PART I [Business](index=5&type=section&id=ITEM%201.%20BUSINESS) Bank of Marin Bancorp, operating through its subsidiary, provides commercial and retail banking and wealth management services across six San Francisco Bay Area counties, focusing on relationship-based banking under extensive regulation - The company operates through its subsidiary, Bank of Marin, with **23 offices** across six San Francisco Bay Area counties[20](index=20&type=chunk) - Its core focus is providing banking services to **small to medium-sized businesses**, professionals, and non-profit organizations[20](index=20&type=chunk) - Key offerings include commercial and retail deposit and lending programs, alongside **Wealth Management and Trust Services**[21](index=21&type=chunk)[26](index=26&type=chunk) - The bank differentiates itself in a competitive market through **personalized relationship banking** and deep local market knowledge[30](index=30&type=chunk)[33](index=33&type=chunk) - As of December 31, 2019, the company employed **290 full-time equivalent staff**[35](index=35&type=chunk) - The company is subject to extensive supervision by the **California Department of Business Oversight**, **FDIC**, and the **Federal Reserve**[36](index=36&type=chunk)[37](index=37&type=chunk)[39](index=39&type=chunk) [Risk Factors](index=13&type=section&id=ITEM%201A.%20RISK%20FACTORS) The company faces material risks from geographic concentration in the San Francisco Bay Area, interest rate fluctuations, significant credit risk from commercial real estate loans, natural disasters, cybersecurity threats, and regulatory changes - The company's success is highly dependent on the local economic conditions of the San Francisco Bay Area, creating a **geographic concentration risk**[72](index=72&type=chunk) - Earnings are significantly influenced by **interest rate risk**, as **net interest income** is the primary driver of profitability, making the business vulnerable to **margin compression** in a falling or flat rate environment[73](index=73&type=chunk) - A significant portion of the loan portfolio is secured by real estate, with **Commercial Real Estate (CRE) loans** representing **330% of total risk-based capital** as of December 31, 2019, exceeding the **300% regulatory guidance threshold** for heightened scrutiny[80](index=80&type=chunk)[82](index=82&type=chunk) - The company is exposed to significant credit risk, and the adoption of the **Current Expected Credit Loss (CECL) accounting standard** on January 1, 2020, will materially change the methodology for estimating the allowance for credit losses[84](index=84&type=chunk)[88](index=88&type=chunk) - The business is located in **earthquake and wildfire-prone zones**, posing risks from natural disasters and climate change-related events which could impact operations and collateral values[83](index=83&type=chunk) - The company faces risks associated with **cybersecurity threats**, reliance on **third-party vendors** for critical operations like core processing, and the upcoming phase-out of the **LIBOR interest rate benchmark**[104](index=104&type=chunk)[107](index=107&type=chunk)[118](index=118&type=chunk) [Unresolved Staff Comments](index=20&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[120](index=120&type=chunk) [Properties](index=21&type=section&id=ITEM%202.%20PROPERTIES) The company leases its corporate headquarters in Novato, California, as well as all of its branch and office facilities across its primary market areas - The company leases its corporate headquarters and all branch and office facilities[121](index=121&type=chunk) [Legal Proceedings](index=21&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) The company is not aware of any pending legal proceedings that would have a material adverse effect on its financial condition - Management is not aware of any pending legal proceedings expected to have a material adverse effect on the company[122](index=122&type=chunk) - The Bank has a proportionate share of litigation indemnifications for Visa U.S.A. but does not expect to make cash payments due to an escrow account funded by Visa[123](index=123&type=chunk) [Mine Safety Disclosures](index=21&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to the company - Not applicable[124](index=124&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=22&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT'S%20COMMON%20EQUITY,%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Bank of Marin Bancorp's common stock trades on Nasdaq under BMRC, outperforming the Russell 2000 Index over five years, with **$15.0 million** in share repurchases in 2019 and a new **$25.0 million** program approved for 2020 - Bancorp common stock trades on the **Nasdaq Capital Market** under the symbol **BMRC**, with a **two-for-one stock split** occurring on November 27, 2018[127](index=127&type=chunk) Five-Year Stock Performance Comparison (Cumulative Total Return) | Period | Bank of Marin Bancorp (BMRC) | Russell 2000 Index | SNL Bank \$1B - \$5B Index | | :--- | :--- | :--- | :--- | | 2014 | 100.00 | 100.00 | 100.00 | | 2015 | 103.37 | 95.59 | 111.94 | | 2016 | 137.81 | 115.95 | 161.04 | | 2017 | 136.63 | 132.94 | 171.69 | | 2018 | 168.40 | 118.30 | 150.42 | | 2019 | 187.45 | 148.49 | 182.85 | - In 2019, Bancorp repurchased 356,000 shares for a total of **$15.0 million**, and a new **$25.0 million** share repurchase program was approved in January 2020, valid through February 28, 2022[135](index=135&type=chunk)[136](index=136&type=chunk) [Selected Financial Data](index=24&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) The company's five-year financial data shows total assets growing to **$2.71 billion** in 2019, with net income reaching **$34.2 million** and diluted EPS at **$2.48**, while maintaining strong asset quality with non-performing loans at **0.01%** Five-Year Selected Financial Data (2015-2019) | (in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Total assets** | $2,707,280 | $2,520,892 | $2,468,154 | $2,023,493 | $2,031,134 | | **Loans, net** | $1,826,609 | $1,748,043 | $1,663,246 | $1,471,174 | $1,436,299 | | **Deposits** | $2,336,489 | $2,174,840 | $2,148,670 | $1,772,700 | $1,728,226 | | **Stockholders' equity** | $336,788 | $316,407 | $297,025 | $230,563 | $214,473 | | **Net interest income** | $95,680 | $91,544 | $74,852 | $73,161 | $67,187 | | **Net income** | $34,241 | $32,622 | $15,976 | $23,134 | $18,441 | | **Diluted EPS** | $2.48 | $2.33 | $1.27 | $1.89 | $1.52 | | **Return on average assets** | 1.34% | 1.31% | 0.75% | 1.15% | 0.98% | | **Return on average equity** | 10.49% | 10.73% | 6.49% | 10.23% | 8.84% | | **Non-performing loans to total loans** | 0.01% | 0.04% | 0.02% | 0.01% | 0.15% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=ITEM%207.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) In 2019, net income increased to **$34.2 million** driven by strong loan and deposit growth, with total assets reaching **$2.7 billion**, while maintaining excellent credit quality and robust capital levels [Executive Summary](index=27&type=section&id=Executive%20Summary) For 2019, the company reported **$34.2 million** in net income and **$2.48** diluted EPS, driven by **4.5% loan growth** and **7.4% deposit growth**, with strong credit quality and improved efficiency 2019 Performance Highlights vs. 2018 | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income | $34.2 million | $32.6 million | | Diluted EPS | $2.48 | $2.33 | | Loan Growth | 4.5% | - | | Deposit Growth | 7.4% | - | | Non-accrual Loans / Total Loans | 0.01% | - | | Efficiency Ratio | 55.3% | 57.3% | | Return on Assets | 1.34% | 1.31% | | Return on Equity | 10.49% | 10.73% | [Results of Operations](index=28&type=section&id=RESULTS%20OF%20OPERATIONS) Net interest income rose by **$4.2 million** to **$95.7 million** in 2019, while non-interest income decreased due to a prior-year one-time gain, and non-interest expense slightly declined Net Interest Income Analysis (2019 vs 2018) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total interest income | $100,437 | $95,080 | | Total interest expense | $4,757 | $3,536 | | **Net interest income** | **$95,680** | **$91,544** | | Tax-equivalent net interest margin | 3.98% | 3.90% | - A provision for loan losses of **$0.9 million** was recorded in 2019, consistent with loan growth, compared to no provision in 2018[174](index=174&type=chunk) - Non-interest income decreased to $9.1 million from **$10.1 million** in 2018, primarily due to a **$0.96 million** pre-tax gain on the sale of Visa stock in 2018 that did not recur[176](index=176&type=chunk)[177](index=177&type=chunk) - Non-interest expense decreased by **$0.3 million** to **$58.0 million**, mainly due to **$1.0 million** in consulting expenses in 2018 for core processing contract renegotiations and lower FDIC insurance expenses in 2019[180](index=180&type=chunk)[181](index=181&type=chunk) [Financial Condition](index=33&type=section&id=FINANCIAL%20CONDITION) Total assets increased to **$2.71 billion** at year-end 2019, driven by deposit and loan growth, with the loan portfolio concentrated in commercial real estate, while maintaining strong credit quality and robust capital - Total assets increased by **$186.4 million** to **$2.71 billion** at year-end 2019, primarily due to increases in cash, funded by deposit growth[186](index=186&type=chunk) - The investment securities portfolio decreased by **$61.8 million** (**10%**) to $561.3 million at amortized cost during 2019[191](index=191&type=chunk) Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial loans | $246,687 | $230,739 | | Real estate - Commercial | $1,255,141 | $1,186,687 | | Real estate - Construction | $61,095 | $76,423 | | Real estate - Home equity | $116,024 | $124,696 | | Real estate - Other residential | $136,657 | $117,847 | | Installment and other consumer | $27,682 | $27,472 | | **Total loans** | **$1,843,286** | **$1,763,864** | - The allowance for loan losses was **$16.7 million**, representing **0.90%** of total loans, unchanged from year-end 2018, with non-performing assets minimal at **$226 thousand**[212](index=212&type=chunk)[223](index=223&type=chunk) - Total deposits grew by **$161.6 million** (**7.4%**) to **$2.34 billion**, with non-interest bearing deposits accounting for **48%** of total deposits at year-end[231](index=231&type=chunk) - Bancorp's total risk-based capital ratio was **15.1%** at December 31, 2019, exceeding the **well capitalized** regulatory requirements[250](index=250&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) The company's primary market risk is interest rate risk, managed by ALCO, with simulations showing NII sensitivity to rate changes, and interest rate swaps used to mitigate risk on fixed-rate loans - The primary market risk is **interest rate risk**, managed by the **Asset Liability Management Committee (ALCO)** to minimize exposure of net interest margin and earnings to rate changes[261](index=261&type=chunk) Estimated Impact of Interest Rate Changes on Net Interest Income (NII) | Immediate Change in Rates (bps) | Estimated Change in NII in Year 1 | Estimated Change in NII in Year 2 | | :--- | :--- | :--- | | +400 | (5.0)% | 7.1% | | +300 | (3.6)% | 6.3% | | +200 | (2.2)% | 5.3% | | +100 | (1.0)% | 3.5% | | -100 | (4.5)% | (9.5)% | - The company uses **interest rate swap contracts** as **fair value hedges** to mitigate **interest rate risk** on specified long-term fixed-rate loans[263](index=263&type=chunk) [Financial Statements and Supplementary Data](index=47&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents the audited consolidated financial statements for 2019 and 2018, including the independent auditor's report, detailing the company's financial position, operations, equity, and cash flows, with comprehensive notes on accounting policies and disclosures Consolidated Statement of Condition Highlights (in thousands) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$2,707,280** | **$2,520,892** | | Loans, net | $1,826,609 | $1,748,043 | | Total investment securities | $569,673 | $619,670 | | **Total Liabilities** | **$2,370,492** | **$2,204,485** | | Total deposits | $2,336,489 | $2,174,840 | | **Total Stockholders' Equity** | **$336,788** | **$316,407** | Consolidated Statement of Income Highlights (in thousands) | | Year Ended Dec 31, 2019 | Year Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net interest income | $95,680 | $91,544 | | Provision for loan losses | $900 | $0 | | Non-interest income | $9,084 | $10,139 | | Non-interest expense | $57,970 | $58,266 | | **Net income** | **$34,241** | **$32,622** | [Note 1: Summary of Significant Accounting Policies](index=56&type=section&id=Note%201%3A%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines key accounting policies, including the adoption of ASC 842 for leases in 2019 and the upcoming CECL model effective January 1, 2020, which is expected to increase the allowance for credit losses by **5% to 15%** - The company adopted the new lease accounting standard (**ASC 842**) on January 1, 2019, resulting in the recognition of **$13.4 million** in right-of-use assets and **$15.4 million** in lease liabilities[368](index=368&type=chunk)[369](index=369&type=chunk) - The company will adopt the **Current Expected Credit Loss (CECL) model** effective January 1, 2020, estimating a **5% to 15%** increase to its allowance for credit losses, recorded as an adjustment to retained earnings[372](index=372&type=chunk)[374](index=374&type=chunk) [Note 3: Loans and Allowance for Loan Losses](index=75&type=section&id=Note%203%3A%20Loans%20and%20Allowance%20for%20Loan%20Losses) The loan portfolio totaled **$1.84 billion** at year-end 2019, with **88%** secured by real estate, maintaining strong credit quality with minimal non-accrual loans and a **$16.7 million** allowance for loan losses - At December 31, 2019, **88%** of the total loan portfolio was secured by real estate, with a significant concentration in commercial real estate[400](index=400&type=chunk) Credit Quality Indicators | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Loans | $1,843,286 | $1,763,864 | | Non-accrual loans | $226 | $697 | | Loans 30-89 days past due | $1,481 | $1,121 | | Troubled Debt Restructurings (TDRs) | $11,333 | $14,406 | Allowance for Loan Losses (ALLL) Rollforward (Year ended Dec 31, 2019) | (in thousands) | Amount | | :--- | :--- | | Beginning balance | $15,821 | | Provision | $900 | | Charge-offs | ($78) | | Recoveries | $34 | | **Ending balance** | **$16,677** | [Note 15: Regulatory Matters](index=99&type=section&id=Note%2015%3A%20Regulatory%20Matters) Both Bancorp and its bank subsidiary exceeded all minimum Basel III regulatory capital requirements as of December 31, 2019, with the Bank significantly above 'well capitalized' thresholds Capital Ratios as of December 31, 2019 | Ratio | Bancorp Actual | Bank Actual | Well Capitalized Threshold | | :--- | :--- | :--- | :--- | | Total Capital (to risk-weighted assets) | 15.07% | 14.63% | ≥ 10.000% | | Tier 1 Capital (to risk-weighted assets) | 14.24% | 13.79% | ≥ 8.000% | | Common Equity Tier 1 (to risk-weighted assets) | 14.11% | 13.79% | ≥ 6.500% | | Tier 1 Capital (to average assets) | 11.66% | 11.29% | ≥ 5.000% | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=105&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[559](index=559&type=chunk) [Controls and Procedures](index=105&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2019 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[559](index=559&type=chunk) - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2019[560](index=560&type=chunk) - There were no significant changes in internal control over financial reporting during the quarter ended December 31, 2019[564](index=564&type=chunk) [Other Information](index=106&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) The company reports no other information for this item - None[566](index=566&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=106&type=section&id=ITEM%2010.%20DIRECTORS,%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[566](index=566&type=chunk) [Executive Compensation](index=106&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[567](index=567&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=106&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) The information required for this item is incorporated by reference from ITEM 5 of this report, Note 8 to the financial statements, and the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement** and other sections of the 10-K[568](index=568&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=106&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS,%20AND%20DIRECTOR%20INDEPENDENCE) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[569](index=569&type=chunk) [Principal Accountant Fees and Services](index=106&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTANT%20FEES%20AND%20SERVICES) The information required for this item is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Shareholders - Information is incorporated by reference from the **Proxy Statement**[570](index=570&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=107&type=section&id=ITEM%2015.%20EXHIBITS,%20FINANCIAL%20STATEMENT%20SCHEDULES) This section lists the documents filed as part of the Form 10-K report, including financial statements and a list of exhibits filed or incorporated by reference - Lists the financial statements filed under **ITEM 8** and all exhibits filed with or incorporated by reference into the report[573](index=573&type=chunk)[574](index=574&type=chunk) [Form 10-K Summary](index=108&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) The company reports no summary for this item - None[576](index=576&type=chunk)

Bank of Marin Bancorp. (NASDAQ:BMRC) Q4 2019 Results Earnings Conference Call January 27, 2020 11:30 AM ET Company Participants Andrea Henderson - Director, Marketing Russ Colombo - President and Chief Executive Officer Tani Girton - Executive Vice President and Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson Matthew Clark - Piper Sandler Jackie Bohlen - KBW Andrea Henderson Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Fourth Quarte ...

[PART I. FINANCIAL INFORMATION](index=3&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section presents the company's unaudited consolidated financial statements, including condition, income, equity, and cash flows, along with detailed explanatory notes [ITEM 1. Financial Statements](index=3&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Bank of Marin Bancorp and its subsidiary, including the Statements of Condition, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows, along with detailed notes explaining the basis of presentation, accounting standards, fair value measurements, investment securities, loans, borrowings, stockholders' equity, commitments, and derivative instruments [Consolidated Statements of Condition](index=3&type=section&id=Consolidated%20Statements%20of%20Condition) This statement provides a snapshot of the company's financial position, detailing its assets, liabilities, and stockholders' equity at specific reporting dates | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | $2,592,071 | $2,520,892 | | Total Liabilities | $2,259,006 | $2,204,485 | | Total Stockholders' Equity | $333,065 | $316,407 | | Loans, net | $1,782,450 | $1,748,043 | | Total Deposits | $2,224,524 | $2,174,840 | [Consolidated Statements of Comprehensive Income](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This statement reports the company's net income and other comprehensive income, reflecting overall financial performance over specific periods | Metric | Three months ended Sep 30, 2019 (in thousands) | Three months ended Sep 30, 2018 (in thousands) | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income | $9,448 | $8,680 | $25,162 | $22,960 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Comprehensive Income | $10,194 | $7,340 | $35,110 | $16,466 | [Consolidated Statements of Changes in Stockholders' Equity](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This statement outlines the changes in each component of stockholders' equity, including net income, other comprehensive income, and stock repurchases | Metric | Nine months ended Sep 30, 2019 (in thousands) | Nine months ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Balance at January 1 | $316,407 | $297,025 | | Net income | $25,162 | $22,960 | | Other comprehensive income (loss) | $9,948 | $(6,494) | | Stock repurchased, net of commissions | $(13,170) | $(1,539) | | Balance at September 30 | $333,065 | $308,603 | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement details the cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity (9 months ended Sep 30) | 2019 (in thousands) | 2018 (in thousands) | | :--------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $31,201 | $31,284 | | Net cash provided by (used in) investing activities | $95,475 | $(149,088) | | Net cash provided by financing activities | $21,589 | $56,977 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $148,265 | $(60,827) | | Cash, cash equivalents and restricted cash at end of period | $182,486 | $142,718 | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes provide essential details and explanations supporting the consolidated financial statements, covering accounting policies, fair value, and specific financial instruments [Note 1: Basis of Presentation](index=10&type=section&id=Note%201:%20Basis%20of%20Presentation) The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin, prepared in accordance with SEC rules and GAAP. The NorCal Community Bancorp Trusts I and II are not consolidated, with subordinated debentures shown as liabilities and Bancorp's investment accounted for under the equity method - The consolidated financial statements include Bank of Marin Bancorp and its wholly-owned bank subsidiary, Bank of Marin[19](index=19&type=chunk) - NorCal Community Bancorp Trusts I and II are not consolidated; subordinated debentures are shown as liabilities, and Bancorp's investment is accounted for under the equity method[20](index=20&type=chunk) Weighted Average Shares Outstanding and EPS | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Weighted average basic shares outstanding (thousands) | 13,571 | 13,900 | 13,654 | 13,872 | | Weighted average diluted shares outstanding (thousands) | 13,735 | 14,110 | 13,825 | 14,062 | | Basic EPS | $0.70 | $0.63 | $1.84 | $1.66 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | [Note 2: Recently Adopted and Issued Accounting Standards](index=11&type=section&id=Note%202:%20Recently%20Adopted%20and%20Issued%20Accounting%20Standards) The company adopted new accounting standards in 2019, including ASU 2016-02 (Leases), which resulted in recording operating and finance lease right-of-use assets and liabilities. Other adopted ASUs (2018-07, 2018-16) had no material impact. Future standards, notably CECL (ASU 2016-13), are expected to increase the allowance for credit losses with a one-time adjustment to retained earnings upon adoption in 2020 - Adoption of ASU 2016-02, Leases (Topic 842), on January 1, 2019, resulted in recording **$13.4 million** in operating and finance lease right-of-use assets and **$15.4 million** in operating and finance lease liabilities, with no cumulative-effect adjustments to retained earnings[25](index=25&type=chunk) - ASU 2016-13, Financial Instruments - Credit Losses (CECL model), effective for fiscal years beginning after December 15, 2019, is expected to increase the allowance for credit losses, resulting in a one-time cumulative-effect adjustment to retained earnings at adoption. The primary methodology will be a discounted cash flow approach[30](index=30&type=chunk)[31](index=31&type=chunk) - ASU 2018-07 (Stock Compensation) and ASU 2018-16 (Derivatives and Hedging) were adopted effective January 1, 2019, with no impact on financial condition or results of operations[26](index=26&type=chunk)[27](index=27&type=chunk) [Note 3: Fair Value of Assets and Liabilities](index=13&type=section&id=Note%203:%20Fair%20Value%20of%20Assets%20and%20Liabilities) The company categorizes fair value measurements into a three-level hierarchy. As of September 30, 2019, all recurring fair value measurements for available-for-sale securities and derivative financial instruments were classified as Level 2, with no Level 1 or Level 3 securities. No transfers between levels occurred in 2019 or 2018 - Fair value hierarchy categorizes assets and liabilities into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk) - As of September 30, 2019, all available-for-sale securities and derivative financial instruments measured at fair value on a recurring basis were classified as **Level 2**, with no Level 1 or Level 3 securities[42](index=42&type=chunk)[44](index=44&type=chunk) Fair Value of Financial Instruments | Financial Instrument | September 30, 2019 (Carrying Amount, in thousands) | September 30, 2019 (Fair Value, in thousands) | Fair Value Hierarchy | | :--------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :------------------- | | Cash and cash equivalents | $182,486 | $182,486 | Level 1 | | Investment securities held-to-maturity | $142,213 | $145,118 | Level 2 | | Loans, net | $1,782,450 | $1,792,192 | Level 3 | | Time deposits | $98,077 | $97,150 | Level 2 | | Subordinated debentures | $2,691 | $3,094 | Level 3 | [Note 4: Investment Securities](index=15&type=section&id=Note%204:%20Investment%20Securities) The investment portfolio comprises held-to-maturity and available-for-sale securities, primarily government-sponsored enterprise securities and obligations of state and political subdivisions. As of September 30, 2019, total investment securities were $500.9 million, with a significant portion in unrealized gains. The company held non-marketable FHLB stock and Visa Inc. Class B common stock, with the latter having a zero carrying value due to resale restrictions and conversion rate uncertainty Investment Securities by Type | Investment Securities | September 30, 2019 (Fair Value, in thousands) | December 31, 2018 (Fair Value, in thousands) | | :--------------------------------- | :-------------------------------------------- | :--------------------------------------------- | | Total held-to-maturity | $145,118 | $153,894 | | Total available-for-sale | $358,724 | $462,464 | | Total investment securities | $503,842 | $616,358 | Pledged Investment Securities | Pledged Investment Securities | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total investment securities pledged to the State of California | $85,319 | $126,430 | | Collateral for Wealth Management and Trust Services checking account | $625 | $2,000 | - As of September 30, 2019, **37 securities** were in unrealized loss positions, with **25** in continuous loss for twelve months or more. Management determined that these were not other-than-temporarily impaired, as there was no intent to sell and recovery of amortized cost was more likely than not[61](index=61&type=chunk)[64](index=64&type=chunk) - The company held **$11.7 million** in FHLB stock (recorded at cost) and **10,439 shares** of Visa Inc. Class B common stock with a zero carrying value due to resale restrictions and conversion rate uncertainty. The converted value of Visa Class B shares was **$2.9 million** at September 30, 2019[65](index=65&type=chunk)[67](index=67&type=chunk) [Note 5: Loans and Allowance for Loan Losses](index=21&type=section&id=Note%205:%20Loans%20and%20Allowance%20for%20Loan%20Losses) Total loans increased to $1.799 billion at September 30, 2019. The company maintains a risk rating system for credit quality, with 'Pass,' 'Watch,' 'Special Mention,' 'Substandard,' and 'Doubtful' categories. Troubled Debt Restructurings (TDRs) decreased, and impaired loans totaled $12.4 million. The Allowance for Loan Losses (ALLL) was $16.2 million, with a ratio of 0.90% to total loans Loan Portfolio Summary | Loan Class | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total loans | $1,798,690 | $1,763,864 | | Total past due | $780 | $1,121 | | Non-accrual loans | $422 | $697 | Loans by Risk Grade (September 30, 2019) | Risk Grade (September 30, 2019) | Commercial and industrial (in thousands) | Commercial real estate, owner-occupied (in thousands) | Commercial real estate, investor (in thousands) | Construction (in thousands) | Home equity (in thousands) | Other residential (in thousands) | Installment and other consumer (in thousands) | Purchased credit-impaired (in thousands) | Total (in thousands) | | :--------------------------------- | :--------------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------------- | :------------------------- | :------------------------------- | :------------------------------------ | :--------------------------------------- | :------------------- | | Pass | $219,346 | $290,074 | $893,574 | $50,254 | $120,400 | $130,781 | $28,313 | $2,059 | $1,734,801 | | Special Mention | $41,092 | $10,198 | $1,664 | — | $1,000 | — | — | — | $53,954 | | Substandard | $386 | $9,061 | — | — | $340 | — | $148 | — | $9,935 | | Total loans | $260,824 | $309,333 | $895,238 | $50,254 | $121,740 | $130,781 | $28,461 | $2,059 | $1,798,690 | Loan Loss Metrics | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Recorded Investment in Troubled Debt Restructurings | $12,162 | $14,406 | | Total recorded investment in impaired loans | $12,351 | $15,038 | | Specific allowance for impaired loans | $389 | $778 | | Ending Allowance for Loan Losses (ALLL) | $16,240 | $15,821 | | Ratio of ALLL to total loans | 0.90% | 0.90% | - Pledged loans to FHLB totaled **$1.083 billion** and to FRB (TIC loans) totaled **$111.5 million** at September 30, 2019[109](index=109&type=chunk) - Related party loans decreased to **$9.0 million** at September 30, 2019, from **$10.6 million** at December 31, 2018[111](index=111&type=chunk) [Note 6: Borrowings and Other Obligations](index=30&type=section&id=Note%206:%20Borrowings%20and%20Other%20Obligations) The company maintains unsecured lines of credit with correspondent banks and FHLB, and a line of credit with the FRBSF, with no outstanding overnight borrowings at September 30, 2019. Subordinated debentures from an acquisition are recorded at fair value and accreted into interest expense, with Bancorp guaranteeing payments on trust preferred securities - No overnight borrowings were outstanding under federal funds purchased lines of credit (**$92.0 million** capacity) or FHLB lines of credit (**$615.9 million** capacity) at September 30, 2019[112](index=112&type=chunk)[113](index=113&type=chunk) - The Federal Reserve line of credit had a borrowing capacity of **$76.5 million** with no outstanding borrowings at September 30, 2019[114](index=114&type=chunk) - Subordinated debentures due to NorCal Community Bancorp Trust II (maturing March 15, 2036) had an interest rate of **3.52%** at September 30, 2019. Accretion on these debentures totaled **$51 thousand** for the nine months ended September 30, 2019[115](index=115&type=chunk) [Note 7: Stockholders' Equity](index=30&type=section&id=Note%207:%20Stockholders'%20Equity) Bancorp declared a $0.21 per share cash dividend payable in November 2019. Share-based payments, including stock options and restricted stock, are expensed over the service period. The company adopted ASU 2018-02, reclassifying $638 thousand from AOCI to retained earnings. A share repurchase program, extended to February 28, 2020, saw $13.2 million in repurchases during the first nine months of 2019 - A cash dividend of **$0.21 per share** was declared on October 18, 2019, payable November 8, 2019[117](index=117&type=chunk) - Share-based compensation expense is recorded for stock options and restricted stock awards over their service period. During the nine months ended September 30, 2019, **7,795 shares** totaling **$326 thousand** were withheld for cashless exercises[119](index=119&type=chunk)[123](index=123&type=chunk) - ASU 2018-02 was adopted in Q1 2018, reclassifying **$638 thousand** from Accumulated Other Comprehensive Income (AOCI) to retained earnings[124](index=124&type=chunk) - The Share Repurchase Program, approved for up to **$25.0 million**, was extended through February 28, 2020. During the nine months ended September 30, 2019, **313,651 shares** were repurchased for **$13.2 million**[125](index=125&type=chunk)[129](index=129&type=chunk) [Note 8: Commitments and Contingencies](index=32&type=section&id=Note%208:%20Commitments%20and%20Contingencies) The company extends credit through loan commitments and standby letters of credit, with an allowance for losses on these off-balance sheet commitments totaling $1.1 million. Operating and finance leases are recognized on the balance sheet, with future minimum payments detailed. Legal proceedings, particularly related to Visa's Covered Litigation, are not expected to have a material adverse effect, as the company's indemnification liability is covered by an escrow account Commitments and Standby Letters of Credit | Commitments and Standby Letters of Credit | September 30, 2019 (in thousands) | | :---------------------------------------- | :-------------------------------- | | Commercial lines of credit | $239,465 | | Revolving home equity lines | $190,230 | | Undisbursed construction loans | $40,101 | | Personal and other lines of credit | $9,888 | | Standby letters of credit | $2,014 | | Total commitments and standby letters of credit | $481,698 | | Allowance for losses on off-balance sheet commitments | $1,100 | Lease Balances (September 30, 2019) | Lease Balances (September 30, 2019) | Amount (in thousands) | | :---------------------------------- | :-------------------- | | Operating lease right-of-use assets | $11,934 | | Operating lease liabilities | $13,665 | | Finance lease right-of-use assets, net | $252 | | Finance lease liabilities | $255 | - The company is responsible for a proportionate share of Visa U.S.A.'s Covered Litigation indemnifications. Visa deposited an additional **$300 million** into the litigation escrow account on September 27, 2019, which is expected to cover settlement obligations. The probability of losses requiring future cash settlement payments from member banks is considered remote[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) [Note 9: Derivative Financial Instruments and Hedging Activities](index=34&type=section&id=Note%209:%20Derivative%20Financial%20Instruments%20and%20Hedging%20Activities) The company uses interest rate swap agreements as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate payments to floating-rate. As of September 30, 2019, there were five such agreements, with a total fair value liability of $1.6 million - Interest rate swap agreements are used as fair value hedges to mitigate interest rate risk on long-term fixed-rate loans, converting fixed-rate interest payments to floating-rate[146](index=146&type=chunk)[148](index=148&type=chunk) Derivative Financial Instruments Summary | Derivative Financial Instruments | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Interest rate contracts notional amount | $17,199 | $9,016 | | Interest rate contracts fair value (liability) | $1,603 | $375 | - Net losses on fair value hedging relationships recognized in interest income were **$(89) thousand** for the nine months ended September 30, 2019, compared to **$(123) thousand** for the same period in 2018[150](index=150&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion highlights the company's financial performance, including increased earnings and diluted EPS for both the third quarter and first nine months of 2019. Key drivers include loan growth, strong credit quality, and deposit increases. The company maintains robust capital ratios and liquidity, supporting organic growth and potential acquisitions. No material changes to critical accounting policies or risk factors were noted [Forward-Looking Statements](index=36&type=section&id=Forward-Looking%20Statements) This section contains forward-looking statements regarding future operations, products, services, revenues, and earnings, identified by words like 'believe,' 'expect,' or 'intend.' These statements are based on current management expectations but are subject to various risks, including economic conditions, interest rate changes, and regulatory factors, as detailed in the Risk Factors section - Forward-looking statements are based on management's current expectations regarding economic, legislative, and regulatory issues, but future results may vary materially due to factors beyond management's control[159](index=159&type=chunk)[160](index=160&type=chunk) - The company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date they are made[162](index=162&type=chunk) [Critical Accounting Policies and Estimates](index=38&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) There have been no material changes to the company's critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements - No material changes have occurred to the critical accounting policies, which include Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements[163](index=163&type=chunk) [Executive Summary](index=39&type=section&id=Executive%20Summary) The company reported increased earnings and diluted EPS for Q3 and the first nine months of 2019, driven by loan growth, strong credit quality, and deposit increases. Capital ratios remain strong, exceeding regulatory requirements, and a $0.21 cash dividend was declared. The company emphasizes relationship banking, disciplined fundamentals, and community commitment for future success Earnings and EPS Summary | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--------------------------------- | :------ | :------ | :------ | :------ | | Earnings (in millions) | $9.4 | $8.7 | $25.2 | $23.0 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | - Loans totaled **$1.799 billion** at September 30, 2019, a net increase of **$34.8 million** from December 31, 2018, driven by **$156.1 million** in new originations[166](index=166&type=chunk) - Non-accrual loans decreased to **$422 thousand** (**0.02%** of loan portfolio) at September 30, 2019, from **$697 thousand** (**0.04%**) at December 31, 2018, reflecting strong credit quality[166](index=166&type=chunk) - Total deposits increased **$49.7 million** in the first nine months of 2019 to **$2.225 billion**, with non-interest bearing deposits representing **50%** of the total[166](index=166&type=chunk) - All capital ratios exceeded regulatory 'well-capitalized' requirements, with a total risk-based capital ratio for Bancorp of **15.3%** at September 30, 2019[166](index=166&type=chunk) [RESULTS OF OPERATIONS](index=40&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, focusing on net interest income, loan loss provisions, non-interest income, and expenses [Net Interest Income](index=41&type=section&id=Net%20Interest%20Income) Net interest income increased by $612 thousand to $24.2 million in Q3 2019 and by $3.5 million to $71.8 million in the first nine months of 2019, primarily due to higher average loan balances and increased yields on earning assets, partially offset by higher deposit rates. The net interest margin also improved to 4.00% in Q3 2019 and 3.99% for the first nine months Net Interest Income and Margin | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net interest income | $24,151 | $23,539 | $71,786 | $68,272 | | Reported net interest margin | 4.00% | 3.91% | 3.99% | 3.86% | - The increase in net interest income was driven by higher average loan balances and higher yields across earning asset categories, partially offset by increased rates on deposit accounts[183](index=183&type=chunk)[185](index=185&type=chunk) - The FOMC lowered the federal funds rate by **0.25%** in July, September, and October 2019, to a range of **1.50% to 1.75%**, which could put pressure on the net interest margin as the Bank is asset sensitive[187](index=187&type=chunk)[188](index=188&type=chunk) [Provision for Loan Losses](index=44&type=section&id=Provision%20for%20Loan%20Losses) A $400 thousand provision for loan losses was recorded in Q3 2019, consistent with loan growth, compared to no provision in the prior year. Impaired loans and classified assets decreased, while special mention loans increased due to unique circumstances, though not indicative of deteriorating credit quality - A **$400 thousand** provision for loan losses was recorded in the quarter ended September 30, 2019, consistent with loan growth. No provision for loan losses was recorded in the three and nine months ended September 30, 2018[192](index=192&type=chunk) - Impaired loan balances totaled **$12.4 million** at September 30, 2019, down from **$15.0 million** at December 31, 2018[191](index=191&type=chunk) - Classified assets (loans with substandard or doubtful risk grades) decreased to **$9.9 million** at September 30, 2019, from **$12.6 million** at December 31, 2018, primarily due to a paydown and upgrade of a land development loan[191](index=191&type=chunk) - Special mention loans increased to **$54.0 million** at September 30, 2019, from **$17.3 million** at December 31, 2018, due to four new loans with unique circumstances, not indicative of deteriorating credit quality[191](index=191&type=chunk) - The ratio of loan loss reserves to total loans was **0.90%** at both September 30, 2019, and December 31, 2018[193](index=193&type=chunk) [Non-interest Income](index=45&type=section&id=Non-interest%20Income) Non-interest income increased by $485 thousand to $2.7 million in Q3 2019, primarily driven by a $562 thousand benefit collected on bank-owned life insurance (BOLI) policies. For the first nine months, non-interest income increased by $50 thousand to $6.8 million, also benefiting from BOLI income and net gains on investment securities, despite decreases in wealth management and other fee income Non-interest Income (Q3) | Non-interest Income Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $2,721 | $2,236 | $485 | 21.7% | | Earnings on bank-owned life insurance, net | $795 | $227 | $568 | 250.2% | | Other income | $305 | $439 | $(134) | (30.5)% | Non-interest Income (9M) | Non-interest Income Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest income | $6,766 | $6,716 | $50 | 0.7% | | Earnings on bank-owned life insurance, net | $970 | $685 | $285 | 41.6% | | Gains (losses) on investment securities, net | $55 | $(79) | $134 | NM | | Wealth Management and Trust Services | $1,406 | $1,493 | $(87) | (5.8)% | - The increase in BOLI earnings in Q3 2019 was primarily due to a **$562 thousand** benefit collected on BOLI policies. For the nine months, this was partially offset by **$283 thousand** in non-refundable underwriting costs for new policies[198](index=198&type=chunk)[199](index=199&type=chunk) [Non-interest Expense](index=46&type=section&id=Non-interest%20Expense) Non-interest expense increased slightly by $229 thousand to $14.2 million in Q3 2019, mainly due to higher salaries and benefits, partially offset by a reversal of FDIC insurance expense. For the first nine months, the increase was $83 thousand to $44.6 million, with higher salaries and benefits and a provision for off-balance sheet commitments offsetting lower data processing and professional services costs from prior year acquisition-related expenses Non-interest Expense (Q3) | Non-interest Expense Component | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $14,200 | $13,971 | $229 | 1.6% | | Salaries and related benefits | $8,412 | $8,069 | $343 | 4.3% | | Federal Deposit Insurance Corporation insurance | $1 | $186 | $(185) | (99.5)% | | Professional services | $580 | $727 | $(147) | (20.2)% | Non-interest Expense (9M) | Non-interest Expense Component | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (Amount) | Change (Percent) | | :--------------------------------- | :--------------------- | :--------------------- | :-------------- | :--------------- | | Total non-interest expense | $44,644 | $44,561 | $83 | 0.2% | | Salaries and related benefits | $26,426 | $25,402 | $1,024 | 4.0% | | Data processing | $2,942 | $3,354 | $(412) | (12.3)% | | Professional services | $1,701 | $2,836 | $(1,135) | (40.0)% | | Provision for losses on off-balance sheet commitments | $129 | — | $129 | 100.0% | - The increase in salaries and related benefits was due to additional full-time equivalent (FTE) staff and annual merit increases. The decrease in FDIC insurance expense was due to a reversal when the Deposit Insurance Fund reserve exceeded its billing threshold[203](index=203&type=chunk) [Provision for Income Taxes](index=47&type=section&id=Provision%20for%20Income%20Taxes) The provision for income taxes decreased to $2.8 million in Q3 2019, with an effective tax rate of 23.0%, due to higher tax-exempt BOLI income and a deferred tax liability true-up adjustment. For the first nine months, the provision increased to $8.3 million, with an effective tax rate of 24.9%, reflecting higher pre-tax income and lower discrete tax benefits compared to the prior year Income Tax Provision and Effective Tax Rate | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Provision for income taxes | $2,824 | $3,124 | $8,346 | $7,467 | | Effective tax rate | 23.0% | 26.5% | 24.9% | 24.5% | - The decrease in the Q3 2019 provision was due to higher tax-exempt BOLI income from death benefits and a **$327 thousand** deferred tax liability true-up adjustment[207](index=207&type=chunk) - The increase in the 9M 2019 provision and effective tax rate was primarily due to higher pre-tax income and lower discrete tax benefits from stock option exercises and restricted stock vesting compared to 2018[208](index=208&type=chunk) [FINANCIAL CONDITION SUMMARY](index=47&type=section&id=FINANCIAL%20CONDITION%20SUMMARY) This section provides an overview of the company's financial position, including investment securities, loans, liabilities, capital adequacy, and liquidity [Investment Securities](index=47&type=section&id=Investment%20Securities) The investment securities portfolio decreased by $118.7 million to $500.9 million at September 30, 2019, primarily due to calls, paydowns, maturities, and sales, partially offset by new purchases and an increase in fair value of available-for-sale securities. The company sold $66 million in lower-yielding, shorter-term securities to manage interest rate spread and cash - The investment securities portfolio decreased by **$118.7 million** to **$500.9 million** at September 30, 2019, from December 31, 2018[211](index=211&type=chunk) - The decrease was primarily due to **$150.5 million** in calls, paydowns, maturities, and sales, partially offset by **$18.9 million** in purchases and an increase in the fair value of available-for-sale securities[211](index=211&type=chunk) - The company sold **$66 million** in lower yielding, shorter term securities in early 2019 to manage its interest rate spread and cash position[211](index=211&type=chunk) Obligations of State and Political Subdivisions | Obligations of State and Political Subdivisions | September 30, 2019 (Fair Value, in thousands) | % of Total | | :---------------------------------------------- | :-------------------------------------------- | :--------- | | Within California | $11,786 | 20.3% | | Outside California | $45,581 | 79.7% | | Total | $57,367 | 100.0% | [Loans](index=48&type=section&id=Loans) Total loans increased by $34.8 million to $1.799 billion at September 30, 2019. New loan originations of $156.1 million in the first nine months of 2019, distributed across Commercial and Consumer Banking, outpaced payoffs of $107.8 million - Loans increased by **$34.8 million** to **$1.799 billion** at September 30, 2019[216](index=216&type=chunk) - New loan originations totaled **$156.1 million** in the first nine months of 2019, distributed across Commercial Banking and Consumer Banking[216](index=216&type=chunk) - Loan payoffs totaled **$107.8 million** in the first nine months of 2019, primarily reflecting asset sales and completed construction projects[216](index=216&type=chunk) [Liabilities](index=48&type=section&id=Liabilities) Total liabilities increased by $54.5 million to $2.259 billion in the first nine months of 2019, driven by a $49.7 million increase in deposits. Non-interest bearing deposits grew by $35.2 million and represented 49.5% of total deposits. The company also repaid a $7.0 million FHLB overnight borrowing and recorded $13.7 million in operating lease liabilities due to new accounting standards - Total liabilities increased by **$54.5 million** to **$2.259 billion** during the first nine months of 2019[217](index=217&type=chunk) - Deposits increased **$49.7 million** in the first nine months of 2019. Non-interest bearing deposits increased **$35.2 million** to **$1.101 billion**, representing **49.5%** of total deposits at September 30, 2019[217](index=217&type=chunk) - The company repaid a **$7.0 million** overnight borrowing from FHLB and recorded **$13.7 million** in operating lease liabilities in 2019 due to the adoption of the new lease accounting standard[217](index=217&type=chunk) [Capital Adequacy](index=48&type=section&id=Capital%20Adequacy) The company consistently exceeds all regulatory 'well capitalized' requirements under Basel III, with Bancorp's total risk-based capital ratio at 15.31% and the Bank's at 14.60% as of September 30, 2019. Bancorp is no longer subject to separate minimum capital requirements due to an increased asset threshold for 'Small Bank Holding Company' definition - Both Bancorp and the Bank's capital ratios exceed the regulatory definition of 'well capitalized' for all periods presented[221](index=221&type=chunk) - Basel III capital rules, fully phased in on January 1, 2019, require minimum ratios for Tier 1 capital (**8.5%**) and Common Equity Tier 1 (**7.0%**), including a **2.50%** capital conservation buffer[222](index=222&type=chunk) Capital Ratios (September 30, 2019) | Capital Ratios (September 30, 2019) | Bancorp Actual Ratio | Bank Actual Ratio | | :---------------------------------- | :------------------- | :---------------- | | Total Capital (to risk-weighted assets) | 15.31% | 14.60% | | Tier 1 Capital (to risk-weighted assets) | 14.46% | 13.75% | | Tier 1 Capital (to average assets) | 11.92% | 11.33% | | Common Equity Tier 1 (to risk-weighted assets) | 14.33% | 13.75% | - Bancorp is no longer subject to separate minimum capital requirements due to the increase in the 'Small Bank Holding Company' asset threshold from **$1.0 billion** to **$3.0 billion**[222](index=222&type=chunk) [Liquidity](index=50&type=section&id=Liquidity) The company maintains strong liquidity through liquid assets, formal lines of credit, and a stable core deposit base, managed by its ALCO. Liquid assets increased to $471.0 million at September 30, 2019. Key liquidity sources include investment security paydowns and deposit inflows, while uses include loan originations, security purchases, and stock repurchases. Bancorp's cash position is sufficient to cover operational needs and dividends through mid-2020 - Liquid assets, including unencumbered available-for-sale securities and cash, totaled **$471.0 million** at September 30, 2019, an increase of **$37.8 million** from December 31, 2018[231](index=231&type=chunk) - Cash and cash equivalents increased **$148.3 million** from December 31, 2018[231](index=231&type=chunk) - Significant liquidity sources in the first nine months of 2019 included **$150.5 million** from investment security paydowns/maturities/sales, **$49.7 million** in deposit increases, and **$30.6 million** net cash from operating activities[231](index=231&type=chunk) - Significant liquidity uses included **$32.9 million** in net loan originations, **$18.9 million** in investment securities purchases, **$13.3 million** in common stock repurchases, and **$8.1 million** in cash dividends[231](index=231&type=chunk) - Bancorp held **$14.3 million** of cash at September 30, 2019, deemed sufficient to cover operational needs, share repurchases, and cash dividends through mid-2020[235](index=235&type=chunk) Performance Metrics | Metric | 3 months ended Sep 30, 2019 | 3 months ended Sep 30, 2018 | 9 months ended Sep 30, 2019 | 9 months ended Sep 30, 2018 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $9,448 | $8,680 | $25,162 | $22,960 | | Diluted EPS | $0.69 | $0.62 | $1.82 | $1.64 | | Return on average assets | 1.49% | 1.38% | 1.33% | 1.24% | | Return on average equity | 11.34% | 11.20% | 10.40% | 10.17% | Financial Condition Data | Financial Condition Data | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total assets | $2,592,071 | $2,520,892 | | Loans, net | $1,782,450 | $1,748,043 | | Deposits | $2,224,524 | $2,174,840 | | Non-accrual loans to total loans | 0.02% | 0.04% | | Total capital (to risk-weighted assets) | 15.31% | 14.93% | - The Board of Directors declared a cash dividend of **$0.21 per share** on October 18, 2019, representing a **30%** payout ratio[166](index=166&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure about Market Risk](index=52&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20about%20Market%20Risk) The company manages interest rate risk, a significant form of market risk, to minimize its impact on net interest margin, earnings, and capital. Interest rate swap contracts are used as fair value hedges. The Asset Liability Management Committee (ALCO) and Board of Directors regularly review exposure using simulation models, and as of September 30, 2019, interest rate risk was within policy guidelines - Market risk, primarily interest rate risk, is managed to minimize exposure to net interest margin, earnings, and capital[236](index=236&type=chunk) - Interest rate swap contracts are used as fair value hedges to mitigate changes in the fair value of long-term fixed-rate loans[238](index=238&type=chunk) - The Asset Liability Management Committee (ALCO) and Board of Directors review interest rate risk at least quarterly using simulation models. As of September 30, 2019, interest rate risk was within policy guidelines[239](index=239&type=chunk) Estimated Change in Net Interest Income | Immediate Changes in Interest Rates (in basis points) | Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income | | :---------------------------------------------------- | :--------------------------------------------------------------------------------- | | up 400 | (1.7)% | | up 300 | (1.0)% | | up 200 | (0.4)% | | up 100 | —% | | down 100 | (4.2)% | | down 200 | (7.9)% | [ITEM 4. Controls and Procedures](index=53&type=section&id=ITEM%204.%20Controls%20and%20Procedures) The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019. There were no significant changes to internal control over financial reporting during the quarter ended September 30, 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[245](index=245&type=chunk) - There were no significant changes that materially affected, or are reasonably likely to affect, the company's internal control over financial reporting during the quarter ended September 30, 2019[246](index=246&type=chunk) [PART II. OTHER INFORMATION](index=53&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other miscellaneous information not covered in the financial statements [ITEM 1. Legal Proceedings](index=53&type=section&id=ITEM%201.%20Legal%20Proceedings) The company refers to Note 8 of the Consolidated Financial Statements for information on legal proceedings, which indicates no material adverse effects are expected from ongoing litigation, including Visa's Covered Litigation - Refer to Note 8 to the Consolidated Financial Statements for details on legal proceedings[247](index=247&type=chunk) [ITEM 1A. Risk Factors](index=53&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's 2018 Form 10-K - There have been no material changes from the risk factors previously disclosed in the company's 2018 Form 10-K[248](index=248&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The Board of Directors extended the Share Repurchase Program, allowing for repurchases of up to $25.0 million of common stock through February 28, 2020. During Q3 2019, 65,127 shares were repurchased for $2.7 million - The Share Repurchase Program, approved for up to **$25.0 million**, was extended through February 28, 2020[250](index=250&type=chunk) Share Repurchases (Q3 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :------------------------------- | :--------------------------- | | July 1-31, 2019 | 19,070 | $42.62 | | August 1-31, 2019 | 26,019 | $41.21 | | September 1-30, 2019 | 20,038 | $41.76 | | Total (Q3 2019) | 65,127 | $41.79 | - During the three months ended September 30, 2019, Bancorp repurchased **65,127 shares** for a total cost of **$2.7 million**[251](index=251&type=chunk) [ITEM 3. Defaults Upon Senior Securities](index=54&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) This section confirms that no defaults upon senior securities occurred during the reported period - No defaults upon senior securities were reported[252](index=252&type=chunk) [ITEM 4. Mine Safety Disclosures](index=54&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations and therefore contains no disclosures - This item is not applicable[253](index=253&type=chunk) [ITEM 5. Other Information](index=54&type=section&id=ITEM%205.%20Other%20Information) This section confirms that no other material information is required to be reported under this item - No other information is reported[254](index=254&type=chunk) [ITEM 6. Exhibits](index=55&type=section&id=ITEM%206.%20Exhibits) This section lists all exhibits filed as part of the report or incorporated by reference, including various agreements, plans, and certifications - The section lists exhibits filed as part of the report or incorporated by reference, including merger agreements, articles of incorporation, bylaws, stock plans, and certifications[256](index=256&type=chunk)[257](index=257&type=chunk) [SIGNATURES](index=56&type=section&id=SIGNATURES) The report is duly signed on behalf of Bank of Marin Bancorp by its President & Chief Executive Officer, Chief Financial Officer, and Vice President & Financial Reporting Manager on November 8, 2019 - The report was signed on November 8, 2019, by Russell A. Colombo (President & Chief Executive Officer), Tani Girton (Executive Vice President & Chief Financial Officer), and David A. Merck (Vice President & Financial Reporting Manager)[258](index=258&type=chunk)[259](index=259&type=chunk)

Financial Data and Key Metrics Changes - Net income for Q3 2019 was $9.4 million, an increase from $8.2 million in Q2 2019 and $8.7 million in Q3 2018 [5] - Diluted earnings per share rose to $0.69 in Q3 2019 from $0.60 in Q2 2019 and $0.62 in Q3 2018 [5] - Year-to-date earnings reached $25.2 million, with a return on assets of 1.33% and return on equity of 10.4% [7] - Net interest income increased to $24.2 million, up from $23.8 million in Q2 2019 and $23.6 million in Q3 2018 [8] - Non-interest income was $2.7 million, an increase of over $400,000 from both Q2 2019 and Q3 2018 [9] Business Line Data and Key Metrics Changes - Loan originations increased to $77 million in Q3 2019 from $53 million in Q3 2018, resulting in total loans of $1.8 billion [5] - Deposits increased by $122.5 million in Q3 2019, totaling $2.22 billion at quarter end [5] - Non-interest bearing deposits accounted for 50% of total deposits, with a low cost of deposits at only 21 basis points [5] Market Data and Key Metrics Changes - Non-accrual loans declined to 0.02% of the total loan portfolio, down 1 basis point from the prior quarter [6] - The efficiency ratio improved to 56.8%, reflecting ongoing expense control amid revenue growth [10] Company Strategy and Development Direction - The company is focused on organic growth initiatives and maintaining exceptional credit quality [4] - A strong pipeline of new opportunities is expected to fuel continued growth across key markets [4] - The transition to an enhanced digital platform has been completed, eliminating costs associated with running two platforms [10] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for the remainder of the year, citing strong performance in Q3 as a reflection of consistent business practices [12] - The company maintains a strong base of low-cost, non-interest bearing deposits, which should support performance in varying interest rate environments [12] - Management is cautiously optimistic about the economy in the Bay Area, with no significant signs of a downturn anticipated [32] Other Important Information - The Board of Directors declared a cash dividend of $0.21 per share, representing a 30% payout ratio and a 2% dividend yield based on the share price as of September 30, 2019 [6] - The company is in the process of searching for a new CEO as the current CEO plans to retire [13] Q&A Session Summary Question: Can we anticipate any further synergies from the systems transition? - Management indicated that expenses in Q3 are indicative of future levels, with no significant new projects expected to increase expenses [16][19] Question: Were there any temporary balances in deposits? - Management clarified that fluctuations are typical due to large clients' cash inflows and outflows, with no unusual patterns anticipated [22][24] Question: Did the company make accommodations on loan pricing to support growth? - Management confirmed that they did not lower interest rates significantly to drive loan growth, maintaining discipline in pricing [28] Question: How does the pipeline for loans compare to last year? - Management reported a significantly higher pipeline than the previous year, indicating strong production opportunities [29] Question: What are the plans for excess cash liquidity? - Management stated that they are focused on maintaining appropriate liquidity while looking for good buying opportunities in the market [37] Question: What is the coverage ratio relative to reserves? - Management noted that the coverage ratio can vary based on the mix of the portfolio and acquisitions, making it difficult to determine if it has bottomed [41]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 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 o ...

Start Time: 11:30 End Time: 11:57 March 1, 0000 ET Q2 2019 Earnings Conference Call July 22, 2019, 11:30 AM ET Company Participants Russ Colombo - President and CEO Tani Girton - EVP and CFO Andrea Henderson - First VP, Director of Marketing Conference Call Participants Luke Wooten - KBW Jeff Rulis - D.A. Davidson Tim O’Brien - Sandler O’Neill & Partners Matthew Clark - Piper Jaffray Andrea Henderson Good morning and thank you for joining Bank of Marin Bancorp's Earnings Call for the Second Quarter ended Ju ...

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 March 31, 2019 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) | --- | ...

Financial Data and Key Metrics Changes - The company reported net income of $7.5 million for Q1 2019, down from $9.7 million in the previous quarter but up from $6.4 million in the same quarter last year [7] - Diluted earnings per share were $0.54 in Q1 2019 compared to $0.69 last quarter and $0.46 in the same quarter a year ago [8] - Net interest income totaled $23.8 million in Q1 2019, up from $23.3 million in the prior quarter and $21.9 million in the same quarter a year ago [13] - The tax equivalent net interest margin was 4.02% in Q1 2019, an increase from 3.85% in both the prior quarter and the year-ago quarter [15] - Return on assets was 1.19% and return on equity was 9.54% for the quarter [22] Business Line Data and Key Metrics Changes - Loans increased to $1.77 billion at March 31, 2019, from $1.76 billion at December 31, 2018, and were up 6% from $1.67 billion in Q1 2018 [8] - Total deposits increased by $3.8 million in Q1 to $2.18 billion, with non-interest bearing deposits increasing by $10.3 million [9] Market Data and Key Metrics Changes - The company is expanding its presence in key markets, including opening a loan production office in Walnut Creek and making strategic hires in Napa and Santa Rosa [11] Company Strategy and Development Direction - The company is focused on organic growth and relationship banking, which has proven effective in a competitive environment [5][25] - The company is investing in talent acquisition to strengthen its foundation for future growth [26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the growth outlook for 2019, citing healthy loan demand and strong underlying fundamentals [6] - The competitive landscape remains intense, particularly for attracting talent, but management sees opportunities arising from mergers in the banking sector [38][40] Other Important Information - The Board declared a cash dividend of $0.19 per share, marking the 56th consecutive quarterly dividend [12] - The company is considering an extension of its $25 million share repurchase program [12] Q&A Session Summary Question: Can you provide details on the expenses and what to expect going forward? - Management indicated that many Q1 expenses are recurring, particularly related to retirement eligible employees and stock-based compensation [29][30] Question: How do you view the competitive landscape and talent acquisition? - Management noted that mergers create opportunities for talent acquisition, but competition for skilled employees remains high [38][40] Question: Can you provide an update on the parallel systems and associated costs? - Management confirmed that parallel processing costs are expected to increase in Q2, with an estimated incremental expense of $30,000 to $40,000 [48] Question: What is the outlook for loan pricing and deposit pricing? - Management indicated that loan yields are improving slightly, while deposit pricing is expected to stabilize due to the Fed's current stance [66][69]

Part I [Business](index=5&type=section&id=Item%201.%20Business) Bank of Marin Bancorp operates as a commercial and retail bank in the San Francisco Bay Area, serving small to medium-sized businesses and offering diverse financial services - The company's business is conducted through its subsidiary, Bank of Marin, which operates **23 offices** across Marin, Sonoma, San Francisco, Napa, and Alameda counties, focusing on small to medium-sized businesses, professionals, and not-for-profit organizations[19](index=19&type=chunk) - A broad range of services are offered, including commercial and real estate loans, consumer lending, various deposit accounts (checking, savings, CDARS, ICS), cash management services, and Wealth Management and Trust Services (WMTS)[20](index=20&type=chunk)[22](index=22&type=chunk)[25](index=25&type=chunk) - The banking environment is highly competitive, with rivals including large nationwide banks, credit unions, and other regional banks. Bank of Marin differentiates itself through relationship banking and local market knowledge, holding the **third-largest deposit market share in Marin County at 10.8%** as of June 30, 2018[32](index=32&type=chunk)[33](index=33&type=chunk)[34](index=34&type=chunk) - As of December 31, 2018, the company employed **290 full-time equivalent staff**, none of whom are represented by a union[35](index=35&type=chunk) [Supervision and Regulation](index=7&type=section&id=Supervision%20and%20Regulation) The company is extensively regulated by federal and state authorities, with regulations covering capital adequacy, consumer protection, and community reinvestment - Bancorp is a bank holding company subject to regulation, reporting, and examination by the Federal Reserve and the California DBO. The Bank is regulated by the DBO and the FDIC[37](index=37&type=chunk)[39](index=39&type=chunk) - The company is subject to the Community Reinvestment Act (CRA) and received a **'Satisfactory' rating** in its January 2018 examination[47](index=47&type=chunk)[49](index=49&type=chunk) - The company implemented the fully phased-in Basel III capital rules as of January 1, 2019. A proposed rule under the Economic Growth Act could allow the bank to opt into a simpler Community Bank Leverage Ratio (CBLR) framework if its CBLR is **greater than 9 percent**, which would ease capital requirement calculations[56](index=56&type=chunk)[59](index=59&type=chunk) - The Dodd-Frank Act continues to impact operations, though some provisions were modified by the Economic Growth Act. The ultimate impact remains subject to rulemaking[58](index=58&type=chunk)[61](index=61&type=chunk) [Risk Factors](index=12&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks from local economic conditions, interest rate fluctuations, intense competition, and a high concentration in commercial real estate - The company's success is highly dependent on the local economic conditions of the San Francisco Bay Area, impacting loan demand, repayment ability, and collateral values[69](index=69&type=chunk) - Earnings are largely dependent on net interest income, which is vulnerable to changes in interest rates controlled by the FOMC[70](index=70&type=chunk) - Approximately **88% of the loan portfolio is secured by real estate**, with a significant concentration in Commercial Real Estate (CRE). As of December 31, 2018, CRE loans represented **340% of total risk-based capital**, exceeding the 300% supervisory criterion, which may warrant greater regulatory scrutiny[80](index=80&type=chunk)[82](index=82&type=chunk) - The company is exposed to cybersecurity risks and relies on key third-party vendors like Fidelity Information Services (FIS) for core processing, making it vulnerable to service interruptions or breaches[102](index=102&type=chunk)[105](index=105&type=chunk) - The planned cessation of LIBOR after 2021 poses a risk, as the company has floating-rate loans, securities, and swaps indexed to LIBOR that mature after this date. The transition to an alternative rate like SOFR could create additional costs and risks[115](index=115&type=chunk)[116](index=116&type=chunk) [Unresolved Staff Comments](index=19&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[117](index=117&type=chunk) [Properties](index=20&type=section&id=Item%202.%20Properties) The company leases its corporate headquarters and all branch and office facilities across its primary market areas - The company leases its corporate headquarters in Novato, CA, and its branch and office facilities in Marin, Sonoma, Napa, San Francisco, Alameda, and Contra Costa counties[118](index=118&type=chunk) [Legal Proceedings](index=20&type=section&id=Item%203.%20Legal%20Proceedings) Management is not aware of any pending legal proceedings that would materially affect the company's financial condition or operations - There are no pending legal proceedings expected to have a material adverse effect on the company's financial condition or results of operations[119](index=119&type=chunk) - The Bank is indemnified for certain Visa U.S.A. litigation and does not anticipate making cash payments as Visa has funded a litigation escrow account to cover liabilities[120](index=120&type=chunk) [Mine Safety Disclosures](index=20&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[121](index=121&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=21&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ, underwent a two-for-one split, and initiated a share repurchase program - The company's common stock (BMRC) trades on the NASDAQ Capital Market. A **two-for-one stock split** occurred on November 27, 2018[124](index=124&type=chunk) Share Repurchase Program Activity (April 23 - Dec 31, 2018) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Remaining ($ thousands) | | :--- | :--- | :--- | :--- | | April 23-30, 2018 | — | — | 25,000 | | May 1-31, 2018 | 2,796 | $37.03 | 24,896 | | August 1-31, 2018 | 8,888 | $44.43 | 24,501 | | September 1-30, 2018 | 24,202 | $42.99 | 23,460 | | October 1-30, 2018 | 29,890 | $40.68 | 22,244 | | November 1-30, 2018 | 34,754 | $42.10 | 20,779 | | December 1-31, 2018 | 70,687 | $39.44 | 17,988 | | **Total** | **171,217** | **$40.92** | **17,988** | [Selected Financial Data](index=23&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes key financial data, highlighting **$2.52 billion** in total assets and **$32.6 million** net income for 2018 Selected Financial Data (2017-2018) | (in thousands, except per share data) | 2018 | 2017 | | :--- | :--- | :--- | | **Financial Condition Data (at year-end)** | | | | Total assets | $2,520,892 | $2,468,154 | | Loans, net | $1,748,043 | $1,663,246 | | Deposits | $2,174,840 | $2,148,670 | | Stockholders' equity | $316,407 | $297,025 | | **Operating Data (for the year)** | | | | Net interest income | $91,544 | $74,852 | | Provision for (reversal of) loan losses | $— | $500 | | Net income | $32,622 | $15,976 | | Diluted EPS | $2.33 | $1.27 | | **Performance Ratios** | | | | Return on average assets | 1.31% | 0.75% | | Return on average equity | 10.73% | 6.49% | | Efficiency ratio | 57.30% | 64.70% | | **Asset Quality Ratios** | | | | Non-performing loans to total loans | 0.04% | 0.02% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operating results for 2018 compared to 2017 [Executive Summary](index=26&type=section&id=Executive%20Summary) In 2018, the company achieved strong performance with net income rising to **$32.6 million**, driven by loan growth and increased net interest income 2018 Performance Highlights vs. 2017 | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Net Income | $32.6 million | $16.0 million | | Diluted EPS | $2.33 | $1.27 | | Loan Growth | 5.1% | - | | Net Interest Income | $91.5 million | $74.9 million | | Provision for Loan Losses | $0 | $500 thousand | | Efficiency Ratio | 57.3% | 64.7% | - Non-accrual loans were exceptionally low at **0.04% of the total loan portfolio** as of year-end 2018[149](index=149&type=chunk) - Strategic actions in 2018 included a **two-for-one stock split**, the repurchase of **171,217 shares for $7.0 million**, and an increase in the quarterly dividend[155](index=155&type=chunk)[156](index=156&type=chunk)[157](index=157&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) In 2018, net interest income increased **22.2%** to **$91.5 million**, non-interest income grew, and the effective tax rate decreased - Net interest income increased by **$16.6 million (22.2%)** in 2018, primarily due to a **$337.7 million** increase in average earning assets and higher yields. The tax-equivalent net interest margin rose **10 basis points to 3.90%**[170](index=170&type=chunk) - No provision for loan losses was recorded in 2018, compared to a **$500 thousand** provision in 2017. This was attributed to a decrease in classified loans and continued high credit quality[176](index=176&type=chunk) - Non-interest income increased by **$1.9 million (22.6%)**, mainly due to a **$956 thousand** pre-tax gain on the sale of Visa Inc. Class B stock and a **$180 thousand** special dividend from the FHLB[180](index=180&type=chunk) - Non-interest expense increased by **$4.5 million (8.3%)**, driven by a **$3.4 million** rise in salaries and benefits from additional personnel and annual merit increases[183](index=183&type=chunk) - The provision for income taxes was **$10.8 million** at an effective tax rate of **24.9%**, down from **$12.9 million** at **44.6%** in 2017. The decrease reflects the lower federal corporate tax rate and the absence of a one-time deferred tax asset write-down that occurred in 2017[184](index=184&type=chunk) [Financial Condition](index=32&type=section&id=Financial%20Condition) As of December 31, 2018, total assets grew to **$2.52 billion**, driven by loan and investment portfolio increases, with strong capital levels Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Commercial loans | $230,739 | $235,835 | | Real estate - Commercial investor | $873,410 | $822,984 | | Real estate - Commercial owner-occupied | $313,277 | $300,963 | | Real estate - Construction | $76,423 | $63,828 | | Real estate - Home equity | $124,696 | $132,467 | | Other loans | $145,319 | $122,936 | | **Total loans** | **$1,763,864** | **$1,679,013** | - The allowance for loan losses was **$15.8 million (0.90% of total loans)** at year-end 2018, compared to **$15.8 million (0.94% of total loans)** at year-end 2017. Net recoveries were **$54 thousand** in 2018 versus net charge-offs of **$175 thousand** in 2017[215](index=215&type=chunk)[222](index=222&type=chunk)[224](index=224&type=chunk) - Total impaired loans decreased to **$15.0 million** at year-end 2018 from **$16.9 million** at year-end 2017, primarily due to payoffs and upgrades[225](index=225&type=chunk) - Total deposits grew by **$26.1 million** to **$2.17 billion**. Non-interest bearing deposits grew by **$51.9 million** and constituted **49% of total deposits** at year-end 2018[230](index=230&type=chunk) - Bancorp's total risk-based capital ratio was **14.9%** at December 31, 2018, consistent with the prior year and well above the regulatory minimums[249](index=249&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, managed through simulations, with the bank being asset-sensitive to rising rates - The primary market risk is interest rate risk. The company is asset-sensitive and expects net interest income to increase over time in a rising rate environment[260](index=260&type=chunk)[261](index=261&type=chunk) Estimated Change in Net Interest Income (NII) from Immediate Interest Rate Shifts | Immediate Change in Interest Rates (bps) | Estimated Change in NII in Year 1 (%) | Estimated Change in NII in Year 2 (%) | | :--- | :--- | :--- | | +400 | (4.7)% | 3.8% | | +300 | (3.3)% | 3.3% | | +200 | (2.0)% | 2.6% | | +100 | (0.8)% | 2.0% | | -100 | (4.5)% | (8.2)% | | -200 | (8.6)% | (17.1)% | [Financial Statements and Supplementary Data](index=47&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements for 2018 and 2017, including the independent auditor's report - The independent auditor, Moss Adams LLP, issued an **unqualified opinion** on the consolidated financial statements and on the effectiveness of internal control over financial reporting as of December 31, 2018[272](index=272&type=chunk) Consolidated Statement of Condition Highlights (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | **Assets** | | | | Total investment securities | $619,670 | $483,499 | | Loans, net | $1,748,043 | $1,663,246 | | Goodwill | $30,140 | $30,140 | | **Total Assets** | **$2,520,892** | **$2,468,154** | | **Liabilities & Equity** | | | | Total deposits | $2,174,840 | $2,148,670 | | Total liabilities | $2,204,485 | $2,171,129 | | Total stockholders' equity | $316,407 | $297,025 | | **Total Liabilities & Equity** | **$2,520,892** | **$2,468,154** | Consolidated Statement of Comprehensive Income Highlights (in thousands) | | Year Ended Dec 31, 2018 | Year Ended Dec 31, 2017 | | :--- | :--- | :--- | | Net interest income | $91,544 | $74,852 | | Provision for loan losses | $— | $500 | | Non-interest income | $10,139 | $8,268 | | Non-interest expense | $58,266 | $53,782 | | **Net income** | **$32,622** | **$15,976** | | Other comprehensive (loss) income, net of tax | $(978) | $807 | | **Comprehensive income** | **$31,644** | **$16,783** | [Notes to Consolidated Financial Statements](index=56&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on significant accounting policies, financial statement accounts, and key disclosures including credit quality - The company adopted new revenue recognition standards (ASC 606) on January 1, 2018, with no material impact. It is preparing to adopt the new CECL model for credit losses (ASU 2016-13) for the fiscal year beginning after December 15, 2019, which is expected to potentially increase the allowance for loan losses[361](index=361&type=chunk)[380](index=380&type=chunk) - Troubled Debt Restructurings (TDRs) decreased to a carrying amount of **$14.4 million** as of Dec 31, 2018, from **$16.5 million** in the prior year[418](index=418&type=chunk)[421](index=421&type=chunk) - On October 22, 2018, a **two-for-one stock split** was announced and became effective November 27, 2018. All share and per share data have been adjusted[456](index=456&type=chunk) - Both Bancorp and the Bank exceeded all regulatory capital requirements to be considered **'well capitalized'** as of December 31, 2018. The Bank's total risk-based capital ratio was **13.98%**[528](index=528&type=chunk)[533](index=533&type=chunk) - The November 2017 acquisition of Bank of Napa, N.A. resulted in goodwill of **$23.7 million** and a core deposit intangible of **$4.4 million**[543](index=543&type=chunk)[544](index=544&type=chunk)[545](index=545&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=102&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[549](index=549&type=chunk) [Controls and Procedures](index=102&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[549](index=549&type=chunk) - Management's assessment concluded that the company maintained effective internal control over financial reporting as of December 31, 2018. The independent registered public accounting firm issued an unqualified opinion on the effectiveness of internal control[550](index=550&type=chunk)[553](index=553&type=chunk) [Other Information](index=103&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[556](index=556&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=103&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[556](index=556&type=chunk) [Executive Compensation](index=103&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[557](index=557&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=103&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership and related stockholder matters is incorporated by reference from Item 5, Note 8, and the Proxy Statement - Information is incorporated by reference from ITEM 5, Note 8 of the financial statements, and the Proxy Statement for the 2019 Annual Meeting of Shareholders[558](index=558&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=103&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[559](index=559&type=chunk) [Principal Accountant Fees and Services](index=103&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2019 Annual Meeting of Shareholders[560](index=560&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=104&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements and all exhibits filed as part of the Form 10-K, either herewith or by reference - This item lists the financial statements filed with the report and all exhibits, which are either filed with this report or incorporated by reference[563](index=563&type=chunk)[564](index=564&type=chunk) [Form 10-K Summary](index=105&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable as no Form 10-K summary is provided - None[567](index=567&type=chunk)

Bank of Marin Bancorp (NASDAQ:BMRC) Q4 2018 Earnings Conference Call January 28, 2019 11:30 AM ET Company Participants Andrea Henderson - Director of Marketing Russ Colombo - President and Chief Executive Officer Tani Girton - Executive Vice President and Chief Financial Officer Conference Call Participants Jeff Rulis - D.A. Davidson Jackie Bohlen - KBW Tim O'Brien - Sandler O'Neill Andrea Henderson Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Fourth Quarter and Y ...