest, which management elected to exclude from the estimate of expected credit losses
(refer to the Past-Due and Non-Accrual Loan Policy section above). Management estimates the allowance
quarterly using relevant available information, from internal and external sources, relating to past events, current
conditions, and reasonable and supportable forecasts. Credit loss experience provides the basis for the estimation
of expected credit losses.
The ACL model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans
collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which are
generally comprised of federal regulatory reporting codes (i.e., Call codes). Pooled segments include the following:
•
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
- Commercial real estate loans secured by owner-occupied non-farm nonresidential properties
- Commercial real estate loans secured by other non-farm nonresidential properties
Loans to finance agricultural production and other loans to farmers
Commercial and industrial loans
Loans to individuals for household, family and other personal expenditures (i.e., consumer loans)
•
•
•
• Municipal entities
•
• Other loans (overdraft credit lines)
Non-profit organizations
The DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and
prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the
difference between the amortized cost basis and the present value of the expected cash flows using the loan's
effective rate. We elected to report the change in present values from one reporting period to the next due to the
58
passage of time and changes in the estimate of future expected cash flows through the provision for credit losses,
rather than though interest income.
In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic
drivers that were considered highly correlated to historical Bank or peer loan default experience. As a result,
management chose the California unemployment rate as the primary economic forecast driver for all segments,
except for municipal loans. In addition, the annual percentage change in the California gross domestic product was
used in the commercial and industrial loan segment and the annual percentage change in California retail sales was
used in the owner-occupied and investor-owned commercial real estate segments. For municipal loans, the ACL
model utilized a constant default rate obtained from a nationally recognized default rate study, which is updated
annually. A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk
Index approach. The ACL model incorporates a one-year reasonable and supportable forecast of economic factors,
updated quarterly, which is provided by a well-recognized economics advisory company. For periods beyond the
forecast horizon the economic factors revert to historical averages on a straight-line basis over a one-year period.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments and
curtailments, when appropriate. The pooled loans' contractual loan terms exclude extensions, renewals, and
modifications unless one or more of the following applies: 1) management has a reasonable expectation at the
reporting date that a troubled debt restructuring will be executed with an individual borrower, 2) the extension or
renewal options are included in the original or modified contract, or 3) an existing troubled debt restructuring is
within six months of maturity.
Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and
generally include all non-accrual loans, collateral dependent loans, and certain troubled debt restructured loans and
loans graded substandard or worse as determined by management.
Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in
segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable
and supportable forecasts of economic conditions to differ from the conditions that existed during the historical
period included in the development of PD and LGD. Qualitative internal and external risk factors include, but are
not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
Changes in the nature and volume of the loan portfolio
Changes in the volume and severity of past due loans, the volume of non-accruals loans, and the volume
and severity of adversely classified or graded loans
The existence and effect of individual loan and loan segment concentrations
Changes in lending policies and procedures, including changes in underwriting standards and collection,
charge-off, and recovery practices not considered elsewhere
Changes in the experience, ability, and depth of lending management and other relevant staff
Changes in the quality of our systematic loan review processes
Changes in economic and business conditions, and developments that affect the collectability of the
portfolio
Changes in the value of underlying collateral, where applicable
The effect of other external factors such as legal and regulatory requirements on the level of estimated
credit losses in the portfolio
The effect of acquisitions of other loan portfolios on our infrastructure, including risk associated with
entering new geographic areas as a result of such acquisitions
The presence of specialized lending segments in the portfolio
While we believe we use the best information available to determine the allowance for credit losses, our results of
operations could be significantly affected if circumstances differ substantially from the assumptions used in
determining the allowance. Our ACL model is sensitive to changes in unemployment rate forecasts and certain
other assumptions that could result in material fluctuations in the allowance for credit losses and adversely affect
our financial condition and results of operations.
For further information regarding the allowance for loan losses, see Note 3, Loans and Allowance for Loan Losses.
59
Allowance for Credit Losses on Unfunded Loan 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 losses over a loan's contractual period in the event that a decline in credit quality of the borrower leads to
nonperformance. We record an allowance for losses on unfunded loan commitments at the balance sheet date
based on estimates of probability that these commitments will be drawn upon according to historical utilization
experience of different types of commitments and expected loss severity and loss rates determined for pooled
funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest
payable and other liabilities on the consolidated statements of condition. Adjustments to the allowance for unfunded
commitments are included in non-interest expense as a provision for (or reversal of) the allowance for unfunded
commitments.
Transfers of Financial Assets - We have entered into certain loan 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 2020, 2019 and 2018.
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.
Leases - We account for leases in accordance with ASC 842, Leases. As a result of the adoption of ASU 2016-02
on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $13.4 million, net of
deferred rent and unrecognized lease incentives, operating and finance lease liabilities totaling $15.4 million, and no
cumulative-effect adjustments to retained earnings. Under the standard's transition guidance, we elected the
package of practical expedients, which allowed us to carry forward existing lease classifications under ASC 840,
Leases (previous GAAP), and did not require us to reassess initial direct costs for any existing leases. We elected
the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably
certain to exercise options to extend or terminate the lease). In addition, we made accounting policy elections not to
separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12
months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications.
We lease certain premises under long-term non-cancelable operating leases, most of which include escalation
clauses and one or more options to extend the lease term, and some of which contain lease termination clauses.
Only those renewal and termination options that management determines are reasonably certain of exercising are
included in the calculation of the lease liability. In addition, we lease certain equipment under finance leases. The
equipment finance lease terms do not contain renewal options, bargain purchase options or residual value
guarantees. We did not have any significant short-term leases during the reported periods.
Lease right-of-use assets represent the right to use the underlying asset while lease liabilities represent the present
value of future lease obligations. When calculating the lease liability, because most lease contracts do not contain
an implicit interest rate, we discount lease payments over a lease's expected term based on the collateralized
Federal Home Loan Bank borrowing rate that was commensurate with lease terms and minimum payments at the
lease commencement date. Right-of-use assets for operating leases are amortized over the lease term by amounts
that represent the difference between periodic straight-line lease expense and periodic interest accretion on the
related liability to make lease payments, whereas finance leases are amortized on a straight-line basis over the term
of the lease. Expense recognition for operating leases is recorded on a straight-line basis while expense
recognition for finance leases represents the sum of periodic amortization of the associated right-of-use asset and
the interest accretion on the lease liability. Refer to Note 12, Commitments and Contingencies, for further
information.
60
Business Combinations - Business combinations are accounted for under the acquisition method of accounting in
accordance with ASC 805, Business Combinations. A business is defined as a set of activities and assets that is
both self-sustaining and managed to provide a return to investors and generally has three elements: inputs,
processes and outputs. 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 a business
combination are 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 consolidated statements of operations from the
date of acquisition. Business acquisition-related costs, including conversion and restructuring charges, are
expensed as incurred. If substantially all of an acquisition is made up of one asset or several similar assets, or
without a substantive process that together contributes to the ability to create outputs, the acquisition is accounted
for as an asset acquisition and acquisition costs will be capitalized as part of the assets acquired, rather than
expensed in a business combinations.
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 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 ("CDI") represents the estimated future benefit of deposits related to an acquisition and is booked
separately from the related deposits and evaluated periodically for impairment. The CDI asset is amortized on an
accelerated method over its estimated useful life of ten years. At December 31, 2020, the future estimated
amortization expense for the CDI arising from our past acquisitions is as follows:
(in thousands)
2021
2022
2023
2024
2025 Thereafter
Total
Core deposit intangible amortization
$
818 $
782 $
719 $
422 $
400 $
690 $
3,831
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. If we conclude that it is more likely than not that the fair value
is more than its carrying amount, no impairment is recorded. 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, significant changes in legal factors or in the general business
climate, significant changes in our stock price and market capitalization, unanticipated competition, and an action or
assessment by a regulator. If the fair value of a reporting unit is less than its carrying amount, an impairment
charge for the amount by which the carrying amount exceeds the reporting unit's fair value is recognized. The loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit.
Bank Owned Life Insurance ("BOLI") - The Bank owns life insurance policies on certain key current and former
officers. 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 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. As of December 31,
2020 and 2019 our investment in FHLB stock was carried at cost, as there was no impairment or changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
We periodically evaluate FHLB stock for impairment based on ultimate recovery of par value. FHLB stock is
included as part of interest receivable and other assets on the consolidated statements of condition. 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
61
California. Our ownership percentage in each limited partnership ranges from 1.0% to 3.5%. We account for the
investments in qualified affordable housing tax credit funds using the proportional amortization method, where the
initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received. Low
income housing tax credits and other tax benefits received, net of the amortization of the investment is recognized
as part of income tax 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. We record an
impairment charge if the value of the future tax credits and other tax benefits is less than the carrying value of the
investments.
Employee Stock Ownership Plan (“ESOP”) - We recognize compensation cost for ESOP contributions 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 and
formally approved). In 2020, 2019 and 2018, the Bank only made stock contributions to the ESOP.
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 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 and unvested restricted stock awards, and 3) weighted average
diluted shares. Basic EPS are calculated by dividing net income by the weighted average number of common
62
shares outstanding during each annual 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 year-to-date diluted EPS is a year-to-date weighted average of potentially
dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude
anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would
not reduce EPS under the treasury method. We have two forms of 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. Under the two-class
method, the difference in EPS is nominal for these participating securities.
(in thousands, except per share data)1
Weighted average basic common shares outstanding
Potentially dilutive common shares related to:
Stock options
Unvested restricted stock awards
Weighted average diluted common shares outstanding
Net income
Basic EPS
Diluted EPS
2020
2019
2018
13,525 13,620 13,864
69
23
148
26
136
29
13,617 13,794 14,029
$ 30,242 $ 34,241 $ 32,622
$
$
2.24 $
2.51 $
2.22 $
2.48 $
2.35
2.33
44
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS
1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
148
35
Share-Based Compensation - All share-based payments, including stock options and restricted stock, are
recognized as stock-based compensation expense in the consolidated 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. We
account for forfeitures as they occur. See Note 8, Stockholders' Equity and Stock Option Plans, for further
discussion.
We determine the fair value of stock options at the grant date using a Black-Scholes pricing model that takes into
account the stock price at the grant date, exercise price, expected life of the option, volatility of the underlying stock,
expected dividend yield and risk-free interest rate over the expected life of the option. The expected term of options
granted is derived from historical data on employee exercises 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 Black-Scholes option
valuation model requires the input of highly subjective assumptions, including the expected life of the stock-based
award and stock price volatility. The assumptions used represent management's best estimates based on historical
information, but these estimates involve inherent uncertainties and the application of management's judgment. As a
result, if other assumptions had been used, the recorded stock-based compensation expense could have been
materially different from that recorded in the consolidated financial statements. The fair value of restricted stock is
based on the stock price on the grant date.
We record excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying
disposition of incentive stock options and vesting of restricted stock awards as tax benefits in the consolidated
statements of comprehensive income with a corresponding decrease to current taxes payable. In addition, we
reflect excess tax benefits as an operating activity in the consolidated statements of cash flows.
Cash paid for tax withholdings when shares are surrendered in a cashless stock option exchange is classified as a
financing activity in the consolidated statements of cash flows.
Derivative Financial Instruments and Hedging Activities - Fair Value Hedges - All of our interest rate swap
contracts are designated and qualified as fair value hedges. The terms of our interest rate swap contracts are
closely aligned to the terms of the designated fixed-rate loans. The hedging relationships are tested for
63
effectiveness on a quarterly basis using a qualitative approach. The qualitative analysis includes verification that
there are no changes to the derivative's or hedged item's key terms and conditions and no adverse developments
regarding risk of counterparty default, and validation that we continue to have fair value hedge designation. 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 due to changes in benchmark interest rates 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 positions with the
ones in asset positions.
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 fair value of the related yield maintenance agreements at the
designation date that was recorded in other assets 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 due to changes in benchmark interest rates result in
an insignificant amount recognized in interest income. For further detail, see Note 14, Derivative Financial
Instruments and Hedging Activities.
Revenue Recognition - We utilize the following five-step model for non-financial instrument related revenue that is
in scope for ASC 606, Revenue from Contracts with Customers: 1) identify the contract, 2) identify the performance
obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance
obligations in the contract, and, 5) recognize revenue when (or as) the entity satisfies the performance obligation.
Our main revenue streams in scope for ASC 606 include:
• Wealth Management & Trust ("WM&T") fees - WM&T services include, but are not limited to: customized
investment advisory and management; administrative services such as bill pay and tax reporting; trust
administration, estate settlement, custody and fiduciary services. Performance obligations for investment
advisory and management services are generally satisfied over time. Revenue is recognized monthly
according to a tiered fee schedule based on the client's month-end market value of assets under our
management. WM&T does not earn revenue based on performance or incentives. Costs associated with
WM&T revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of
professional service expenses when incurred.
•
•
Deposit account service charges - Service charges on deposit accounts consist of monthly maintenance
fees, business account analysis fees, business online banking fees, check order charges, and other deposit
account-related fees. Performance obligations for monthly maintenance fees and account analysis fees are
satisfied, and the related revenue recognized, when we complete our performance obligation each month.
Performance obligations related to transaction-based services (such as check orders) are satisfied, and the
related revenue recognized, at a point in time typically when the transaction is completed, except for
business accounts subject to analysis where the transaction-based fees are part of the monthly account
analysis fees.
Debit card interchange fees - We issue debit cards to our consumer and small business customers that
allow them to purchase goods and services from merchants in person, online, or via mobile devices using
funds held in their demand deposit accounts held with us. Debit cards issued to our customers are part of
global electronic payment networks (such as Visa) who pass a portion of the merchant interchange fees to
debit card-issuing member banks like us when our customers make purchases through their networks.
64
Performance obligations for debit card services are satisfied and revenue is recognized daily as the
payment networks process transactions. Because we act in an agent capacity, we recognize network costs
on a net basis with interchange fees in non-interest income.
Advertising Costs - are expensed as incurred. For the years ended December 31, 2020, 2019, and 2018,
advertising costs totaled $769 thousand, $775 thousand, and $666 thousand, respectively.
Comprehensive Income (Loss) - includes net income, changes in the unrealized gains or losses on available-for-
sale investment securities, and amortization of net unrealized gains or losses on securities transferred from
available-for-sale
the consolidated statements of
comprehensive income and as components of stockholders' equity.
to held-to-maturity, net of related
taxes, reported on
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
(i.e., exit price notion) reflecting factors such as a liquidity premium. Securities available-for-sale and derivatives
are recorded at fair value on a recurring basis. Our equity investments that do not have readily determinable fair
values are recorded 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. FHLB stock and Visa
Inc. Class B common stock are carried at cost as of December 31, 2020 and 2019, as there was no impairment or
changes resulting from observable price changes in orderly transactions for an identical or similar investment of the
same issuer. Additionally, from time to time, we may be required to record certain assets and liabilities at fair value
on a non-recurring basis, such as purchased loans and acquired deposits 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 consolidated financial statements.
Other Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC Topic 820): Disclosure
Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU
remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The
modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU
2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal
years. Entities should disclose and describe the range and weighted-average of significant unobservable inputs
used to develop Level 3 fair value measurements. We adopted this ASU prospectively effective January 1, 2020. As
the ASU’s requirements only relate to disclosures, the amendments did not impact our financial condition or results
of operations. Refer to Note 9, Fair Value of Assets and Liabilities, for additional disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (ASC
Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
That is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred to
develop or obtain internal-use software regardless of whether they convey a license to the hosted software. The
accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and
interim periods within those fiscal years. An entity has the option to apply amendments in the ASU either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this
ASU prospectively on January 1, 2020, which did not impact our financial condition and results of operations.
65
Accounting Standards Not Yet Effective
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (ASC Topic 740): Simplifying the Accounting
for Income Taxes. This ASU is intended to reduce the cost and complexity related to accounting for income taxes
by removing certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the
methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for
franchise taxes and enacted changes in tax laws or rates. This ASU is effective for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. As this ASU is
narrow in scope and applicability to us will likely be minimal, we do not expect that the ASU will have a material
impact on our financial condition or results of operations.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (ASC Topic 321), Investments
- Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) - Clarifying
the Interactions between ASC 321, ASC 323, and ASC 815. Among other things, this ASU clarifies that a company
should consider observable transactions that require a company to either apply or discontinue the equity method of
accounting under ASC 323, for the purposes of applying the measurement alternative in accordance with ASC 321.
This ASU is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. ASU No.
2020-01 should be applied prospectively at the beginning of the interim period that includes adoption. We do not
expect that the ASU will have a material impact on our financial condition or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this
ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of
accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional
expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that
reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The
amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose
to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods
varying based on transaction type. We have not elected to apply amendments at this time, however, will assess the
applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its
impact on our financial condition and results of operations.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—
Nonrefundable Fees and Other Costs. This ASU was issued as part of the Board's ongoing project to improve
codification or correct unintended application. This ASU adds clarification to ASU 2017-08, which the Bank early-
adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should
amortize the amount above that which is repayable, to the next call date. This ASU is effective for fiscal years
beginning after December 15, 2020, and interim periods within those fiscal years, on a prospective basis. Early
adoption is not permitted. As this ASU is narrow in scope and for clarification purposes, we do not expect this ASU
will have a material impact on our financial condition and results of operations.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments
in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments
are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December
31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU
(and ASU 2020-04) to us as we continue to monitor guidance for reference rate reform from FASB and its impact on
our financial condition and results of operations.
Note 2: Investment Securities
Our investment securities portfolio consists of obligations of state and political subdivisions, U.S. federal
government agencies such as Government National Mortgage Association ("GNMA") and Small Business
Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs") such as Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC), Federal Farm Credit Banks Funding
Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities ("MBS"/"CMBS")
and collateralized mortgage obligations ("CMOs") issued or guaranteed by the GSEs, as reflected in the following
table.
66
A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as
of December 31, 2020 and December 31, 2019 is presented below.
Held-to-maturity:
(in thousands)
December 31, 2020
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and
FNMA
CMOs issued by FHLMC
CMOs issued by FNMA
SBA-backed securities
Obligations of state and political subdivisions
Amortized
Cost 1
Allowance
for Credit
Losses
Net
Carrying
Amount
Gross Unrealized
Gains
(Losses)
Fair Value
$ 65,579 $
— $ 65,579 $
3,924 $
— $ 69,503
27,201
8,042
6,547
1,667
—
—
—
—
27,201
1,441
8,042
6,547
1,667
363
400
21
—
—
—
28,642
8,405
6,947
1,688
Total held-to-maturity
$ 109,036 $
— $ 109,036 $
6,149 $
— $ 115,185
December 31, 2019
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and
FNMA
CMOs issued by FHLMC
CMOs issued by FNMA
CMOs issued by GNMA
SBA-backed securities
Obligations of state and political subdivisions
80,451
31,477
10,210
3,763
7,999
3,513
Total held-to-maturity
$ 137,413 $
—
—
—
—
80,451
1,018
(144)
81,325
31,477
10,210
3,763
685
282
53
(5)
—
—
32,157
10,492
3,816
7,999
3,513
—
—
— $ 137,413 $
265
75
2,378 $
—
—
8,264
3,588
(149) $ 139,642
1 Amortized cost and fair values exclude accrued interest receivable of $366 thousand and $469 thousand at December 31, 2020 and 2019,
respectively, which is included in interest receivable and other assets in the consolidated statements of condition.
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security
type with each type sharing similar risk characteristics, and considers historical credit loss information that is
adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued
or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and
interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the
U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to
securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit
ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,
(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the
securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit
enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the
comprehensive analysis, no credit losses are expected.
The following table summarizes Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity
securities issued by states and political subdivisions as of December 31, 2020.
(in thousands)
AA
A
Total
Obligations of state and
political subdivisions
$
$
1,461
206
1,667
67
A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as
of December 31, 2020 and December 31, 2019 is presented below.
Available-for-sale:
(in thousands)
December 31, 2020
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA
CMOs issued by FHLMC
CMOs issued by FNMA
CMOs issued by GNMA
SBA-backed securities
Debentures of government- sponsored agencies
Obligations of state and political subdivisions
Total available-for-sale
December 31, 2019
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA
CMOs issued by FHLMC
CMOs issued by FNMA
CMOs issued by GNMA
SBA-backed securities
Debentures of government- sponsored agencies
Obligations of state and political subdivisions
Corporate bonds
Amortized
Cost 1
Gross Unrealized
Allowance
for Credit
Gains
(Losses)
Losses Fair Value
$ 50,686 $
143,267
16,450
6,863
30,941
19,944
104,887
2,530 $
7,925
580
351
1,976
266
5,765
$ 373,038 $ 19,393 $
$ 98,502 $
139,398
22,702
11,719
35,674
48,389
66,042
1,497
1,617 $
3,892
390
42
688
727
1,386
6
— $
(1)
—
—
(55)
(24)
—
(80) $
(48) $
(64)
—
(6)
(76)
(70)
(146)
(1)
— $ 53,216
— 151,191
17,030
—
7,214
—
32,862
—
—
20,186
— 110,652
— $ 392,351
— $ 100,071
— 143,226
23,092
—
11,755
—
36,286
—
49,046
—
67,282
—
1,502
—
Total available-for-sale
$ 423,923 $
8,748 $
(411) $
— $ 432,260
1 Amortized cost and fair value exclude accrued interest receivable of $1.9 million and $1.8 million at December 31, 2020 and 2019,
respectively, which is included in interest receivable and other assets in the consolidated statements of condition.
The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2020 and
2019 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities
have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 2020
December 31, 2019
Held-to-Maturity
Available-for-Sale
Held-to-Maturity
Available-for-Sale
(in thousands)
Within one year
After one but within five years
After five years through ten years
After ten years
Total
$
Fair
Value
Fair
Value
Amortized
Cost
Amortized
Cost
246 $
Fair
Amortized
Value
Cost
250 $ 11,530 $ 11,687 $ 1,807 $ 1,811 $ 6,699 $ 6,706
2,296 48,706 49,619
2,256
52,113 55,872 144,908 154,089 56,221 57,544 208,806 214,277
49,127 51,102 157,572 164,178 77,129 77,991 159,712 161,658
$ 109,036 $ 115,185 $ 373,038 $ 392,351 $ 137,413 $ 139,642 $ 423,923 $ 432,260
7,961 59,028 62,397
Amortized
Cost
Fair
Value
7,550
As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain
securities issued by government sponsored agencies. During 2018, we transferred $27.4 million, from available-for-
sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net
unrealized pre-tax loss of $278 thousand, remained in accumulated other comprehensive income and is amortized
over the remaining life of the securities along with amortization of any prior transfers. Amortization of the net
unrealized pre-tax loss totaled $524 thousand, $445 thousand and $516 thousand in 2020, 2019 and 2018,
respectively. There were no securities transferred from available-for-sale to held-to-maturity at fair value in 2020 or
2019.
68
Sales of investment securities and gross gains and losses are shown in the following table.
(in thousands)
Available-for-sale:
Sales proceeds
Gross realized gains
Gross realized losses
2020
2019
2018
$
$
$
33,756 $
916 $
(1) $
66,081 $
214 $
(159) $
16,972
27
(106)
Pledged investment securities are shown in the following table.
(in thousands)
Pledged to the State of California:
December 31,
2020
December 31,
2019
Secure public deposits in compliance with the Local Agency Security Program
Collateral for trust deposits
Total investment securities pledged to the State of California
$
$
131,051 $
126,598
751
742
131,802 $
127,340
Collateral for Wealth Management and Trust Services ("WMTS") checking account $
629 $
622
Total pledged investment securities
$
132,431 $
127,962
There were 10 and 40 securities in unrealized loss positions at December 31, 2020 and 2019, respectively. Those
securities are summarized and classified according to the duration of the loss period in the tables below.
December 31, 2020
< 12 continuous months
≥ 12 continuous months
Total securities
in a loss position
(in thousands)
Available-for-sale:
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
SBA-backed securities
CMOs issued by FHLMC
Debentures of government-sponsored
agencies
Total
$
$
— $
5,975
3,943
9,918 $
— $
(1)
(24)
(25) $
1,790 $
—
—
1,790 $
(55) $
—
1,790 $
5,975
—
(55) $
3,943
11,708 $
(55)
(1)
(24)
(80)
December 31, 2019
< 12 continuous months
> 12 continuous months
Total securities
in a loss position
(in thousands)
Held-to-maturity:
Fair value
Unrealized
loss
Fair value
Unrealized
loss
Fair value
Unrealized
loss
MBS pass-through securities issued by
FHLMC and FNMA
CMOs issued by FHLMC
Total held-to-maturity
$
14,203 $
—
14,203
(60) $
—
(60)
6,073 $
1,725
7,798
(84) $
(5)
(89)
20,276 $
1,725
22,001
Available-for-sale:
MBS pass-through securities issued by
FHLMC and FNMA
SBA-backed securities
CMOs issued by FHLMC
CMOs issued by GNMA
Debentures of government- sponsored
agencies
Obligations of state and political
subdivisions
Corporate bonds
Total available-for-sale
4,367
9,227
14,918
7,139
25,228
20,579
500
81,958
(34)
(14)
(58)
(6)
(70)
4,464
2,448
2,981
—
(14)
(62)
(6)
—
8,831
11,675
17,899
7,139
—
—
25,228
(145)
(1)
(328)
659
—
10,552
(1)
—
(83)
21,238
500
92,510
Total
$
96,161 $
(388) $
18,350 $
(172) $ 114,511 $
(144)
(5)
(149)
(48)
(76)
(64)
(6)
(70)
(146)
(1)
(411)
(560)
69
As of December 31, 2020, the investment portfolio included 5 investment securities that had been in a continuous
loss position for twelve months or more and 5 investment securities had been in a loss position for less than twelve
months.
Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit
support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government
conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S.
federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal
government, which protects us from credit losses on the contractual cash flows of the securities.
Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our
comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or
credit enhancements.
At December 31, 2020, management determined that it did not intend to sell investment securities with unrealized
losses, and it is not more than likely than not that we will have to sell any of the securities with unrealized losses
before recovery of their amortized cost. Therefore, no allowance for credit losses has been recognized on available
for sale securities in an unrealized loss position as management does not believe any of the securities are impaired
due to reasons of credit quality at December 31, 2020.
Non-Marketable Securities
FHLB Capital Stock
As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by
the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase
our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB
and its members at the $100 per share par value. We held $11.9 million and $11.7 million of FHLB stock included in
other assets on the consolidated statements of condition at December 31, 2020 and 2019, 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. Based on our analysis of FHLB’s
financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at
December 31, 2020 and 2019. On February 18, 2021, FHLB announced a cash dividend for the fourth quarter of
2020 at an annualized dividend rate of 5.00% to be distributed in mid-March 2021. Cash dividends paid on FHLB
capital stock are recorded as non-interest income.
Visa Inc. Class B Common Stock
As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at both December 31,
2020 and 2019. These shares have a carrying value of zero and are restricted from resale to non-member banks of
Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation
escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these
shares lack a readily determinable fair value. When converting this Class B common stock to Class A common
stock based on the conversion rate of 1.6228, as of December 31, 2020 and 2019, and the closing stock price of
Class A shares at those respective dates, the converted value of our shares of Class B common stock would have
been $3.7 million and $3.2 million at December 31, 2020 and 2019, respectively. The conversion rate is subject to
further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As
such, the fair value of these Class B shares can differ significantly from their converted values. In October 2018, we
sold 6,500 shares of our holdings of Visa Inc. Class B common stock to a member bank of Visa U.S.A., resulting in
a pre-tax gain, net of sales commission, of $956 thousand. For further information, refer to Note 12, Commitments
and Contingencies.
Low Income Housing Tax Credits
We invest in low income housing tax credit funds as a limited partner, which totaled $3.5 million and $4.1 million
recorded in other assets as of December 31, 2020 and 2019, respectively. In 2020, we recognized $654 thousand
of low income housing tax credits and other tax benefits, net of $550 thousand of amortization expense of low
income housing tax credit investment, as a component of income tax expense. As of December 31, 2020, our
70
unfunded commitments for these low income housing tax credit funds totaled $821 thousand. We did not recognize
any impairment losses on these low income housing tax credit investments during 2020 or 2019, as the value of the
future tax benefits exceeds the carrying value of the investments.
Note 3: Loans and Allowance for Credit Losses
We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of
December 31, 2020. Certain prior period credit quality disclosures related to impaired loans and individually and
collectively evaluated loans were superseded with the current guidance and have not been included below. Refer to
Note 3, Loans and Allowance for Loan Losses, under Part II, Item 8 of our 2019 Form 10-K for additional prior
period information. Also refer to Note 1, Summary of Significant Accounting Policies, for additional information
regarding the adoption of CECL.
The following table presents the amortized cost of loans by class as of December 31, 2020 and 2019.
(in thousands)
Commercial and industrial
Real estate:
Commercial owner-occupied
Commercial investor-owned
Construction
Home equity
Other residential
Installment and other consumer loans
Total loans, at amortized cost 1
Allowance for credit losses on loans
Total loans, net
December 31,
2020
2019
$
498,408 $
246,687
304,963
961,208
73,046
104,813
123,395
22,723
308,824
946,317
61,095
116,024
136,657
27,682
2,088,556
1,843,286
(22,874)
(16,677)
$
2,065,682 $
1,826,609
1 Amortized cost includes net deferred loan origination (fees) costs of $(4.9) million and $983 thousand at December 31, 2020 and 2019, respectively. Amounts are
also net of unrecognized purchase discounts of $815 thousand and $958 thousand at December 31, 2020 and 2019, respectively. Amortized cost excludes accrued
interest, which totaled $8.8 million and $7.7 million at December 31, 2020 and 2019, respectively, and is included in interest receivable and other assets in the
consolidated statements of condition.
Lending Risks
Concentrations of Credit - Virtually all of our loans are from customers located in California, primarily in Marin,
Alameda, Sonoma, San Francisco, Napa, and Contra Costa counties. Approximately 77% and 88%, of total loans
were secured by real estate at December 31, 2020 and 2019, respectively. The decrease in the percentage
secured by real estate from 2019 to 2020 was due to $291.6 million in unsecured loans guaranteed by the SBA
under the PPP, which are included in commercial and industrial loans at December 31, 2020. At December 31,
2020 and 2019, 61% and 68%, respectively, of our loans were for commercial real estate, 85% and 84% of which
were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).
Commercial and Industrial Loans - 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
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 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
inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide
additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened
economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality of
commercial loans.
Pursuant to the CARES Act, the Bank funded over 1,800 loans to eligible small businesses and non-profit
organizations who participated in the PPP administered by the SBA. PPP loans have terms of two to five years and
earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was
71
netted with loan origination costs and amortized into interest income using the effective yield method over the
contractual life of each loan. The recognition of fees and costs is accelerated when the loan is forgiven by the SBA
and/or paid off prior to maturity. PPP loans are fully guaranteed by the SBA and are expected to be forgiven by the
SBA if they meet the requirements of the program. At December 31, 2020, PPP loans totaling $291.6 million, net of
$5.4 million in unearned fees, were included in commercial and industrial loan balances. The Bank ended its
origination of new PPP loans under the provisions of the CARES Act on June 30, 2020. On June 5, 2020, the PPP
Flexibility Act was signed into law that modified, among other things, rules governing the PPP payment deferral
period. In October 2020, due to the continued delay in the PPP forgiveness process, the Bank modified the first
payment due dates for PPP loans that originated prior to June 5, 2020 and extended the payment deferral period
from six to sixteen months. The extended payment deferral period also extended the time over which the accretion
of PPP net loan origination fees are recognized. In addition, on January 19, 2021, the Bank launched the
application process and began accepting loan requests for the second round of PPP loans as revised by the
Economic Aid Act.
Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment
properties and owner-occupied real estate used for business purposes, 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, a large majority of our loans are
guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general
economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to
carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong
economic incentive to continue to support the commercial real estate projects. As such, we have generally
experienced a relatively low level of loss and delinquencies in this portfolio.
Construction Loans - Construction loans are generally made to developers and builders to finance construction,
renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include
interest reserves that are used for the payment of interest during the development and marketing periods and are
capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the
depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal
balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track
record, and independent appraisals. We monitor all construction projects to determine whether they are on
schedule, completed as planned and in accordance with the approved construction budgets. Significant events can
affect the construction industry, 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 - Consumer loans primarily consist of home equity lines of credit, other residential loans and
floating homes along with a small number of installment loans. Our other residential loans include tenancy-in-
common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer
loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among
consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers,
mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans
commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with
low FICO scores or collateral with high loan-to-value ratios.
Credit Quality Indicators
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and
in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used
by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:
Pass and Watch - 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
72
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
financial condition, managerial weaknesses and/or significant collateral
deficiencies.
the borrower’s
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 we receive new information. Borrowers are
generally required to submit financial information at regular intervals. Typically, 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. In addition, investor commercial real estate borrowers with loans
exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually.
We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency.
We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.
The following table presents the loan portfolio by loan class, origination year and internal risk rating as of
December 31, 2020. Generally, existing term loans that were re-underwritten are reflected in the table in the year of
renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm
loans, are presented by year of origination.
73
(in thousands)
Commercial and industrial:
Pass
Special Mention
Substandard
Term Loans - Amortized Cost by Origination Year
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost
Total
$
308,237 $
22,589 $
12,596 $
4,508 $
5,915 $
34,282 $
85,889 $
474,016
—
2,034
1,318
1,747
—
—
141
—
11
—
49
—
19,092
22,645
—
1,747
Total commercial and industrial
$
309,984 $
24,623 $
13,914 $
4,649 $
5,926 $
34,331 $
104,981 $
498,408
Commercial real estate, owner-occupied:
Pass
Special Mention
Substandard
$
31,029 $
27,581 $
32,603 $
43,843 $
12,768 $
101,014 $
— $
248,838
—
7,147
—
—
11,764
17,062
—
—
7,343
6,208
6,601
—
—
—
42,770
13,355
Total commercial real estate, owner-occupied
$
38,176 $
27,581 $
44,367 $
60,905 $
26,319 $
107,615 $
— $
304,963
Commercial real estate, investor-owned:
Pass
Special Mention
Substandard
$
162,300 $
144,751 $
173,955 $
100,842 $
94,862 $
253,611 $
117 $
930,438
—
—
10,695
—
1,819
—
2,716
4,435
—
1,553
8,124
1,428
—
—
20,638
10,132
Total commercial real estate, investor-owned
$
162,300 $
158,162 $
178,390 $
102,661 $
96,415 $
263,163 $
117 $
961,208
Construction:
Pass
Special Mention
Substandard
Total construction
Home equity:
Pass
Special Mention
Substandard
Total home equity
Other residential:
Pass
Special Mention
Substandard
$
31,654 $
30,150 $
11,242 $
—
—
—
—
—
—
$
31,654 $
30,150 $
11,242 $
$
$
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
—
—
— $
— $
73,046
—
—
—
—
— $
73,046
128 $
694 $
102,614 $
103,436
—
—
—
391
799
187
799
578
128 $
1,085 $
103,600 $
104,813
$
34,447 $
31,079 $
23,673 $
10,574 $
6,035 $
17,587 $
— $
123,395
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total other residential
$
34,447 $
31,079 $
23,673 $
10,574 $
6,035 $
17,587 $
— $
123,395
Installment and other consumer:
Pass
Special Mention
Substandard
Total installment and other consumer
Total loans:
Pass
Total Special Mention
Total Substandard
Totals
$
2,361 $
4,382 $
3,483 $
1,543 $
3,423 $
4,921 $
2,593 $
22,706
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
17
2,361 $
4,382 $
3,483 $
1,560 $
3,423 $
4,921 $
2,593 $
22,723
570,028 $
260,532 $
257,552 $
161,310 $
123,131 $
412,109 $
191,213 $ 1,975,875
— $
12,729 $
13,082 $
19,022 $
7,354 $
14,774 $
19,891 $
86,852
8,894 $
2,716 $
4,435 $
17 $
7,761 $
1,819 $
187 $
25,829
578,922 $
275,977 $
275,069 $
180,349 $
138,246 $
428,702 $
211,291 $ 2,088,556
$
$
$
$
$
The following table summarizes the amortized cost of loans by internally assigned risk grades and loan class at
December 31, 2019.
(in thousands)
December 31, 2019
Pass
Special Mention
Substandard
Total loans
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor-
owned Construction
Home
equity
Other
residential
Installment
and other
consumer
Total
$ 209,213 $ 264,766 $ 945,757 $ 61,095 $ 114,935 $ 136,657 $ 27,538 $ 1,759,961
73,391
—
9,934
—
$ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286
35,016
9,042
37,065
409
750
339
560
—
—
144
—
—
74
The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of
December 31, 2020 and 2019.
(in thousands)
December 31, 2020
30-59 days past due
60-89 days past due
90 days or more past due
Total past due
Current
Total loans 1
Non-accrual loans 2
Non-accrual loans with no allowance
December 31, 2019
30-59 days past due
60-89 days past due
90 days or more past due
Total past due
Current
Total loans 1
Non-accrual loans 2
Non-accrual loans with no allowance
Loan Aging Analysis by Class
Commercial
and industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor-
owned Construction Home equity
Other
residential
Installment
and other
consumer
Total
$
— $
—
—
—
498,408
— $
—
—
—
1,673 $
—
—
1,673
304,963 959,535
— $
—
—
—
— $
—
—
—
73,046 104,539 123,395
274 $
—
—
274
136 $
622
—
758
2,083
622
—
2,705
21,965 2,085,851
$ 498,408 $ 304,963 $ 961,208 $ 73,046 $ 104,813 $ 123,395 $ 22,723 $ 2,088,556
$
$
$
— $
— $
7,147 $
7,147 $
1,610 $
1,610 $
— $
— $
459 $
459 $
— $
— $
17 $
17 $
9,233
9,233
1 $
—
—
1
246,686
— $
—
—
—
1,001 $
—
—
1,001
308,824 945,316
— $
—
—
—
— $
—
—
—
61,095 115,480 136,657
279 $
98
167
544
7 $
1,288
193
167
1,648
27,580 1,841,638
95
—
102
$ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286
$
$
— $
— $
— $
— $
— $
— $
— $
— $
168 $
168 $
— $
— $
58 $
58 $
226
226
1 There were no loans past due more than ninety days accruing interest at December 31, 2020 or 2019.
2 None of the non-accrual loans as of December 31, 2020 or 2019 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for
the years ended December 31, 2020, 2019 or 2018. Accrued interest of $36 thousand was reversed from interest income for loans that were placed on non-accrual
status during the year ended December 31, 2020.
Collateral Dependent Loans
The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual
loans by class at December 31, 2020.
(in thousands)
Commercial real estate, owner-occupied
Commercial real estate, investor-owned
Home equity
Installment and other consumer
Total
Amortized Cost by Collateral Type
Commercial
Real Estate
Residential
Real Estate
Other
Total
Allowance
for Credit
Losses
$
7,147 $
1,610
—
—
— $
—
459
—
— $ 7,147 $
—
—
17
1,610
459
17
$
8,757 $
459 $
17 $ 9,233 $
—
—
—
—
—
No collateral-dependent loans were in process of foreclosure at December 31, 2020. In addition, the weighted
average loan-to-value of collateral dependent loans was approximately 56%.
75
Troubled Debt Restructuring
The following table summarizes the amortized cost of TDR loans by loan class as of December 31, 2020 and 2019.
(in thousands)
Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, investor-owned
Home equity
Other residential
Installment and other consumer
Total 1
$
December 31,
2020
1,021 $
7,147
3,305
281
—
752
2019
1,223
6,998
1,770
251
452
639
$
12,506 $
11,333
1 TDR loans on non-accrual status totaled $7.4 million at December 31, 2020 and $58 thousand at December 31, 2019. Unfunded commitments for TDR loans
totaled $704 thousand as of December 31, 2020.
There were no loans removed from TDR designation during 2020. After meeting all of the conditions specified in
Note 1, there was one commercial loan with an amortized cost of $3 thousand removed from TDR designation
during 2019, and one TIC loan and one home equity loan with amortized costs totaling $247 thousand removed
from TDR designation during 2018.
In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid Act,
we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which
would otherwise be designated as a TDR under existing GAAP. Since the onset of the pandemic, the Bank granted
payment relief for 269 loans that included full payment deferral or interest-only payments on loan balances
exceeding $402.9 million. Of these loans, 222 or $324.2 million have resumed normal payments and 18 loans or
$7.7 million paid off. As of December 31, 2020, 21 borrowing relationships with 29 loans totaling $71.0 million had
requested additional payment relief. We accrue and recognize interest income on loans under payment relief based
on the original contractual interest rates. When payments resume at the end of the relief period, the payments will
generally be applied to accrued interest due until accrued interest is fully paid.
The following table presents information for loans modified in a TDR during the presented periods, including the
number of modified contracts, the amortized cost of the loans prior to modification, and the amortized cost of the
loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a
TDR and subsequently paid-off during the years presented, if applicable.
(dollars in thousands)
TDRs modified during 2020:
Commercial and industrial
Commercial real estate, investor-owned
Home equity
Installment and other consumer
Total
TDRs modified during 2019:
Commercial and industrial
TDRs modified during 2018:
Commercial and industrial
Number of
Contracts
Modified
Pre-Modification
Amortized Cost
Post-Modification
Amortized Cost
Post-Modification
Amortized Cost at
Period End
1 $
1
1
2
5 $
1 $
2 $
170 $
1,553
276
204
2,203 $
162 $
1,553
276
204
2,195 $
298 $
298 $
254 $
245 $
96
1,553
271
201
2,121
150
172
The loans modified during 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and
payment modifications that did not meet the criteria specified by the CARES Act for temporary relief from TDR
accounting. The loan modified during 2019 reflected a maturity extension and interest rate concession. The loans
modified during 2018 were to the same borrower and included maturity extensions and other changes to loan terms.
One consumer loan for $7 thousand, which was designated as a TDR during 2020, was subsequently charged-off in
the fourth quarter. During 2020, 2019 and 2018, there were no other 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.
76
The following tables disclose activity in the allowance for credit losses.
(in thousands)
Year ended December 31, 2020
Beginning balance
Provision - incurred loss method
(Charge-offs)
Recoveries
Allowance for Credit Losses Rollforward
Commercial
and
industrial
Commercial
real estate,
owner-
occupied
Commercial
real estate,
investor-
owned Construction
Home
equity
Other
residential
Installment
and other
consumer Unallocated
Total
$
2,334 $
2,462 $
8,483 $
638 $ 850 $
973 $
284 $
653 $ 16,677
208
(30)
13
673
3,141
219
188
287
122
612
5,450
—
—
—
—
—
3
—
—
—
—
—
—
—
—
(30)
16
Balance at September 30, 2020
2,525
3,135
11,624
860 1,038
1,260
406
1,265 22,113
Impact of CECL adoption
Post adoption balance at
October 1, 2020
(278)
138
1,755
201
(361)
(212)
(125)
486
1,604
2,247
3,273
13,379
1,061
677
1,048
281
1,751 23,717
Provision (reversal) - CECL method
269
(495)
(697)
(Charge-offs)
Recoveries
Ending balance
Year ended December 31, 2019
Beginning balance
Provision (reversal) - incurred loss
method
(Charge-offs)
Recoveries
Ending balance
Year ended December 31, 2018
Beginning balance
Provision (reversal) - incurred loss
method
(Charge-offs)
Recoveries
Ending balance
—
14
—
—
—
—
496
—
—
61
—
—
(50)
—
—
11
(1)
—
(451)
(856)
—
—
(1)
14
$
2,530 $
2,778 $ 12,682 $
1,557 $ 738 $
998 $
291 $
1,300 $ 22,874
$
2,436 $
2,407 $
7,703 $
756 $ 915 $
800 $
310 $
494 $ 15,821
(49)
(75)
22
55
—
—
768
(118)
(65)
173
—
12
—
—
—
—
—
—
(23)
(3)
—
159
—
—
900
(78)
34
$
2,334 $
2,462 $
8,483 $
638 $ 850 $
973 $
284 $
653 $ 16,677
$
3,654 $
2,294 $
6,475 $
681 $ 1,031 $
536 $
378 $
718 $ 15,767
(1,232)
113
1,228
75
(116)
264
(108)
(224)
(3)
17
—
—
—
—
—
—
—
—
—
—
(2)
42
—
—
—
(5)
59
$
2,436 $
2,407 $
7,703 $
756 $ 915 $
800 $
310 $
494 $ 15,821
We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the
optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national
emergency or December 31, 2020. During the first nine months of 2020, we applied the incurred loss method in
determining the allowance for credit losses on loans ("ACL") and recorded a $5.5 million provision for credit losses.
Upon adoption of the CECL standard, we increased the ACL by $748 thousand, which represented the difference
between allowances calculated under the CECL method as of December 31, 2020 and the incurred loss method as
of September 30, 2020. Refer to Note 1, Summary of Significant Accounting Policies, for additional information on
the adoption of CECL.
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying
loans with unpaid principal balances of $1.165 billion and $1.133 billion at December 31, 2020 and 2019,
respectively. In addition, we pledge eligible TIC loans, which totaled $113.6 million and $115.7 million at
December 31, 2020 and 2019, respectively, to secure our borrowing capacity with the Federal Reserve Bank
("FRB"). For additional information , see Note 7, Borrowings.
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 businesses or 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.
77
The following table shows changes in net loans to related parties for each of the three years ended December 31,
2020, 2019 and 2018.
(in thousands)
Balance at beginning of year
Additions
Repayments
Reclassified due to a change in borrower status
Balance at end of year
$
$
2020
8,333 $
—
(1,910)
—
6,423 $
2019
10,635 $
—
(2,320)
18
8,333 $
2018
11,852
863
(2,080)
—
10,635
Undisbursed commitments to related parties totaled $9.1 million and $9.2 million as of December 31, 2020 and
2019, respectively.
Note 4: Bank Premises and Equipment
A summary of Bank premises and equipment follows:
(in thousands)
Leasehold improvements
Furniture and equipment
Subtotal
Accumulated depreciation and amortization
Bank premises and equipment, net
December 31,
2020
14,426 $
11,324
25,750
(20,831)
4,919 $
2019
15,287
11,156
26,443
(20,373)
6,070
$
$
The amount of depreciation and amortization totaled $2.1 million, $2.2 million and $2.1 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
Note 5: Bank Owned Life Insurance
We own life insurance policies on the lives of certain current and former officers designated by the Board of
Directors to fund our employee benefit programs. Death benefits provided under the specific terms of these
insurance policies are estimated to be $91.3 million at December 31, 2020. The benefits to employees'
beneficiaries are limited to each 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, net of surrender charges,
of $43.6 million and $41.6 million at December 31, 2020 and 2019, 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, net of mortality costs and other fees. Income of $973 thousand, $1.2 million and $913
thousand was recognized on these life insurance policies in 2020, 2019 and 2018, respectively. We regularly
monitor the financial information and credit ratings of our insurance carriers to ensure that they are credit worthy
and comply with our policy.
Note 6: Deposits
A stratification of time deposits 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,
2020
28,016 $
38,773
30,644
97,433 $
2019
29,931
39,377
28,502
97,810
$
$
78
Interest on time deposits was $554 thousand, $595 thousand and $542 thousand in 2020, 2019 and 2018,
respectively.
Scheduled maturities of time deposits at December 31, 2020 are presented as follows:
(in thousands)
2021
2022
2023
2024
2025 Thereafter
Total
Scheduled time deposit maturities
$ 71,852 $
9,552 $
6,382 $
4,045 $
5,602 $
— $ 97,433
As of December 31, 2020, $131.1 million in securities 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. In addition, we offer deposits through Reich & Tang
Deposit Networks, LLC, comprised of Demand Deposit MarketplaceSM ("DDM") balances. Through these two
networks 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, ICS and DDM, on behalf of a customer,
we have the option of receiving matching deposits through the network's reciprocal deposit program, or placing
deposits "one-way" for which we receive no matching deposits. We consider the reciprocal deposits to be in-market
deposits as distinguished from traditional out-of-market brokered deposits. The following table shows the
composition of our network deposits at December 31, 2020 and 2019.
(in thousands)
December 31, 2020
December 31, 2019
CDARS
ICS
DDM
$
Total network deposits
$
Reciprocal 1
One-Way 1
Reciprocal 1
7,622 $
—
30,544
38,166 $
2,434 $
110,929
60,000
173,363 $
5,011 $
56,681
41,636
103,328 $
One-Way 1
7,453
27,220
—
34,673
1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet.
The aggregate amount of deposit overdrafts that have been reclassified as loan balances was $219 thousand and
$155 thousand at December 31, 2020 and 2019, respectively.
The Bank accepts deposits from shareholders, board of directors and employees in the normal course of business,
and the terms are comparable to those with non-affiliated parties. The total deposits from board directors and their
businesses, and executive officers were $28.1 million and $39.6 million at December 31, 2020 and 2019,
respectively.
Note 7: Borrowings and Other Obligations
Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight
borrowings totaling $135.0 million and $92.0 million at December 31, 2020 and 2019, respectively. In general,
interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under
these credit facilities at December 31, 2020 and 2019.
Federal Home Loan Bank Borrowings – As of December 31, 2020 and 2019, the Bank had lines of credit with the
FHLB totaling $642.5 million and $648.0 million, respectively, based on eligible collateral of certain loans. There
were no FHLB overnight borrowings at December 31, 2020 and 2019.
Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential
loans. At December 31, 2020 and 2019, the Bank had borrowing capacity under this line totaling $78.7 million and
$80.3 million, respectively, and had no outstanding borrowings with the FRBSF.
Subordinated Debentures - As part of an acquisition, Bancorp assumed two subordinated debentures due to
NorCal Community Bancorp Trusts I and II, established for the sole purpose of issuing trust preferred securities.
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. On October 7, 2018, Bancorp redeemed in full the
79
subordinated debenture due to NorCal Community Bancorp Trust I, resulting in $916 thousand of accelerated
accretion. The Trust II subordinated debenture was recorded at fair value totaling $2.14 million at acquisition date
with a contractual balance of $4.12 million. The difference between the contractual balance and the fair value at
acquisition date is accreted into interest expense over the life of the debenture. Accretion on the subordinated
debentures totaled $69 thousand, $68 thousand (Trust II) and $1.0 million (Trusts I and II) for the years ended
December 31, 2020, 2019 and 2018, respectively. Bancorp has guaranteed, on a subordinated basis, distributions
and other payments due on trust preferred securities totaling $4.0 million issued by Trust II, which have identical
maturity, repricing and payment terms as the subordinated debenture.
The subordinated debenture due to Trust II on March 15, 2036 with interest payable quarterly (repricing quarterly,
based on 3-month LIBOR plus 1.40%, or 1.62% as of December 31, 2020) is redeemable in whole or in part on any
interest payment date. On March 15, 2021, we early redeemed the $2.8 million subordinated debenture due to
Trust II, which carried an average interest rate of 5.68% in 2020. The redemption consisted of $4.1 million principal
balance, accrued interest, and $1.3 million in accelerated purchase discount accretion.
Other Obligations - The Bank leases certain equipment under finance leases, which are included in borrowings
and other obligations in the consolidated statements of condition. Refer to Note 12, Commitments and
Contingencies, for additional information.
Borrowings and other obligations at and for the years ended December 31, 2020, 2019 and 2018 are summarized
as follows:
(dollars in thousands)
FHLB overnight borrowings
Other obligations (finance
leases)
Subordinated debentures 1
2020
Carrying
Value
$ — $
Average
Balance
42
2019
2018
Average
Rate
Average
Balance
0.75 % $ — $ 2,656
Carrying
Value
Average
Rate
Carrying
Value
2.55 % $ 7,000 $
Average
Balance
105
Average
Rate
2.03 %
$
58 $
132
2.62 % $
212 $
279
2.85 % $ — $ —
— %
$ 2,777 $ 2,741
5.68 % $ 2,708 $ 2,673
8.44 % $ 2,640 $ 5,025
26.29 %
1 Subordinated debentures average rate in 2018 included the impact of the $916 thousand accelerated accretion due to early redemption of the
subordinated debenture due to NorCal Community Bancorp Trust I.
Note 8: Stockholders' Equity and Stock Plans
Stock Split
On October 22, 2018, Bancorp announced a two-for-one stock split, which occurred on November 27, 2018. All
share and per share data have been adjusted to reflect the stock split effective November 27, 2018.
Share-Based Awards
On May 12, 2020, our shareholders approved the 2020 Director Stock Plan, replacing and superseding the 2010
Director Stock Plan (collectively "the Plan"). The Plan provides for the payment of director fees in common shares
of Bancorp's common stock and a way for directors to purchase shares at fair market value. Common shares
issued under the Plan shall not exceed an aggregate of 250,000 shares, which includes 205,253 shares rolled over
from the 2010 Plan. During 2020, 2019 and 2018 we issued 5,723, 5,544 and 5,470 shares of common stock,
respectively, for director fees. As of December 31, 2020, 246,141 shares were available for future director fees and
purchases.
The 2017 Employee Stock Purchase Plan ("ESPP") gives our employees an opportunity to purchase Bancorp's
common shares through payroll deductions of between one percent and fifteen percent of their 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. As of December 31, 2020, 380,123 shares were available for future purchases under the ESPP.
Under the 2017 Equity Plan, the Compensation Committee of the Board of Directors has the discretion to
determine, among other things, which employees, advisors and non-employee directors will receive share-based
awards, the number and timing of awards, the vesting schedule for each award, and the type of award to be
80
granted. As of December 31, 2020, there were 940,918 shares available for future grants to employees, advisors
and non-employee directors. Options are issued at an exercise price equal to the fair value of the stock at the date
of grant. Options granted to officers and employees generally vest by one-third on each anniversary of the grant for
three years and expire ten years from the grant date. Options granted to non-employee directors vest immediately
and expire ten years from the grant date. Stock options and restricted stock may be net settled in a cashless
exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the
exercise payment and/or applicable tax withholding requirements. Shares withheld under net settlement
arrangements are available for future grants. The table below depicts the total number of shares, amount, and
weighted average price withheld for cashless exercises in each of the respective years.
Number of shares withheld
Total amount withheld (in thousands)
Weighted-average price
2020
10,001
398 $
39.83 $
$
$
2019
7,795
326 $
41.84 $
2018
46,794
1,698
36.28
Performance-based stock awards (restricted stock) are issued to a selected group of employees under the 2017
Equity Plan. 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 stock option activity for the years ended December 31, 2020, 2019, and 2018 is presented in the
following table. 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 and the exercise prices of the in-the-
money options as of each year-end period presented.
Options outstanding at December 31, 2017
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2018
Exercisable (vested) at December 31, 2018
Options outstanding at December 31, 2018
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2019
Exercisable (vested) at December 31, 2019
Options outstanding at December 31, 2019
Granted
Cancelled, expired or forfeited
Exercised
Options outstanding at December 31, 2020
Exercisable (vested) at December 31, 2020
Weighted
Average
Exercise Price
Aggregate
Intrinsic Value
(in thousands)
7,075
Weighted
Average
Remaining
Contractual
Term
(in years)
5.34
Weighted
Average Grant-
Date Fair
Value
$
7.17
20.42 $
33.97
28.25
13.93
25.01
22.57
25.01
44.01
38.88
16.11
28.01
25.34
28.01
39.18
40.31
22.26
29.92
28.05
3,462
6,910
5,809
6,910
1,247
7,112
6,581
7,112
1,370
2,262
2,254
9.37
6.84
5.85
4.94
5.85
5.50
4.76
5.50
5.12
4.53
Number of
Shares
517,936 $
74,096
(9,140)
(157,192)
425,700
311,050
425,700
53,370
(13,580)
(48,108)
417,382
333,870
417,382
44,632
(17,222)
(73,208)
371,584
315,377
81
The following table summarizes non-vested restricted stock awards and changes during the years ended
December 31, 2020, 2019, and 2018.
Non-vested awards at December 31, 2017
Granted
Vested
Cancelled or forfeited
Non-vested awards at December 31, 2018
Granted
Vested
Cancelled or forfeited
Non-vested awards at December 31, 2019
Granted
Vested
Cancelled or forfeited
Non-vested awards at December 31, 2020
Number of
Shares
91,216 $
37,040
(28,812)
(12,056)
87,388
29,110
(28,099)
(18,333)
70,066
29,100
(23,524)
(14,314)
61,328
Weighted
Average
Grant-Date
Fair Value
28.16
33.58
26.06
27.32
31.26
44.45
27.88
32.34
37.81
40.10
36.35
37.63
39.50
A summary of the options outstanding and exercisable by price range as of December 31, 2020 is presented in the
following table:
Range of Exercise Prices
$10.01 - $20.00
$20.01 - $30.00
$30.01 - $40.00
$40.01 - $50.00
Stock Options Outstanding as of
December 31, 2020
Remaining
Contractual Life (in
years)
1.3 $
3.6 $
6.5 $
8.4 $
Weighted
Average
Exercise Price
19.24
23.92
33.75
42.33
Stock Options
Outstanding
48,962
138,394
108,818
75,410
371,584
Stock Options Exercisable as of
December 31, 2020
Stock Options
Exercisable
48,962 $
138,394 $
97,960 $
30,061 $
315,377
Weighted
Average
Exercise Price
19.24
23.92
33.77
42.84
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, exercise price, and the following assumptions (weighted-average shown).
Risk-free interest rate
Expected dividend yield on common stock
Expected life in years
Expected price volatility
Years ended December 31,
2020
0.91 %
2.38 %
6.1
24.43 %
2019
2.51 %
1.75 %
5.8
22.71 %
2018
2.60 %
1.76 %
5.9
22.47 %
The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the
consolidated statements of comprehensive income over the requisite service period, which is generally the vesting
period, with a corresponding increase in common stock. Stock-based compensation also includes compensation
expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards,
which equals the grant date price, is recorded as compensation expense over the requisite service period with a
corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock
awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the
retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the
award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the
exercisability of the stock options, which are based on the scheduled vesting period. Total compensation expense
for stock options and restricted stock awards was $1.2 million, $1.5 million, and $1.7 million during 2020, 2019, and
2018, respectively, and the total recognized deferred tax benefits related thereto were $341 thousand, $389
thousand, and $404 thousand, respectively.
82
As of December 31, 2020, there was $652 thousand of total unrecognized compensation expense related to non-
vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average
period of approximately 1.7 years. The total grant-date fair value of stock options vested during the years ended
December 31, 2020, 2019, and 2018 was $484 thousand, $473 thousand, and $543 thousand, respectively. The
total grant-date fair value of restricted stock awards vested was $1.2 million during both 2020 and 2019, and $967
thousand during 2018.
We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the
disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits
(expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to
current taxes payable. In 2020, 2019, and 2018 we recognized $120 thousand, $145 thousand, and $484
thousand, respectively, in excess tax benefits recorded as a reduction to income tax expense related to these types
of transactions. The tax benefits realized from disqualifying dispositions of incentive stock options were recognized
in tax expense to the extent of the book compensation cost recorded.
Dividends
Presented below is a summary of cash dividends paid in 2020, 2019 and 2018 to common shareholders, recorded
as a reduction from retained earnings. On January 22, 2021, the Board of Directors declared a $0.23 per share
cash dividend, paid February 12, 2021 to the shareholders of record at the close of business on February 5, 2021.
(in thousands except per share data)
Cash dividends to common stockholders
Cash dividends per common share
Years ended December 31,
2020
12,506 $
0.92 $
2019
10,958 $
0.80 $
$
$
2018
8,860
0.64
The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of
common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in
the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable.
Dividends on forfeited awards are included in stock-based compensation expense.
Under the California Corporations Code, payment of dividends by Bancorp to its shareholders 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, 2020, Bancorp's retained earnings and amount of
total assets that exceeds total liabilities were $219.7 million and $358.3 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 $30.6 million of the Bank's retained earnings balance was available for
payment of dividends to Bancorp as of December 31, 2020. Bancorp held $5.3 million in cash at December 31,
2020. This cash, combined with the $30.6 million dividends available to be distributed from the Bank, is considered
adequate to cover Bancorp's estimated operational needs, cash dividends to shareholders in 2021, and the Share
Repurchase Program discussed below.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
We adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified
$638 thousand from AOCI to retained earnings. This amount represented the stranded income tax effects related to
the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs
Act of 2017.
Preferred Stock and Shareholder Rights Plan
On July 6, 2017, Bancorp adopted a new shareholder rights agreement (“Rights Agreement”), which replaced the
existing Rights Agreement that expired on July 23, 2017. The Rights Agreement, which expires on July 23, 2022, is
designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders. The
83
Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10% of the outstanding
common shares. Currently, each right entitles the registered holder to purchase from Bancorp one two-hundredth of
a share of Series A Junior Participating Preferred Stock, no par value, of Bancorp at an initial price of $90 per one
one-hundredth of a preferred share, subject to adjustment upon the occurrence of certain events. As of
December 31, 2020, Bancorp was authorized to issue five million shares of preferred stock with no par value, one
million shares of which have been designated as Series A Junior Participating 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, the Board of Directors may 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.
Share Repurchase Program
On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under
which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019.
Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.
After expiration of this Share Repurchase Program, our new Share Repurchase Program began on March 1, 2020.
The new program was approved on January 24, 2020 by Bancorp Board of Directors, allowing Bancorp to
repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. The new share
repurchase program, which began on March 1, 2020, was suspended by the Board of Directors on March 20, 2020
in response to the COVID-19 pandemic. The program was reactivated by the Board of Directors on October 23,
2020.
Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means
such as open market transactions, including block purchases, and privately negotiated transactions. The number of
shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's
discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along
with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does
not obligate Bancorp to acquire any specific number of shares of its common stock.
As part of the Share Repurchase Program, Bancorp entered into a trading plan adopted in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be
repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading
restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market
volume and timing restrictions.
Shares repurchased pursuant to our common stock share repurchase programs during 2020, 2019, and 2018, were
as follows.
Cumulative
Totals
(dollars in millions)
730,926
Total number of common shares repurchased
Total purchase price of common shares repurchased 2
29.2
1 On February 28, 2020, the 2018 Share Repurchase Program expired with approximately $1.5 million remaining from the $25.0 million
authorized for repurchases.
2 Total purchase price includes commission costs.
2020 1
203,709
2019
356,000
2018
171,217
15.0 $
7.2 $
7.0 $
$
Note 9: 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 into 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.
84
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. No such
transfers occurred in the years presented.
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, 2020
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)
Measurement
Categories:
Changes in
Fair Value
Recorded In1
Mortgage-backed securities and collateralized
mortgage obligations issued by U.S. government-
sponsored agencies
SBA-backed securities
Debentures of government sponsored agencies
$ 228,651 $
$
$
32,862 $
20,186 $
Obligations of state and political subdivisions
$ 110,652 $
Derivative financial liabilities (interest rate contracts)
$
1,912 $
— $
— $
— $
— $
— $
228,651 $
36,286 $
20,186 $
110,652 $
1,912 $
December 31, 2019
Securities available for sale:
Mortgage-backed securities and collateralized
mortgage obligations issued by U.S. government-
sponsored agencies
SBA-backed securities
Debentures of government sponsored agencies
Obligations of state and political subdivisions
Corporate bonds
Derivative financial liabilities (interest rate contracts)
1Other comprehensive income ("OCI") or net income ("NI").
$ 278,144 $
$
$
$
$
$
36,286 $
49,046 $
67,282 $
1,502 $
1,178 $
— $
— $
— $
— $
— $
— $
278,144 $
36,286 $
49,046 $
67,282 $
1,502 $
1,178 $
—
—
—
—
—
—
—
—
—
—
—
OCI
OCI
OCI
OCI
NI
OCI
OCI
OCI
OCI
OCI
NI
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices
(Level 1) are used to determine the fair value of available-for-sale securities. If quoted market prices are not
available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation
techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-
quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and
credit spreads (Level 2). Level 2 securities include obligations of state and political subdivisions, U.S. agencies or
government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued,
privately-issued collateralized mortgage obligations and corporate bonds. As of December 31, 2020 and 2019,
there were no Level 1 or Level 3 securities.
Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment, and
we did not record any write-downs during 2020 or 2019. Fair value of held-to-maturity securities is determined using
the same techniques discussed above for available-for-sale securities.
85
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 risk in determining the fair value of the derivatives. Level 2 inputs for the valuations
are limited to observable market prices for London Interbank Offered Rate (“LIBOR”) 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 OIS curves 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 the Bank. For further discussion on
our methodology in valuing our derivative financial instruments, refer to Note 14, Derivative Financial Instruments
and Hedging Activities.
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 that are collateral dependent and other real estate owned ("OREO"). As
of December 31, 2020 and 2019, we did not carry any assets measured at fair value on a non-recurring basis.
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of December 31, 2020 and 2019,
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. Further, we have not disclosed the fair value of financial instruments specifically excluded from
disclosure requirements such as BOLI and non-maturity deposit liabilities. Additionally, we held shares of FHLB
stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting
from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as
of December 31, 2020 and 2019. See further discussion on values within Note 2, Investment Securities, above.
(in thousands)
Financial assets (recorded at amortized cost)
December 31, 2020
December 31, 2019
Carrying
Amounts
Fair Value
Fair Value
Hierarchy
Carrying
Amounts
Fair Value
Fair Value
Hierarchy
Cash and cash equivalents
$ 200,320 $
200,320
Level 1 $ 183,388 $ 183,388
Investment securities held-to-maturity
109,036
115,185
Level 2
137,413
139,642
Loans, net
Interest receivable
2,065,682
2,089,192
Level 3 1,826,609 1,839,666
10,922
10,922
Level 2
7,732
7,732
Financial liabilities (recorded at amortized cost)
Time deposits
Subordinated debenture
Interest payable
97,433
97,769
Level 2
97,810
97,859
2,777
3,115
Level 3
2,708
97
97
Level 2
134
3,182
134
Level 1
Level 2
Level 3
Level 2
Level 2
Level 3
Level 2
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, 2020 and 2019.
86
Note 10: Benefit Plans
Deferred Compensation Plan
We established a Deferred Compensation Plan which 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. 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 was 4.75% on January 1, 2020 and 5.50% on January 1, 2019. Our deferred compensation obligation
totaled $4.7 million and $4.4 million at December 31, 2020 and 2019, respectively, and is included in interest
payable and other liabilities. A similar Deferred Director Fee Plan, which allows members of the Board of Directors
to defer the cash portion of their director compensation, went into effect on January 1, 2021, and the first deferral of
their fees will be in July 2021.
401(k) Defined Contribution Plan
Our 401(k) Defined Contribution Plan, which includes a Roth 401(k) option (the “401(k) Plan”), 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. The Bank provides employer-match of 70% of each participant's
contribution, with a maximum of $5 thousand of matching contribution per participant per year. Employer matching
contributions to the 401(k) Plan vest at a rate of 20% per year over five years, per plan provisions. Employer
contributions totaled $929 thousand, $874 thousand and $851 thousand for the years ended December 31, 2020,
2019 and 2018, respectively and are recorded as part of salaries and benefits expense.
Employee Stock Ownership Plan
Our Employee Stock Ownership Plan (the “Plan”) is also available to all employees under the same eligibility criteria
of the 401(k) Plan, while employee contribution is not permitted. 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. For all participants, employer
contributions vest over a five year service period, per plan provisions. After five years of service, all employer
contributions vest immediately.
Bancorp issued shares of common stock, contributed them to the ESOP and recognized expenses of $1.3 million in
2020 and $1.2 million in both 2019 and 2018, based on the quoted market price on the date of contribution. 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 are included in salaries and benefits expense.
Salary Continuation Plan
A Salary Continuation Plan was established for a select group of executive management, who, upon retirement, will
receive twenty-five percent of their estimated salary at retirement as salary continuation benefit payments that are
fixed and will be made between seven to fifteen years, depending on the executives' service period at the Bank.
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.
As part of the acquisition of Bank of Napa in November 2017, we assumed the salary continuation agreements for
four former executive officers of Bank of Napa, under which, fixed annual retirement benefit payments will be made
for ten years beginning the first day of the month following the executive reaching the age of 65. At December 31,
2020 and 2019, respectively, our liability under the Salary Continuation Plan was $3.2 million and $3.0 million
recorded in interest payable and other liabilities.
87
Note 11: 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 tax provision
Deferred tax benefit
Federal
State
Total deferred tax provision
Total income tax provision
2020
2019
2018
$
$
7,108 $
4,895
12,003
(964)
(694)
(1,658)
10,345 $
7,838 $
5,183
13,021
(907)
(461)
(1,368)
11,653 $
7,289
4,722
12,011
(898)
(318)
(1,216)
10,795
The following table shows the tax effect of our cumulative temporary differences as of December 31:
(in thousands)
Deferred tax assets:
Operating and finance lease liabilities
Allowance for credit losses on loans and unfunded loan commitments
Deferred compensation plan and salary continuation plan
Net operating loss carryforwards
Accrued but unpaid expenses
State franchise tax
Stock-based compensation
Depreciation and disposals on premises and equipment
Fair value adjustment on acquired loans
Interest received on non-accrual loans
Other
Total gross deferred tax assets
Deferred tax liabilities:
Operating and finance lease right-of-use assets
Net unrealized gains on securities available-for-sale
Deferred loan origination costs and fees
Core deposit intangible assets
Unaccreted discount on subordinated debenture
Accretion on investment securities
Other
Total gross deferred tax liabilities
Net deferred tax assets
2020
2019
$
8,018 $
7,584
2,343
1,660
1,103
1,017
658
635
254
23
100
23,395
(7,589)
(5,237)
(1,945)
(1,133)
(398)
(33)
(132)
(16,467)
$
6,928 $
3,792
5,252
2,188
1,914
1,067
1,015
623
562
299
12
154
16,878
(3,314)
(1,738)
(1,619)
(1,385)
(418)
(70)
(172)
(8,716)
8,162
As of December 31, 2020, federal and California net operating loss carryforwards ("NOLs") of $1.5 million and $15.7
million, respectively, corresponded to the total $1.7 million deferred tax asset above. If not fully utilized, the federal
NOLs will begin to expire in 2031, and the California NOLs will begin to expire in 2029. 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 valuation allowance has been established as of December 31,
2020 or 2019.
88
The effective tax rate for 2020, 2019 and 2018 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 and qualified zone academy bond tax credits
Stock-based compensation and excess tax benefits
Other
Effective Tax Rate
2020
21.0 %
8.1 %
(2.4) %
(0.5) %
(0.5) %
(0.2) %
— %
25.5 %
2019
21.0 %
8.2 %
(1.8) %
(0.6) %
(0.4) %
(0.1) %
(0.9) %
25.4 %
2018
21.0 %
8.0 %
(2.4) %
(0.4) %
(0.5) %
(0.6) %
(0.2) %
24.9 %
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. We are
no longer subject to examinations by tax authorities for years before 2017 for federal income tax and before 2016
for California. At December 31, 2020 and 2019, there were no unrecognized tax benefits, and neither the Bank nor
Bancorp had accruals for interest and penalties related to unrecognized tax benefits.
Note 12: Commitments and Contingencies
Leases
We lease premises under long-term non-cancelable operating leases with remaining terms of approximately 6
months to 12 years, most of which include escalation clauses and one or more options to extend the lease term,
and some of which contain lease termination clauses. Lease terms may include certain renewal options that were
considered reasonably certain to be exercised.
We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance
leases do not contain renewal options, bargain purchase options or residual value guarantees.
The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of
December 31, 2020 and 2019.
(in thousands)
Operating leases:
Operating lease right-of-use assets
Operating lease liabilities
Finance leases:
Finance lease right-of-use assets
Accumulated amortization
Finance lease right-of-use assets, net1
Finance lease liabilities2
1 Included in premises and equipment in the consolidated statements of condition.
2 Included in borrowings and other obligations in the consolidated statements of condition.
December 31, 2020 December 31, 2019
$
$
$
$
$
25,612 $
27,062 $
11,002
12,615
365 $
(307)
58 $
58 $
379
(170)
209
212
89
The following table shows supplemental disclosures of noncash investing and financing activities for the years
ended December 31, 2020 and 2019.
(in thousands)
Right-of-use assets obtained in exchange for operating lease liabilities
Right-of-use assets obtained in exchange for finance lease liabilities
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating
lease right-of-use assets upon adoption of ASC 842
2020
2019
$ 18,633 $
1,661
$
$
18 $
31
— $
1,967
There were no lease-related noncash investing and financing activities for the year ended December 31, 2018.
The following table shows components of operating and finance lease cost for the years ended December 31, 2020
and 2019.
(in thousands)
Operating lease cost1
Variable lease cost
Total operating lease cost
Finance lease cost:
Amortization of right-of-use assets2
Interest on finance lease liabilities3
Total finance lease cost
$
$
$
$
Total lease cost
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.
$
2020
2019
4,498 $
5
4,503 $
169 $
3
172 $
4,675 $
4,144
—
4,144
172
8
180
4,324
Operating lease rent expense totaled $4.6 million for the year ended December 31, 2018, as disclosed prior to the
adoption of ASC 842 in 2019.
The following table shows the future minimum lease payments, weighted average remaining lease terms, and
weighted average discount rates under operating and finance lease arrangements as of December 31, 2020.
(in thousands)
Year
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Amounts representing interest (present value discount)
Present value of net minimum lease payments (lease liability)
Weighted average remaining term (in years)
Weighted average discount rate
Litigation Matters
December 31, 2020
Operating
Leases
Finance
Leases
$ 4,612
$
4,424
4,004
3,302
2,877
9,869
29,088
(2,026)
$ 27,062
$
42
13
4
—
—
—
59
(1)
58
7.8
1.80 %
1.4
2.35 %
Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's
management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has
90
recently been a party that will have a material adverse effect on the financial condition or results of operations of
Bancorp or the Bank.
The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A.
("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees
("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer
upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for
settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan,
when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock
to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by
Visa's member banks like us.
In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs
representing a class of U.S. retailers. The escrow balance of $894 thousand as of December 31, 2020, combined
with funds previously deposited with the court, are expected to cover the settlement payment obligations.
The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa
Class A common stock, as discussed above and in Note 2, Investment Securities. The final conversion rate is
subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain.
Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve
the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from
individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and
the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are
required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any
contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses
to be remote. For further information, including a discussion of a reduction to our holdings of Class B Visa shares,
refer to Note 2, Investment Securities.
Note 13: 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 the Federal Reserve Bank and other high credit quality financial institutions, periodically monitor
their credit worthiness and limit the amount of credit exposure to any one institution according to regulations.
Concentrations of credit risk with respect to investment securities primarily related to the U.S. government and
GSEs, which accounted for $389.1 million, or 78% of our total investment portfolio at December 31, 2020 and
$497.4 million, or 87% at December 31, 2019. Our largest investment security issued by a non-GSE issuer
accounted for approximately 3% of our total investment portfolio at December 31, 2020, and 1% at December 31,
2019.
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
3% of loans held in the portfolio. The largest loan concentration group by industry of the borrowers is real estate,
which accounts for 76% and 83% of our loan portfolio at December 31, 2020 and 2019, respectively.
Note 14: Derivative Financial Instruments and Hedging Activities
We 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
91
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.
Our credit exposure, if any, on interest rate swap asset positions is limited to the fair 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.
As of December 31, 2020, we had four interest rate swap agreements, which are scheduled to mature in June 2031,
October 2031, July 2032 and October 2037. In December 2020, one interest rate swap, scheduled to mature in
August 2037, was terminated as the hedged loan was paid off. All of our derivatives are accounted for as fair value
hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans.
Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $11
thousand and $6 thousand as of December 31, 2020 and 2019, respectively. Information on our derivatives follows:
(in thousands)
Fair value hedges:
Asset derivatives
Liability derivatives
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
Interest rate contracts notional amount
Interest rate contracts fair value 1
— $
1 Refer to Note 9, Fair Value of Assets and Liabilities, for valuation methodology.
— $
$
$
— $
— $
13,991 $
1,912 $
16,956
1,178
The following table presents the carrying amount associated cumulative basis adjustment related to the application
of fair value hedge accounting that is included in the carrying amount of hedged assets as of December 31, 2020
and 2019:
(in thousands)
Loans
December 31, 2020
December 31, 2019
December 31, 2020
December 31, 2019
$
15,745 $
17,900 $
1,753 $
944
Carrying Amounts of Hedged Assets
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Amount of the Hedged Loans
The following table presents the net gains (losses) recognized in interest income on loans on the consolidated
statements of comprehensive income related to our derivatives designated as fair value hedges:
(in thousands)
Interest and fees on loans 1
(Decrease) increase in value of designated interest rate swaps due to LIBOR
interest rate movements
$
$
Payment on interest rate swaps
Increase (decrease) in value of hedged loans
Decrease in value of yield maintenance agreement
Years ended December 31,
2020
2019
2018
84,674 $
84,331 $
79,527
(734) $
(964) $
(360)
809
(12)
(90)
938
(13)
452
(149)
(425)
(14)
(136)
Net losses on fair value hedging derivatives recognized in interest income
1 Represents the income line item in the statements of comprehensive income in which the effects of fair value hedges are recorded.
(297) $
(129) $
$
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.
92
Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
Offsetting of Financial Liabilities and Derivative Liabilities
Gross Amounts Not Offset in the
Statements of Condition
(in thousands)
Gross Amounts
of Recognized
Liabilities1
Gross Amounts
Offset in the
Statements of
Condition
Net Amounts of
Liabilities Presented
in the Statements of
Condition1
Financial
Instruments
Cash Collateral
Pledged
Net Amount
December 31, 2020
Derivatives by Counterparty:
Counterparty A
December 31, 2019
Derivatives by Counterparty:
Counterparty A
$
$
1,912 $
— $
1,912 $
—
(1,912) $
1,178 $
— $
1,178 $
—
(1,178) $
—
—
1 Amounts exclude accrued interest on swaps.
Note 15: Regulatory Matters
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements as set forth in the following tables 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.
Management reviews capital ratios 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 to be considered a well-capitalized bank holding company. In
addition, 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, 2020. 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 for prompt corrective action purposes.
In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank
Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion. As a result, Bancorp was not
subject to separate minimum capital requirements as of December 31, 2020 and 2019. However, we disclosed
comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been
subject to the same minimum capital requirements in 2020 and 2019.
The Bancorp’s and Bank's capital adequacy ratios as of December 31, 2020 and 2019 are presented in the
following tables. Bancorp's Tier 1 capital includes the subordinated debenture, which is not included at the Bank
level.
93
Ratio to be a Well
Capitalized Bank Holding
Company
Ratio
Actual Ratio
Adequately Capitalized
Threshold 1
Capital Ratios for Bancorp
(dollars in thousands)
Amount
December 31, 2020
$ 339,544
Total Capital (to risk-weighted assets)
$ 313,891
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
$ 313,891
Common Equity Tier 1 (to risk-weighted assets) $ 311,114
December 31, 2019
$ 319,317
Total Capital (to risk-weighted assets)
≥ 10.00 %
$ 301,553
Tier 1 Capital (to risk-weighted assets)
≥ 8.00 %
Tier 1 Capital (to average assets)
$ 301,553
≥ 5.00 %
≥ 6.50 %
Common Equity Tier 1 (to risk-weighted assets) $ 298,845
1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1,
2019.
Amount
≥ 10.50 % ≥ $ 211,802
≥ 8.50 % ≥ $ 169,442
≥ 4.00 % ≥ $ 145,280
≥ 7.00 % ≥ $ 137,672
Amount
16.03 % ≥ $ 222,393
14.82 % ≥ $ 180,032
10.80 % ≥ $ 116,224
14.69 % ≥ $ 148,262
≥ 10.50 % ≥ $ 211,838
≥ 8.50 % ≥ $ 169,471
≥ 4.00 % ≥ $ 129,361
≥ 7.00 % ≥ $ 137,695
15.07 % ≥ $ 222,430
14.24 % ≥ $ 180,063
11.66 % ≥ $ 103,489
14.11 % ≥ $ 148,287
Ratio
≥ 10.00 %
≥ 8.00 %
≥ 5.00 %
≥ 6.50 %
Ratio
Actual Ratio
Capital Ratios for the Bank
(dollars in thousands)
Amount
December 31, 2020
$ 334,686
Total Capital (to risk-weighted assets)
$ 309,033
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
$ 309,033
Common Equity Tier 1 (to risk-weighted assets) $ 309,033
December 31, 2019
$ 309,875
Total Capital (to risk-weighted assets)
$ 292,111
Tier 1 Capital (to risk-weighted assets)
Tier 1 Capital (to average assets)
$ 292,111
Common Equity Tier 1 (to risk-weighted assets) $ 292,111
Adequately Capitalized
Threshold 1
Ratio to be Well
Capitalized under Prompt
Corrective Action
Provisions
Ratio
Amount
15.80 % ≥ $ 222,391
14.59 % ≥ $ 180,031
10.64 % ≥ $ 116,224
14.59 % ≥ $ 148,261
Ratio
Amount
≥ 10.50 % ≥ $ 211,801
≥ 8.50 % ≥ $ 169,441
≥ 4.00 % ≥ $ 145,280
≥ 7.00 % ≥ $ 137,671
Ratio
≥ 10.00 %
≥ 8.00 %
≥ 5.00 %
≥ 6.50 %
14.63 % ≥ $ 222,437
13.79 % ≥ $ 180,068
11.29 % ≥ $ 103,488
13.79 % ≥ $ 148,291
≥ 10.50 % ≥ $ 211,844
≥ 8.50 % ≥ $ 169,476
≥ 4.00 % ≥ $ 129,360
≥ 7.00 % ≥ $ 137,699
≥ 10.00 %
≥ 8.00 %
≥ 5.00 %
≥ 6.50 %
1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1,
2019.
Note 16: 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. Because various commitments will expire without being fully
drawn, the total commitment amount does not necessarily represent future cash requirements.
Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by
the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral
obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types
pledged may include accounts receivable, inventory, other personal property and real property.
The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the
consolidated statements of condition are as follows:
(in thousands)
Commercial lines of credit
Revolving home equity lines
Undisbursed construction loans
Personal and other lines of credit
Standby letters of credit
December 31, 2020
December 31, 2019
$
297,898 $
191,969
101,307
10,611
2,657
287,533
189,035
41,033
9,567
1,964
Total unfunded loan commitments and standby letters of credit
$
604,442 $
529,132
94
As of December 31, 2020, approximately 35% of the commitments expire in 2021, 54% expire between 2022 and
2028 and 11% expire thereafter.
We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the
optional accounting relief provisions of the CARES Act (refer to Note 1, Summary of Significant Accounting Policies
and Note 3, Loans and Allowance for Credit Losses for additional information). During the first nine months of 2020,
we increased the allowance for credit losses on unfunded loan commitments under the incurred loss method
("previous GAAP") by $610 thousand. Upon adoption of the CECL standard, we increased the allowance for
unfunded loan commitments by $1.1 million, which represented the difference between the allowance calculated
under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020. The
$1.1 million increase in the allowance for unfunded loan commitments included approximately $550 thousand
related to a $36.9 million increase in available commitments during the fourth quarter of 2020. The remaining
increase was due to changes in credit loss assumptions between the CECL and incurred loss methods. The prior
period allowance is reported in accordance with previous GAAP and was $1.1 million as of December 31, 2019.
Note 17: 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, 2020 and 2019
(in thousands)
Assets
Cash and due from Bank of Marin
Investment in bank subsidiary
Other assets
Total assets
Liabilities and Stockholders' Equity
Subordinated debenture
Accrued expenses payable
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
2020
2019
$
$
$
$
5,329 $
356,172
336
361,837 $
2,777 $
74
733
3,584
358,253
361,837 $
9,539
330,053
332
339,924
2,708
71
357
3,136
336,788
339,924
CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2020, 2019 and 2018
(in thousands)
Income
Dividends from bank subsidiary
Miscellaneous Income
Total income
Expense
Interest expense
Non-interest expense
Total expense
Income before income taxes and equity in undistributed net income of subsidiary
Income tax benefit
Income before equity in undistributed net income of subsidiary
Earnings of bank subsidiary greater (less) than dividends received from bank subsidiary
Net income
95
2020
2019
2018
$ 16,200 $ 17,600 $ 36,700
9
16,203 17,605 36,709
5
3
158
1,325
1,483
229
1,399
1,628
1,339
1,275
2,614
14,720 15,977 34,095
770
15,157 16,457 34,865
15,085 17,784
(2,243)
$ 30,242 $ 34,241 $ 32,622
480
437
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2020, 2019 and 2018
2020
2019
2018
$ 30,242 $ 34,241 $ 32,622
(15,085) (17,784)
68
30
69
31
2,243
1,025
23
(4)
59
36
(86)
15,312 16,635 35,863
—
80
(1,464)
(1,464)
(747)
(747)
(667)
(667)
1,419
—
(73)
747
—
(220)
(12,506) (10,958)
(6,898) (15,062)
613
(4,137)
(45)
(8,860)
(6,869)
(18,058) (25,493) (19,298)
(9,605) 15,898
3,246
$ 5,329 $ 9,539 $ 19,144
(4,210)
9,539 19,144
217 $
413 $
204
$
$
143
$ 1,289 $ 1,245 $ 1,173
231 $
103 $
(in thousands)
Cash Flows from Operating Activities:
Net income
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
Accretion of discount on subordinated debentures
Noncash director compensation expense
Net changes in:
Other assets
Other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Capital contribution to bank subsidiary
Net cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from stock options exercised and stock issued under employee and director stock
purchase plans
Repayment of subordinated debenture including execution costs
Payment of tax withholdings for vesting of restricted stock
Dividends paid on common stock
Stock repurchased, net of commissions
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental schedule of non-cash investing and financing activities:
Stock issued in payment of director fees
Repurchase of stock not yet settled
Stock issued to ESOP
End of 2020 Audited Consolidated Financial Statements
96
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, 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 Securities Exchange Act of 1934 (the “Act”)) as of the end
of the period covered by this report. The term disclosure controls and procedures means controls and other
procedures that are designed to ensure that information we are required to disclose in the reports that we
file or submit under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information we are required to disclose
in the reports that we file or submit under the Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
(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, 2020, 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, 2020.
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)
Audit 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, 2020 as stated in their audit
report, which is included in ITEM 8 and incorporated herein by reference.
(D)
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, we adopted the CECL accounting standard and designed
new controls and modified existing controls as part of the implementation of the new CECL method. The
additional controls over financial reporting included, among other things, controls over model design and
97
validation, model governance, assumptions, and the accuracy and completeness of loan level data. There
were no other significant changes in internal control that materially affected, or were reasonably likely to
affect, our internal control over financial reporting identified in connection with the evaluation mentioned in
(B) above.
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 2021 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
2020 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 2021 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 8 to our audited
consolidated financial statements and our Proxy Statement for the 2021 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 2021 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 2021 Annual
Meeting of Shareholders.
98
PART IV
ITEM 15.
Exhibits, 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, 2020,
2019 and 2018
Management's Report on Internal Control over Financial Reporting
Consolidated Statements of Condition as of December 31, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019
and 2018
Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31,
2020, 2019 and 2018
Consolidated Statement of Cash Flows for the years ended December 31, 2020, 2019 and 2018
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.
99
Exhibit
Number
3.01
3.02
3.02a
4.01
4.02
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
10.11
10.12
10.13
14.02
23.01
31.01
31.02
Exhibit Description
Articles of Incorporation, as amended
Bylaws
Bylaws Amendment
Rights Agreement, dated July 6, 2017
Description of Capital Stock
Employee Stock Ownership Plan
2017 Employee Stock Purchase Plan
2017 Equity Plan, as amended
2020 Director Stock Plan
Form of Indemnification Agreement for Directors and
Executive Officers, dated August 9, 2007
Form of Employment Agreement, dated January 23,
2009
2010 Annual Individual Incentive Compensation Plan,
revised 2019
Salary Continuation Agreement for executive officer
Russell Colombo, Chief Executive Officer, dated
January 1, 2011
Incorporated by Reference
Form
10-Q
10-Q
8-K
8-A12B
10-K
S-8
S-8
S-8
S-8
10-Q
File No.
001-33572
001-33572
001-33572
001-33572
001-33572
333-218274
333-221219
333-227840
333-239555
001-33572
Exhibit
3.01
3.02
3.03
4.1
4.02
4.1
4.1
4.1
4.1
10.06
Filing Date
November 7, 2007
May 9, 2011
July 6, 2015
July 7, 2017
March 13, 2020
May 26, 2017
October 30, 2017
October 15, 2018
June 30, 2020
November 7, 2007
8-K
001-33572
10.1
January 26, 2009
8-K
001-33572
10.1
January 6, 2011
Salary Continuation Agreement for executive officer Tani
Girton, Chief Financial Officer, dated October 18, 2013
Salary Continuation Agreement for executive officer
Elizabeth Reizman, Chief Credit Officer, dated July 20,
2014
8-K
8-K
001-33572
10.2
November 4, 2014
001-33572
10.3
November 4, 2014
10-Q
001-33572
10.12
November 6, 2020
8-K
001-33572
10.1
October 31, 2007
Salary Continuation Agreement for executive officer
Timothy Myers, Commercial Banking Manager, dated
May 28, 2015
2007 Form of Change in Control Agreement
Director Deferred Fee Plan, dated December 17, 2020
Code of Ethical Conduct, dated June 18, 2020
Consent of Moss Adams 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
32.01
Certification pursuant to 18 U.S.C. §1350 as adopted
pursuant to §906 of the Sarbanes-Oxley Act of 2002
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
Document
Herewith
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Filed
Copies of any exhibit to our Annual Report on Form 10-K listed in the index above will be furnished to shareholders as of the record date without
charge upon written request by such shareholder addressed as follows: Corporate Secretary, Bank of Marin Bancorp, 504 Redwood Boulevard,
Suite 100, Novato, CA 94947.
ITEM 16.
Form 10-K Summary
None.
100
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 15, 2021
Date
Bank of Marin Bancorp (registrant)
/s/ Tani Girton
Tani Girton
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
101
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 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
Dated: March 15, 2021
/s/ Russell A. Colombo
Russell A. Colombo
President & Chief Executive Officer, Director
(Principal Executive Officer)
/s/ Tani Girton
Tani Girton
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ David A. Merck
David A. Merck
Vice President & Financial Reporting Manager
(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/ Steven I. Barlow
Steven I. Barlow
/s/ James C. Hale
James C. Hale
/s/ Robert Heller
Robert Heller
/s/ Norma J. Howard
Norma J. Howard
/s/ Kevin R. Kennedy
/s/ Kevin R. Kennedy
Kevin R. Kennedy
/s/ William H. McDevitt, Jr.
William H. McDevitt, Jr.
/s/ Leslie E. Murphy
/s/ Leslie E. Murphy
Leslie E. Murphy
/s/ Joel Sklar
Joel Sklar, M.D.
102
EXHIBIT 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-218274, No. 333-221219,
No.333-227840, and 333-239555 on Form S-8 of our report dated March 15, 2021, 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, 2020.
/s/ Moss Adams LLP
Los Angeles, California
March 15, 2021
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 the
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 15, 2021
Date
/s/ Russell A. Colombo
Russell A. Colombo
President &
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 the
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 15, 2021
Date
/s/ Tani Girton
Tani Girton
Executive Vice President &
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, 2020, 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 15, 2021
Date
March 15, 2021
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.
(cid:11)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3) (cid:83)(cid:68)(cid:74)(cid:72)(cid:3) (cid:75)(cid:68)(cid:86)(cid:3) (cid:69)(cid:72)(cid:72)(cid:81)(cid:3) (cid:79)(cid:72)(cid:73)(cid:87)(cid:3)(cid:69)(cid:79)(cid:68)(cid:81)(cid:78)(cid:3) (cid:76)(cid:81)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)(cid:17)(cid:12)
www.bankofmarin.com
001CSN48DB