form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

 Commission File Number  001-33572

Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)

               California              
20-8859754
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)
   
504 Redwood Blvd., Suite 100, Novato, CA
94947
(Address of principal executive office)
(Zip Code)
 
Registrant’s telephone number, including area code:  (415) 763-4520

Not Applicable
(Former name or former address, if changes since last report)

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, and (2) has been subject to such filing requirements for the past 90 days.
Yes  x     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b(2) of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b(2) of the Exchange Act.
Yes    o         No  x

As of October 29, 2010 there were 5,269,724 shares of common stock outstanding.
 


 
 

 
 
TABLE OF CONTENTS

PART I
3
     
ITEM 1.
3
     
 
4
 
5
 
7
 
8
 
9
     
ITEM 2.
23
     
ITEM 3.
38
     
ITEM 4.
39
     
PART II
39
     
ITEM 1
39
     
ITEM 1A
39
     
ITEM 2
40
     
ITEM 3
40
     
ITEM 4
40
     
ITEM 5
40
     
ITEM 6
41
     
43
   
44

 
Page -2


PART I FINANCIAL INFORMATION

ITEM 1.  Financial Statements

 
Page -3

 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF CONDITION
at September 30, 2010 and December 31, 2009

(in thousands, except share data; September 30, 2010 unaudited)
 
September 30, 2010
   
December 31, 2009
 
             
Assets
           
Cash and due from banks
  $ 73,546     $ 23,660  
Short-term investments and Federal funds sold
    24,208       15,000  
Cash and cash equivalents
    97,754       38,660  
                 
Investment securities
               
Held to maturity, at amortized cost
    29,809       30,396  
Available for sale (at fair value, amortized cost $114,625, and $96,752 at September 30, 2010 and December 31, 2009, respectively)
    118,113       97,818  
Total investment securities
    147,922       128,214  
                 
Loans, net of allowance for loan losses of $12,023 and $10,618 at September 30, 2010 and December 31, 2009, respectively
    926,111       907,130  
Bank premises and equipment, net
    8,584       8,043  
Interest receivable and other assets
    38,843       39,625  
                 
Total assets
  $ 1,219,214     $ 1,121,672  
                 
Liabilities and Stockholders' Equity
               
                 
Liabilities
               
Deposits
               
Non-interest bearing
  $ 276,320     $ 230,551  
Interest-bearing
               
Transaction accounts
    99,367       89,660  
Savings accounts
    52,991       47,871  
Money market accounts
    392,381       416,481  
CDARS® time accounts
    70,661       51,819  
Other time accounts
    131,558       107,679  
Total deposits
    1,023,278       944,061  
                 
Federal Home Loan Bank borrowings
    55,000       55,000  
Subordinated debenture
    5,000       5,000  
Interest payable and other liabilities
    17,322       8,560  
                 
Total liabilities
    1,100,600       1,012,621  
                 
Stockholders' Equity
               
Preferred stock, no par value, $1,000 per share liquidation preference
               
Authorized - 5,000,000 shares; none issued
    ---       ---  
Common stock, no par value
               
Authorized - 15,000,000 shares
               
Issued and outstanding - 5,258,487 and 5,229,529 at September 30, 2010 and December 31, 2009, respectively
    54,664       53,789  
Retained earnings
    61,927       54,644  
Accumulated other comprehensive income, net
    2,023       618  
                 
Total stockholders' equity
    118,614       109,051  
                 
Total liabilities and stockholders' equity
  $ 1,219,214     $ 1,121,672  

The accompanying notes are an integral part of these consolidated financial statements.

 
Page -4

 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF INCOME
for the nine months ended September 30, 2010, and September 30, 2009

(in thousands, except per share amounts; unaudited)
 
September 30, 2010
   
September 30, 2009
 
             
Interest income
           
Interest and fees on loans
  $ 42,146     $ 40,945  
Interest on investment securities
               
Securities of U.S. Government agencies
    2,442       2,471  
Obligations of state and political subdivisions
    855       818  
Corporate debt securities and other
    452       292  
Interest on short-term investments and Federal funds sold
    98       4  
Total interest income
    45,993       44,530  
                 
Interest expense
               
Interest on interest-bearing transaction accounts
    81       86  
Interest on savings accounts
    79       69  
Interest on money market accounts
    2,128       2,359  
Interest on CDARS® time accounts
    663       550  
Interest on other time accounts
    1,122       1,188  
Interest on borrowed funds
    1,070       1,101  
Total interest expense
    5,143       5,353  
                 
Net interest income
    40,850       39,177  
Provision for loan losses
    4,300       2,985  
Net interest income after provision for loan losses
    36,550       36,192  
                 
Non-interest income
               
Service charges on deposit accounts
    1,355       1,323  
Wealth Management and Trust Services
    1,127       1,017  
Other income
    1,679       1,501  
Total non-interest income
    4,161       3,841  
                 
Non-interest expense
               
Salaries and related benefits
    13,832       13,050  
Occupancy and equipment
    2,692       2,569  
Depreciation and amortization
    1,033       1,021  
FDIC insurance
    1,125       1,456  
Data processing
    1,422       1,173  
Professional services
    1,436       1,184  
Other expense
    3,780       3,480  
Total non-interest expense
    25,320       23,933  
Income before provision for income taxes
    15,391       16,100  
                 
Provision for income taxes
    5,747       6,137  
Net income
  $ 9,644     $ 9,963  
                 
Preferred stock dividends and accretion
  $ ---     $ (1,299 )
Net income available to common stockholders
  $ 9,644     $ 8,664  
                 
Net income per common share:
               
Basic
  $ 1.84     $ 1.68  
Diluted
  $ 1.82     $ 1.66  
                 
Weighted average shares used to compute net income per common share:
               
Basic
    5,231       5,172  
Diluted
    5,305       5,224  
                 
Dividends declared per common share
  $ 0.45     $ 0.42  

The accompanying notes are an integral part of these consolidated financial statements.

 
Page -5

 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF INCOME
for the three months ended September 30, 2010, June 30, 2010, and September 30, 2009

(in thousands, except per share amounts; unaudited)
 
September 30, 2010
   
June 30, 2010
   
September 30, 2009
 
                   
Interest income
                 
Interest and fees on loans
  $ 14,296     $ 14,169     $ 13,860  
Interest on investment securities
                       
Securities of U.S. Government agencies
    829       885       794  
Obligations of state and political subdivisions
    284       285       285  
Corporate debt securities and other
    144       138       176  
Interest on short-term investments and Federal funds sold
    48       28       1  
Total interest income
    15,601       15,505       15,116  
                         
Interest expense
                       
Interest on interest-bearing transaction accounts
    32       26       31  
Interest on savings accounts
    27       27       24  
Interest on money market accounts
    602       729       797  
Interest on CDARS® time accounts
    221       233       186  
Interest on other time accounts
    391       377       378  
Interest on borrowed funds
    363       356       364  
Total interest expense
    1,636       1,748       1,780  
                         
Net interest income
    13,965       13,757       13,336  
Provision for loan losses
    1,400       1,350       1,100  
Net interest income after provision for loan losses
    12,565       12,407       12,236  
                         
Non-interest income
                       
Service charges on deposit accounts
    446       463       456  
Wealth Management and Trust Services
    364       368       350  
Other income
    497       674       525  
Total non-interest income
    1,307       1,505       1,331  
                         
Non-interest expense
                       
Salaries and related benefits
    4,665       4,561       4,286  
Occupancy and equipment
    880       914       950  
Depreciation and amortization
    335       360       335  
FDIC insurance
    388       375       307  
Data processing
    491       485       400  
Professional services
    550       454       366  
Other expense
    1,198       1,442       1,132  
Total non-interest expense
    8,507       8,591       7,776  
Income before provision for income taxes
    5,365       5,321       5,791  
                         
Provision for income taxes
    2,006       1,983       2,190  
Net income
  $ 3,359     $ 3,338     $ 3,601  
                         
Net income per common share:
                       
Basic
  $ 0.64     $ 0.64     $ 0.69  
Diluted
  $ 0.63     $ 0.63     $ 0.68  
                         
Weighted average shares used to compute net income per common share:
                       
Basic
    5,241       5,234       5,205  
Diluted
    5,311       5,308       5,274  
                         
Dividends declared per common share
  $ 0.15     $ 0.15     $ 0.14  

The accompanying notes are an integral part of these consolidated financial statements.

 
Page -6

 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the year ended December 31, 2009 and the nine months ended September 30, 2010

                     
Accumulated Other
       
                           
Comprehensive
       
   
Preferred
   
Common Stock
   
Retained
   
Income,
       
(dollars in thousands; 2010 unaudited )
 
Stock
   
Shares
   
Amount
   
Earnings
   
Net of Taxes
   
Total
 
Balance at December 31, 2008
    27,055       5,146,798     $ 51,965     $ 46,138     $ 388     $ 125,546  
Comprehensive income:
                                               
Net income
    ---       ---       ---       12,765       ---       12,765  
Other comprehensive income
                                               
Net change in unrealized gain on available for sale securities (net of tax effect of $168)
    ---       ---       ---       ---       230       230  
Comprehensive income
    ---       ---       ---       12,765       230       12,995  
Accretion of preferred stock
    945       ---       ---       (945 )     ---       ---  
Repurchase of preferred stock
    (28,000 )     ---       ---       ---       ---       (28,000 )
Stock options exercised
    ---       61,175       873       ---       ---       873  
Excess tax benefit - stock-based compensation
    ---       ---       291       ---       ---       291  
Stock issued under employee stock purchase plan
    ---       894       24       ---       ---       24  
Restricted stock granted
    ---       11,575       ---       ---       ---       ---  
Stock-based compensation - stock options
    ---       ---       330       ---       ---       330  
Stock-based compensation - restricted stock
    ---       ---       73       ---       ---       73  
Cash dividends paid on common stock
    ---       ---       ---       (2,960 )     ---       (2,960 )
Dividends on preferred stock
    ---       ---       ---       (354 )     ---       (354 )
Stock issued in payment of director fees
    ---       9,087       233       ---       ---       233  
Balance at December 31, 2009
    ---       5,229,529       53,789       54,644       618       109,051  
Net income
    ---       ---       ---       9,644       ---       9,644  
Other comprehensive income
                                               
Net change in unrealized gain on available for sale securities (net of tax effect of $1,017)
    ---       ---       ---       ---       1,405       1,405  
Comprehensive income
    ---       ---       ---       9,644       1,405       11,049  
Stock options exercised
    ---       18,516       244       ---       ---       244  
Excess tax benefit - stock-based compensation
    ---       ---       87       ---       ---       87  
Stock issued under employee stock purchase plan
    ---       392       12       ---       ---       12  
Restricted stock granted
    ---       6,150       ---       ---       ---       ---  
Restricted stock forfeited / cancelled
    ---       (2,320 )     ---       ---       ---       ---  
Stock-based compensation - stock options
    ---       ---       246       ---       ---       246  
Stock-based compensation - restricted stock
    ---       ---       86       ---       ---       86  
Cash dividends paid on common stock
    ---       ---       ---       (2,361 )     ---       (2,361 )
Stock issued in payment of director fees
    ---       6,220       200       ---       ---       200  
Balance at September 30, 2010
    ---       5,258,487     $ 54,664     $ 61,927     $ 2,023     $ 118,614  

The accompanying notes are an integral part of these consolidated financial statements.

 
Page -7

 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 2010 and 2009

(in thousands, unaudited)
 
September 30, 2010
   
September 30, 2009
 
             
Cash Flows from Operating Activities:
           
Net income
  $ 9,644     $ 9,963  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    4,300       2,985  
Compensation expense--common stock for director fees
    150       165  
Stock-based compensation expense
    332       304  
Excess tax benefits from exercised stock options
    (70 )     (142 )
Amortization of investment security premiums, net of accretion of discounts
    848       284  
Depreciation and amortization
    1,033       1,021  
Loss on sale of investment securities
    ---       9  
Loss on sale of repossessed assets
    6       29  
Loss on disposal of premise and equipment
    3       ---  
Net change in operating assets and liabilities:
               
Interest receivable
    147       (4 )
Interest payable
    150       40  
Deferred rent and other rent-related expenses
    191       202  
Other assets
    (336 )     (2,200 )
Other liabilities
    283       1,393  
Total adjustments
    7,037       4,086  
Net cash provided by operating activities
    16,681       14,049  
                 
Cash Flows from Investing Activities:
               
Purchase of securities held-to-maturity
    ---       (8,438 )
Purchase of securities available-for-sale
    (36,370 )     (30,662 )
Proceeds from sale of securities
    ---       1,410  
Proceeds from paydowns/maturity of:
               
Securities held-to-maturity
    480       320  
Securities available-for-sale
    24,316       29,906  
Loans originated and principal collected, net
    (21,776 )     (32,557 )
Purchase of premises and equipment
    (1,577 )     (986 )
Proceeds from sale of repossessed assets
    158       42  
Net cash used in investing activities
    (34,769 )     (40,965 )
                 
Cash Flows from Financing Activities:
               
Net increase in deposits
    79,217       97,001  
Proceeds from stock options exercised
    244       845  
Net decrease  in Federal Funds purchased and Federal
               
Home Loan Bank borrowings
    ---       (1,800 )
Preferred stock repurchased
    ---       (28,000 )
Cash dividends paid on common stock
    (2,361 )     (2,176 )
Cash dividends paid on preferred stock
    ---       (451 )
Stock issued under employee stock purchase plan
    12       18  
Excess tax benefits from exercised stock options
    70       142  
Net cash provided by financing activities
    77,182       65,579  
                 
Net increase in cash and cash equivalents
    59,094       38,663  
Cash and cash equivalents at beginning of period
    38,660       24,926  
                 
Cash and cash equivalents at end of period
  $ 97,754     $ 63,589  

Non-Cash Transactions: The nine-month period ended September 30, 2010 reflects a non-cash financing item of $200 thousand for stock issued to pay director fees and a non-cash investing item of $210 thousand of loans transferred to repossessed assets.  Also, the nine-month period ended September 30, 2010 reflects the purchase in late September of a $6.5 million available-for-sale security which is payable as of September 30, 2010. The nine-month period ended September 30, 2009 reflects non-cash financing items of $233 thousand for stock issued to pay director fees and $945 thousand for the accretion of preferred stock.  The nine-month period ended September 30, 2009 also reflects a non-cash investing item of $141 thousand of loans transferred to repossessed assets.

The accompanying notes are an integral part of these consolidated financial statements.

 
Page -8


BANK OF MARIN BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Introductory Explanation

References in this report to “Bancorp” mean the Bank of Marin Bancorp as the parent holding company for Bank of Marin, the wholly-owned subsidiary (the “Bank”). References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes.

Note 1:  Basis of Presentation

The consolidated financial statements include the accounts of Bancorp and its only wholly-owned bank subsidiary, the Bank. All material intercompany transactions have been eliminated. In the opinion of Management, the unaudited interim consolidated financial statements contain all adjustments necessary to present fairly our financial position, results of operations, changes in stockholders' equity and cash flows. All adjustments are of a normal, recurring nature. Management has evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”), and has determined that there are no subsequent events that require recognition or disclosure.

Certain information and footnote disclosures presented in the annual financial statements are not included in the interim consolidated financial statements.  Accordingly, the accompanying unaudited interim consolidated financial statements should be read in conjunction with our 2009 Annual Report on Form 10-K.  The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the operating results for the full year.

The following table shows: 1) weighted average basic shares, 2) potential common shares related to stock options, non-vested restricted stock and stock warrant, and 3) weighted average diluted shares. Net income available to common stockholders is calculated as net income reduced by dividends accumulated on preferred stock and accretion of discounts on the preferred stock. Basic earnings per share (“EPS”) are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period.  Diluted EPS are calculated using the weighted average diluted shares. The number of potential common shares included in quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period. For year-to-date diluted EPS, the number of potential common shares included in the denominator is determined by computing a year-to-date weighted average of the number of potential common shares included in each quarterly diluted EPS computation. Our calculation of weighted average shares includes two classes of our outstanding common stock: common stock and unvested restricted stock awards. Holders of restricted stock awards receive non-forfeitable dividends at the same rate as common stockholders and they both share equally in undistributed earnings.

 
Page -9


BANK OF MARIN BANCORP

   
Three months ended
   
Nine months ended
 
(in thousands, except per share data; unaudited)
 
September 30, 2010
   
June 30, 2010
   
September 30, 2009
   
September 30, 2010
   
September 30, 2009
 
Weighted average basic shares outstanding
    5,241       5,234       5,205       5,231       5,172  
Add: Potential common shares related to stock options
    42       45       49       46       45  
Potential common shares related to non-vested restricted stock
    3       3       3       3       1  
Potential common shares related to warrant
    25       26       17       25       6  
Weighted average diluted shares outstanding
    5,311       5,308       5,274       5,305       5,224  
                                         
Net income
  $ 3,359     $ 3,338     $ 3,601     $ 9,644     $ 9,963  
Preferred stock dividends and accretion
    ---       ---       ---       ---       (1,299 )
Net income available to common stockholders
  $ 3,359     $ 3,338     $ 3,601     $ 9,644     $ 8,664  
                                         
Basic EPS
  $ 0.64     $ 0.64     $ 0.69     $ 1.84     $ 1.68  
Diluted EPS
  $ 0.63     $ 0.63     $ 0.68     $ 1.82     $ 1.66  
                                         
Weighted average anti-dilutive shares not included in the calculation of diluted EPS
                                       
Stock options
    175       170       210       164       288  
Non-vested restricted stock
    ---       ---       ---       ---       2  
Total anti-dilutive shares
    175       170       210       164       290  

Note 2: Recently Issued Accounting Standards

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU amends FASB Accounting Standards Codification(TM) (the “Codification” or “ASC”) Topic 310, Receivables, to improve the disclosures about the credit quality of an entity’s financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.

Existing disclosures are amended to require an entity to provide the following disclosures about its financing receivables on a disaggregated basis:

(1) A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method;

(2) For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables;

(3) The nonaccrual status of financing receivables by class of financing receivables;

(4) Impaired financing receivables by class of financing receivables.

The amendments in the ASU also require an entity to provide the following additional disclosures about its financing receivables:

(1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;

(2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables;

(3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses;

 
Page -10


BANK OF MARIN BANCORP

(4) The nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and

(5) Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segments.

The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. As this ASU is disclosure-related only, we do not expect it to have an impact on our financial condition or results of operations.

In April 2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. This ASU codifies the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.  We do not expect this ASU to have a significant impact on our financial condition or results of operations.

On April 16, 2010, the FASB issued ASU No. 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in EITF Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. As our current share-based payment awards are equity awards (exercise price is denominated in dollars in the U.S. where our stock is traded), this ASU does not have an impact on our financial condition or results of operations.

On February 24, 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in this ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. generally accepted accounting principles. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires: (1) disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurement categories and the reasons for the transfers; and (2) separate presentation of purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures set forth in the Codification Subtopic 820-10: (1) For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and (2) a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning January 1, 2011, and for interim periods within those fiscal years. As ASU 2010-06 is disclosure-related only, our adoption of this ASU in the first quarter of 2010 did not impact our financial condition or results of operations.

 
Page -11


BANK OF MARIN BANCORP

Note 3:  Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and include management judgment and estimation which may be significant.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.

(in thousands; September 30, 2010 unaudited)
Description of Financial Instruments
 
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Balance at September 30, 2010:
                       
Securities available for sale:
                       
Mortgage-backed securities and collaterized mortgage obligations issued by U.S. government agencies
  $ 101,339     $ ---     $ 101,339     $ ---  
Corporate collateralized mortgage obligations
  $ 16,076     $ ---     $ 16,076     $ ---  
Equity securities
  $ 698     $ 698     $ ---     $ ---  
                                 
Derivative financial liabilities (interest rate contracts)
  $ 3,570     $ ---     $ 3,570     $ ---  
                                 
Balance at December 31, 2009:
                               
Securities available for sale
  $ 97,818     $ ---     $ 97,818     $ ---  
                                 
Derivative financial assets
  $ 35     $ ---     $ 35     $ ---  
                                 
Derivative financial liabilities
  $ 1,624     $ ---     $ 1,624     $ ---  
 
Securities available for sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available for sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, and credit spreads (Level 2).  Level 1 securities include those traded on active markets, including U.S. Treasury securities and equity securities (e.g. Visa Inc. common stock).  Level 2 securities include U.S. agencies’ debt securities, mortgage-backed securities, and corporate collateralized mortgage obligations.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date.  Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction.  Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit quality in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate (“LIBOR”) cash rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals.  Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements.  Key inputs for interest rate valuations are used to project spot rates at resets specified by each swap, as well as to discount those future cash flows to present value at the measurement date.  When the value of any collateral placed with counterparties is less than the interest rate derivative liability, the interest rate liability position is further discounted to reflect our potential credit risk to counterparties.  We have used the spread between the Standard & Poors BBB rated U.S. Bank Composite rate and LIBOR, with maturity terms corresponding to the duration of the swaps, to calculate this credit-risk-related discount of future cash flows.

 
Page -12


BANK OF MARIN BANCORP

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For example, when a loan is identified as impaired, it is reported at the lower of cost or fair value, which is measured based on the loan's observable market price (Level 1), the present value of expected future cash flows discounted at the loan’s original effective interest rate (Level 2), or the current appraised value of the underlying collateral securing the loan, if the loan is collateral dependent (Level 3).  Securities held to maturity may be written down to fair value (determined using the same techniques discussed above for securities available for sale) as a result of an other-than-temporary impairment, if any.

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded.

(in thousands; September 30, 2010 unaudited)
Description of Financial Instruments
 
Carrying Value
   
Quoted Prices in Active Markets for Identical Assets 
(Level 1)
   
Significant Other Observable Inputs(Level 2) (a)
   
Significant Unobservable Inputs
(Level 3) (b)
   
Losses for the three months ended September 30, 2010 (c)
   
Losses for the nine months ended September 30, 2010 (c)
 
At September 30, 2010:
                         
Impaired loans carried at fair value (d)
  $ 6,890     $ ---     $ 1,049     $ 5,841     $ 1,502     $ 3,702  
                                                 
At December 31, 2009:
                           
Losses for the year ended December 31, 2009
 
Impaired loans carried at fair value (d)
  $ 7,620     $ ---     $ 406     $ 7,214             $ 4,887  

(a) Represents impaired loan principal balances net of specific valuation allowance of $342 thousand and $34 thousand at September 30, 2010 and December 31, 2009, respectively, determined using the discounted cash flow method.
(b) Represents collateral-dependent loan principal balances that had been generally written down to the appraised value of the underlying collateral, net of specific valuation allowance of $510 thousand and $11 thousand at September 30, 2010 and December 31, 2009, respectively. The carrying value of loans fully charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero at the end of each period presented.
(c) Represents net charge-offs during the period presented and the specific valuation allowance established on loans during the period.
(d) Represents the portion of impaired loans that have been written down to their fair value.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of September 30, 2010 and December 31, 2009, excluding financial instruments recorded at fair value on a recurring basis (summarized in a separate table). The carrying amounts in the following table are recorded in the statement of condition under the indicated captions. We have excluded non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), such as Bank premises and equipment, deferred taxes and other liabilities.  In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies.

 
Page -13


BANK OF MARIN BANCORP

   
September 30, 2010
   
December 31, 2009
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(in thousands; 2010 amounts unaudited)
 
Amounts
   
Value
   
Amounts
   
Value
 
Financial assets
                       
Cash and cash equivalents
  $ 97,754     $ 97,754     $ 38,660     $ 38,660  
Investment securities held to maturity
    29,809       31,521       30,396       30,786  
Loans, net
    926,111       941,779       907,130       891,117  
Interest receivable
    4,191       4,191       4,338       4,338  
Financial liabilities
                               
Deposits
    1,023,278       1,024,169       944,061       944,469  
Federal Home Loan Bank long-term borrowings
    55,000       57,712       55,000       54,058  
Subordinated debenture
    5,000       4,753       5,000       4,146  
Interest payable
    1,125       1,125       975       975  

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value, but required for disclosure purposes:

Cash and Cash Equivalents – The carrying amounts of cash and cash equivalents approximate their fair value due to the short-term nature of these instruments.

Held-to-maturity Securities - Held-to-maturity securities, which generally consist of obligations of state & political subdivisions, are recorded at their amortized cost. Their fair value for disclosure purposes is determined using methodologies similar to those described above for available-for-sale securities using Level 2 inputs. If Level 2 inputs are not available, we may utilize pricing models that incorporate unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3).  As of September 30, 2010, we did not hold any securities whose fair value was measured using significant unobservable inputs.

Loans - The fair value of loans with variable interest rates approximates their current carrying value, because their rates are regularly adjusted to current market rates.  The fair value of fixed rate loans or variable loans at negotiated interest rate floors or ceilings with remaining maturities in excess of one year is estimated by discounting the future cash flows using current market rates at which similar loans would be made to borrowers with similar credit worthiness and similar remaining maturities.

Interest Receivable and Payable - The interest receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

Deposits - The fair value of non-interest bearing deposits, interest bearing transaction accounts, savings accounts and money market accounts is the amount payable on demand at the reporting date.  The fair value of time deposits is estimated by discounting the future cash flows using current rates offered for deposits of similar remaining maturities.

Federal Home Loan Bank Long-term Borrowings - The fair value is estimated by discounting the future cash flows using current rates offered by the Federal Home Loan Bank San Francisco (“FHLB”) for similar credit advances corresponding to the remaining duration of our fixed-rate credit advances.

Subordinated Debenture - The fair value of the subordinated debenture is estimated by discounting the future cash flows (interest payment at a rate of three-month LIBOR plus 2.48%) using current market rates at which similar bonds would be issued with similar credit ratings as ours and similar remaining maturities. We have used the spread of the ten-year BBB rated U.S. Bank Composite over LIBOR to calculate this credit-risk-related discount of future cash flows.

Commitments - Loan commitments and standby letters of credit generate ongoing fees, which are recognized over the term of the commitment period. In situations where the borrower's credit quality has declined, we record a reserve for these off-balance sheet commitments. Given the uncertainty in the likelihood and timing of a commitment being drawn upon, a reasonable estimate of the fair value of these commitments is the carrying value of the related unamortized loan fees plus the reserve, which is not material.

 
Page -14


BANK OF MARIN BANCORP

Note 4:  Investment Securities

Our investment securities portfolio consists primarily of U.S. government agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued or guaranteed by Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), or Government National Mortgage Association (“GNMA”). Our portfolio also includes obligations of state and political subdivisions, as well as corporate CMOs and equity securities, as reflected in the table below.

   
September 30, 2010
   
December 31, 2009
 
                Gross Unrealized                 Gross Unrealized  
(in thousands; September 30, 2010 unaudited)
 
Amortized
Cost
   
Fair
Value
   
Gains
   
(Losses)
   
Amortized
Cost
   
Fair
Value
   
Gains
   
(Losses)
 
Held-to-maturity
                                               
Obligations of state and political subdivisions
  $ 29,809     $ 31,521     $ 1,822     $ (110 )   $ 30,396     $ 30,786     $ 774     $ (384 )
                                                                 
Available-for-sale
                                                               
Securities of U. S. government agencies:
                                                               
MBS pass-through securities issued by FNMA and FHLMC
    15,131       15,703       573       (1 )     12,882       13,086       253       (49 )
CMOs issued by FNMA
    13,502       14,016       514       ---       18,207       18,527       479       (159 )
CMOs issued by FHLMC
    25,964       26,691       727       ---       30,664       30,912       530       (282 )
CMOs issued by GNMA
    44,139       44,929       790       ---       15,180       15,657       477       ---  
Debentures of government sponsored agencies
    ---       ---       ---       ---       5,000       5,040       46       (6 )
Corporate CMOs
    15,889       16,076       207       (20 )     14,819       14,596       1       (224 )
Equity securities
    ---       698       698       ---       ---       ---       ---       ---  
Total securities available for sale
    114,625       118,113       3,509       (21 )     96,752       97,818       1,786       (720 )
                                                                 
Total investment securities
  $ 144,434     $ 149,634     $ 5,331     $ (131 )   $ 127,148     $ 128,604     $ 2,560     $ (1,104 )

As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock at a zero cost basis.  These shares are restricted from resale until their conversion into Class A (voting) shares on the later of March 25, 2011 or the termination of Visa Inc.’s covered litigation escrow account. The conversion rate will be determined upon the final resolution of the Visa Inc. covered litigation described in Note 13 to the Consolidated Financial Statements in our 2009 Form 10-K.  We expect our shares of Class B common stock to qualify for sale within one year.  As such, the stock was classified as available-for-sale securities and reported at fair value, with the unrealized gain, net of tax, recognized in other comprehensive income.  The fair value of the Class B common stock we own was $698 thousand as of September 30, 2010 based on the Class A as-converted rate of 0.5550.

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2010 are shown below.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities with a zero cost basis and a fair value of $698 thousand are excluded from the following table.

   
September 30, 2010
 
   
Held to Maturity
   
Available for Sale
 
(in thousands; unaudited)
 
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
Within one year
  $ 1,292     $ 1,317     $ ---     $ ---  
After one but within five years
    3,515       3,676       ---       ---  
After five years through ten years
    16,164       17,274       17,444       17,861  
After ten years
    8,838       9,254       97,181       99,554  
Total
  $ 29,809     $ 31,521     $ 114,625     $ 117,415  

At September 30, 2010, investment securities carried at $1.3 million were pledged with the Federal Reserve Bank of San Francisco (“FRB”) to secure our Treasury, Tax and Loan account.  At September 30, 2010, investment securities carried at $29.4 million were pledged with the State of California:  $28.7 million to secure public deposits in compliance with the Local Agency Security Program and $670 thousand to provide collateral for trust deposits. In addition, at September 30, 2010, investment securities carried at $1.4 million were pledged to collateralize an internal Wealth Management and Trust Services checking account and $4.1 million were pledged to collateralize interest rate swap as discussed in Note 9.

 
Page -15


BANK OF MARIN BANCORP

Other-Than-Temporarily Impaired Debt Securities

For each security in an unrealized loss position, we assess whether we intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of our amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.

We do not have the intent to sell the securities that are temporarily impaired, and it is more likely than not that we will not have to sell those securities before recovery of the cost basis. Additionally, we have evaluated the credit ratings of our investment securities and their issuers and/or insurers, if applicable. Based on our evaluation, Management has determined that no investment security in our investment portfolio is other-than-temporarily impaired.

Four and thirty investment securities were in unrealized loss positions at September 30, 2010 and December 31, 2009, respectively.  They are summarized and classified according to the duration of the loss period as follows:

September 30, 2010
 
< 12 continuous months
   
> 12 continuous months
   
Total Securities in a loss position
 
(In thousands; unaudited)
 
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
Held-to-maturity
                                   
Obligations of state & political subdivisions
  $ ---     $ ---     $ 1,948     $ (110 )   $ 1,948     $ (110 )
                                                 
Available-for-sale
                                               
Securities of U. S. government agencies
    1,654       (1 )     ---       ---       1,654       (1 )
Corporate CMOs
    ---       ---       1,369       (20 )     1,369       (20 )
Total available for sale
    1,654       (1 )     1,369       (20 )     3,023       (21 )
Total temporarily impaired securities
  $ 1,654     $ (1 )   $ 3,317     $ (130 )   $ 4,971     $ (131 )
                                                 
December 31, 2009
 
< 12 continuous months
   
> 12 continuous months
   
Total Securities in a loss position
 
(In thousands)
 
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
Held-to-maturity
                                               
Obligations of state & political subdivisions
  $ 6,351     $ (76 )   $ 1,753     $ (308 )   $ 8,104     $ (384 )
                                                 
Available-for-sale
                                               
Securities of U. S. government agencies
    25,737       (496 )     ---       ---       25,737       (496 )
Corporate CMOs
    14,384       (224 )     ---       ---       14,384       (224 )
Total available for sale
    40,121       (720 )     ---       ---       40,121       (720 )
Total temporarily impaired securities
  $ 46,472     $ (796 )   $ 1,753     $ (308 )   $ 48,225     $ (1,104 )

The security in a loss position for more than twelve continuous months relates to one debenture issued by a local subdivision with payments collected through property tax assessments in an affluent community.  This security is still investment grade without delinquency history. This security will continue to be monitored as part of our ongoing impairment analysis, but is expected to perform. As a result, we concluded that it was not other-than-temporarily impaired at September 30, 2010.

The unrealized losses associated with debt securities of U.S. government agencies are primarily driven by changes in interest rates and not due to the credit quality of the securities. Further, securities backed by GNMA, FNMA, or FHLMC have the guarantee of the full faith and credit of the U.S. Federal Government.

The unrealized loss associated with the corporate CMO is primarily related to securities backed by residential mortgages, which was AAA rated or equivalent by at least one major rating agency. We estimate loss projections for each security by assessing loans collateralizing the security and determining expected default rates and loss severities. Based upon our assessment of expected credit losses of the security given the performance of the underlying collateral and credit enhancements where applicable, we concluded that the security was not other-than-temporarily impaired at September 30, 2010.

 
Page -16


BANK OF MARIN BANCORP

Securities Carried at Cost

As a member of the FHLB, we are required to maintain a minimum investment in the FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can also increase in the event we need to increase our borrowing capacity with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at its $100 per share par value.  We held $5.0 million and $4.7 million of FHLB stock recorded at cost in other assets at September 30, 2010 and December 31, 2009, respectively. On August 12, 2010, the FHLB declared a cash dividend for the second quarter of 2010 at an annualized dividend rate of 0.44%.  Management expects to be able to redeem this stock at cost, and therefore does not believe the FHLB stock to be other-than-temporarily impaired.

Note 5:  Allowance for Loan Losses and Impaired Loans

The allowance for loan losses is maintained at levels considered adequate by Management to provide for probable loan losses inherent in the portfolio. The allowance is based on Management's assessment of various factors affecting the loan portfolio, including the level of problem loans, economic conditions, loan loss experience, and an overall evaluation of the quality of the underlying collateral.

Activity in the allowance for loan losses follows:

   
Three months ended
   
Nine months ended
 
(Dollars in thousands; unaudited)
 
September 30,
2010
   
June 30,
2010
   
September 30,
2009
   
September 30,
2010
   
September 30,
2009
 
Beginning balance
  $ 11,773     $ 10,648     $ 10,135     $ 10,618     $ 9,950  
Provision for loan loss charged to expense
    1,400       1,350       1,100       4,300       2,985  
Loans charged off
    (1,159 )     (241 )     (392 )     (2,947 )     (2,238 )
Loan loss recoveries
    9       16       275       52       421  
Ending balance
  $ 12,023     $ 11,773     $ 11,118     $ 12,023     $ 11,118  
                                         
Total loans outstanding at period end, before deducting allowance for loan losses
  $ 938,134     $ 939,293     $ 919,844     $ 938,134     $ 919,844  
                                         
Ratio of allowance for loan losses to total loans
    1.28 %     1.25 %     1.21 %     1.28 %     1.21 %
                                         
Non-accrual loans at period end:
                                       
Construction
  $ 4,955     $ 5,654     $ ---     $ 4,955     $ ---  
Commercial real estate
    3,388       3,455       4,353       3,388       4,353  
Commercial
    1,562       1,354       1,346       1,562       1,346  
Installment and other consumer
    404       310       139       404       139  
Home equity
    150       ---       211       150       211  
Residential real estate
    150       ---       ---       150       ---  
Total non-accrual loans
    10,609       10,773       6,049       10,609       6,049  
Accruing impaired construction loans
    ---       ---       589       ---       589  
Accruing troubled-debt restructured loans:
                                       
Installment and other consumer
    909       908       377       909       377  
Home equity
    260       ---       ---       ---       ---  
Total accruing restructured loans
    1,169       908       377       909       377  
Total impaired loans
  $ 11,778     $ 11,681     $ 7,015     $ 11,518     $ 7,015  
                                         
Allowance for loan losses to non-accrual loans at period end
    113.33 %     109.28 %     183.80 %     113.33 %     183.80 %
                                         
Non-accrual loans to total loans
    1.13 %     1.15 %     0.66 %     1.13 %     0.66 %
                                         
Average recorded investment in impaired loans
  $ 12,219     $ 12,093     $ 8,950     $ 12,142     $ 8,222  
                                         
Foregone interest income on non-accrual loans
  $ 253     $ 243     $ 237     $ 732     $ 583  
                                         
Cash receipt on non-accrual loan interest and recognized as interest income
  $ 57     $ 23     $ 60     $ 82