10-Q 1 bmrc-20150930x10q.htm 10-Q 10-Q
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q


(Mark One)
 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
OR
 
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________________ to __________________
 
Commission File Number  001-33572

Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
 
California  
 
20-8859754
(State or other jurisdiction of incorporation)  
 
(IRS Employer Identification No.)
 
 
 
504 Redwood Blvd., Suite 100, Novato, CA 
 
94947
(Address of principal executive office)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (415) 763-4520
 
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x                    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x                   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
         
 Large accelerated filer   o
 Accelerated filer   x
 Non-accelerated filer   o
 Smaller reporting company   o
 
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes   o     No  x
 
As of October 31, 2015, there were 6,062,407 shares of common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
PART I
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 




Page-2



PART I       FINANCIAL INFORMATION
 
ITEM 1.  Financial Statements
 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION 
at September 30, 2015 and December 31, 2014
(in thousands, except share data; unaudited)
September 30, 2015

 
December 31, 2014

Assets
 

 
 
Cash and due from banks
$
35,315

 
$
41,367

Investment securities
 

 
 
Held-to-maturity, at amortized cost
86,471

 
116,437

Available-for-sale, at fair value (amortized cost $331,024 and $199,045 at September 30, 2015 and December 31, 2014, respectively)
333,856

 
200,848

Total investment securities
420,327

 
317,285

Loans, net of allowance for loan losses of $14,457 and $15,099 at September 30, 2015 and December 31, 2014, respectively
1,348,743

 
1,348,252

Bank premises and equipment, net
9,537

 
9,859

Goodwill
6,436

 
6,436

Core deposit intangible
3,268

 
3,732

Interest receivable and other assets
59,168

 
60,199

Total assets
$
1,882,794

 
$
1,787,130

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Liabilities
 

 
 

Deposits
 

 
 

Non-interest-bearing
$
752,336

 
$
670,890

Interest-bearing
 

 


Transaction accounts
95,522

 
93,758

Savings accounts
136,021

 
133,714

Money market accounts
495,642

 
503,543

Time accounts
155,961

 
149,714

Total deposits
1,635,482

 
1,551,619

   Federal Home Loan Bank ("FHLB") borrowings
15,000

 
15,000

 Subordinated debentures
5,343

 
5,185

   Interest payable and other liabilities
15,015

 
15,300

Total liabilities
1,670,840

 
1,587,104

 
 
 
 
Stockholders' Equity
 

 
 

Preferred stock, no par value
Authorized - 5,000,000 shares, none issued

 

Common stock, no par value
Authorized - 15,000,000 shares;
Issued and outstanding - 6,060,744 and 5,939,482 at
    September 30, 2015 and December 31, 2014, respectively
84,272

 
82,436

Retained earnings
126,082

 
116,502

Accumulated other comprehensive income, net
1,600

 
1,088

Total stockholders' equity
211,954

 
200,026

Total liabilities and stockholders' equity
$
1,882,794

 
$
1,787,130


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

Page-3



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three months ended
 
Nine months ended
(in thousands, except per share amounts; unaudited)
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Interest income
 
 
 
 
 
 
 
Interest and fees on loans
$
15,498

 
$
16,195

 
$
46,164

 
$
48,877

Interest on investment securities


 


 
 

 
 

Securities of U.S. government agencies
1,223

 
1,126

 
3,248

 
3,551

Obligations of state and political subdivisions
527

 
496

 
1,578

 
1,737

Corporate debt securities and other
162

 
254

 
546

 
778

Interest on Federal funds sold and due from banks
35

 
37

 
107

 
125

Total interest income
17,445

 
18,108

 
51,643

 
55,068

Interest expense
 

 
 

 
 

 
 

Interest on interest-bearing transaction accounts
28

 
25

 
88

 
74

Interest on savings accounts
12

 
12

 
37

 
34

Interest on money market accounts
125

 
126

 
375

 
415

Interest on time accounts
212

 
229

 
649

 
695

Interest on FHLB and overnight borrowings
80

 
79

 
236

 
235

Interest on subordinated debentures
105

 
106

 
314

 
316

Total interest expense
562

 
577

 
1,699

 
1,769

Net interest income
16,883

 
17,531

 
49,944

 
53,299

Provision for loan losses

 

 

 
750

Net interest income after provision for loan losses
16,883

 
17,531

 
49,944

 
52,549

Non-interest income
 

 
 

 
 

 
 

Service charges on deposit accounts
489

 
552

 
1,518

 
1,636

Wealth Management and Trust Services
568

 
567

 
1,809

 
1,744

Debit card interchange fees
372

 
375

 
1,087

 
1,035

Merchant interchange fees
171

 
224

 
430

 
629

Earnings on bank-owned life insurance
204

 
208

 
610

 
632

Dividends on FHLB stock
209

 
149

 
817

 
409

Gain on sale of securities
72

 
4

 
80

 
93

Other income
213

 
222

 
744

 
707

Total non-interest income
2,298

 
2,301

 
7,095

 
6,885

Non-interest expense
 

 
 

 
 

 
 

Salaries and related benefits
6,300

 
6,108

 
19,762

 
19,270

Occupancy and equipment
1,346

 
1,381

 
4,181

 
4,044

Depreciation and amortization
441

 
383

 
1,512

 
1,202

Federal Deposit Insurance Corporation insurance
250

 
261

 
739

 
780

Data processing
835

 
748

 
2,413

 
2,856

Professional services
493

 
537

 
1,572

 
1,577

Directors' expense
182

 
153

 
620

 
466

Information technology
186

 
180

 
554

 
517

Provision for (reversal of) losses on off-balance sheet commitments
324

 
13

 
14

 
(2
)
Other expense
1,281

 
1,586

 
4,447

 
4,940

Total non-interest expense
11,638

 
11,350

 
35,814

 
35,650

Income before provision for income taxes
7,543

 
8,482

 
21,225

 
23,784

Provision for income taxes
2,770

 
3,104

 
7,709

 
8,705

Net income
$
4,773

 
$
5,378

 
$
13,516

 
$
15,079

Net income per common share:
 

 
 

 
 
 
 
Basic
$
0.80

 
$
0.91

 
$
2.27

 
$
2.56

Diluted
$
0.79

 
$
0.89

 
$
2.23

 
$
2.51

Weighted average shares used to compute net income per common share:


 
 

 
 
 
 
Basic
5,963

 
5,903

 
5,943

 
5,887

Diluted
6,067

 
6,014

 
6,059

 
5,996

Dividends declared per common share
$
0.22

 
$
0.20

 
$
0.66

 
$
0.58

Comprehensive income:
 
 
 
 


 


Net income
$
4,773

 
$
5,378

 
$
13,516

 
$
15,079

Other comprehensive income


 


 


 


Change in net unrealized gain (loss) on available-for-sale securities
1,523

 
(344
)
 
1,037

 
2,047

Reclassification adjustment for loss (gain) on available-for-sale securities
    included in net income

 
4

 
(8
)
 
19

             Net change in unrealized gain (loss) on available-for-sale securities, before
             tax
1,523

 
(340
)
 
1,029

 
2,066

Deferred tax expense (benefit)
654

 
(141
)
 
517

 
828

Other comprehensive income (loss), net of tax
869

 
(199
)
 
512

 
1,238

Comprehensive income
$
5,642

 
$
5,179

 
$
14,028

 
$
16,317

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

Page-4



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the year ended December 31, 2014 and the nine months ended September 30, 2015
(in thousands, except share data; unaudited)
 
Common Stock
 
Retained
Earnings

 
Accumulated Other
Comprehensive Income (Loss),
Net of Taxes

 
 Total

Shares

 
Amount

 
 
 
Balance at December 31, 2013
 
5,877,524

 
$
80,095

 
$
101,464

 
$
(672
)
 
$
180,887

Net income
 

 

 
19,771

 

 
19,771

Other comprehensive income
 

 

 

 
1,760

 
1,760

Stock options exercised
 
49,415

 
1,452

 

 

 
1,452

Excess tax benefit - stock-based compensation
 

 
172

 

 

 
172

Stock issued under employee stock purchase plan
 
521

 
23

 

 

 
23

Restricted stock granted
 
8,523

 

 

 

 

Restricted stock forfeited / cancelled
 
(2,067
)
 

 

 

 

Stock-based compensation - stock options
 

 
200

 

 

 
200

Stock-based compensation - restricted stock
 

 
246

 

 

 
246

Cash dividends paid on common stock
 

 

 
(4,733
)
 

 
(4,733
)
Stock purchased by directors under director stock plan
 
260

 
12

 

 

 
12

Stock issued in payment of director fees
 
5,306

 
236

 

 

 
236

Balance at December 31, 2014
 
5,939,482

 
$
82,436

 
$
116,502

 
$
1,088

 
$
200,026

Net income
 

 

 
13,516

 

 
13,516

Other comprehensive income
 

 

 

 
512

 
512

Stock options exercised
 
29,358

 
888

 

 

 
888

Excess tax benefit - stock-based compensation
 

 
172

 

 

 
172

Stock issued under employee stock purchase plan
 
253

 
12

 

 

 
12

Restricted stock granted
 
15,970

 

 

 

 

Restricted stock forfeited / cancelled
 
(450
)
 

 

 

 

Stock-based compensation - stock options
 

 
192

 

 

 
192

Stock-based compensation - restricted stock
 

 
285

 

 

 
285

Cash dividends paid on common stock
 

 

 
(3,936
)
 

 
(3,936
)
Stock purchased by directors under director stock plan
 
245

 
12

 

 

 
12

Stock issued in payment of director fees
 
5,295

 
275

 

 

 
275

Stock issued from exercise of warrants

70,591









Balance at September 30, 2015
 
6,060,744

 
$
84,272

 
$
126,082

 
$
1,600

 
$
211,954


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

Page-5



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2015 and 2014
(in thousands; unaudited)
September 30, 2015

 
September 30, 2014

Cash Flows from Operating Activities:
 
 
 
Net income
$
13,516

 
$
15,079

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses

 
750

Provision for (reversal of) losses on off-balance sheet commitments
14

 
(2
)
Compensation expense - common stock for director fees
207

 
170

Stock-based compensation expense
477

 
336

Excess tax benefits from exercised stock options
(150
)
 
(104
)
Amortization of core deposit intangible
464

 
578

Amortization of investment security premiums, net of accretion of discounts
2,038

 
1,982

Accretion of discount on acquired loans
(1,569
)
 
(3,311
)
Accretion of discount on subordinated debentures
158

 
162

Net amortization of deferred loan origination costs/fees
(374
)
 
(382
)
Write-down of other real estate owned
40

 

Gain on sale of investment securities
(80
)
 
(93
)
Depreciation and amortization
1,512

 
1,202

Loss on disposal of premises and equipment
4

 

Earnings on bank-owned life insurance policies
(610
)
 
(632
)
Net change in operating assets and liabilities:
 

 
 

Interest receivable
303

 
122

Interest payable
(13
)
 
(44
)
Deferred rent and other rent-related expenses
42

 
165

Other assets
1,930

 
(44
)
Other liabilities
(819
)
 
(1,847
)
Total adjustments
3,574

 
(992
)
Net cash provided by operating activities
17,090

 
14,087

Cash Flows from Investing Activities:
 

 
 

Purchase of held-to-maturity securities
(2,375
)
 

Purchase of available-for-sale securities
(189,755
)
 
(16,353
)
Proceeds from sale of available-for-sale securities
1,559

 
2,435

Proceeds from sale of held-to-maturity securities
1,015

 
2,146

Proceeds from paydowns/maturity of held-to-maturity securities
30,529

 
14,738

Proceeds from paydowns/maturity of available-for-sale securities
54,966

 
33,320

Proceeds from the sale of loan
1,502

 

Loans originated and principal collected, net
403

 
(88,028
)
Purchase of FHLB stock
(136
)
 
(492
)
Purchase of premises and equipment
(1,194
)
 
(1,369
)
Cash paid for low income housing tax credit investment
(645
)
 
(208
)
Net cash used in investing activities
(104,131
)
 
(53,811
)
Cash Flows from Financing Activities:
 

 
 

Net increase (decrease) in deposits
83,863

 
(15,478
)
Proceeds from stock options exercised
888

 
1,146

Proceeds from stock issued under employee and director stock purchase plans
24

 
31

Cash dividends paid on common stock
(3,936
)
 
(3,428
)
Excess tax benefits from exercised stock options
150

 
104

Net cash provided by (used in) financing activities
80,989

 
(17,625
)
Net decrease in cash and cash equivalents
(6,052
)
 
(57,349
)
Cash and cash equivalents at beginning of period
41,367

 
103,773

Cash and cash equivalents at end of period
$
35,315

 
$
46,424

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
1,554

 
$
1,660

Cash paid for income taxes
$
6,603

 
$
6,940

Supplemental disclosure of non-cash investing and financing activities:
 

 
 

Change in unrealized gain on available-for-sale securities
$
(1,029
)
 
$
(2,066
)
Securities transferred from available-for-sale to held-to-maturity
$

 
$
14,297

Transfer of loan to loans held-for-sale at fair value
$
1,502

 
$

Subscription in low income housing tax credit investment
$
1,023

 
$
1,000

Stock issued in payment of director fees
$
275

 
$
236


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

Page-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 

Note 1:  Basis of Presentation
 
The consolidated financial statements include the accounts of Bank of Marin Bancorp (“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California state-chartered commercial bank. References to “we,” “our,” “us” mean the holding company and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in our 2014 Annual Report on Form 10-K.  In the opinion of Management, the unaudited consolidated financial statements reflect all adjustments which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period. We have evaluated subsequent events through the date of filing with the SEC and have determined that there are no subsequent events that require additional recognition or disclosure.

In connection with the acquisition of NorCal Community Bancorp ("NorCal") (the "Acquisition"), Bancorp assumed ownership of Norcal Community Bancorp Trusts I and II (the "Trusts"). Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the subordinated debentures due to the Trusts are shown as liabilities on our consolidated statements of condition (see Note 6). Bancorp's investment in the common stock of the Trusts is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition.
 
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options, unvested restricted stock awards and stock warrant, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares, which is based on average market prices during the three months of the reporting period, under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. We have two forms of outstanding stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Therefore, under the two-class method, the difference in EPS is not significant for these participating securities.

Page-7



 
Three months ended
Nine months ended
(in thousands, except per share data)
September 30, 2015

September 30, 2014

September 30, 2015

September 30, 2014

Weighted average basic shares outstanding
5,963

5,903

5,943

5,887

Add: Potentially dilutive common shares related to
         stock options
35

41

41

42

 Potentially dilutive common shares related to
 unvested restricted stock
5

4

5

4

 Potentially dilutive common shares related to
 the warrant
64

66

70

63

Weighted average diluted shares outstanding
6,067

6,014

6,059

5,996

 
 
 
 
 
Net income
$
4,773

$
5,378

$
13,516

$
15,079

Basic EPS
$
0.80

$
0.91

$
2.27

$
2.56

Diluted EPS
$
0.79

$
0.89

$
2.23

$
2.51

 








Weighted average anti-dilutive shares not included in the calculation of diluted EPS
42

51

35

48


Page-8




Note 2: Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU is a converged standard involving FASB and International Financial Reporting Standards that provides a single comprehensive revenue recognition model for all contracts with customers across transactions and industries. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount and at a time that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date which institutes a one-year deferral of the effective date of this amendment to annual reporting periods beginning after December 15, 2017. We are currently evaluating the provisions of this ASU and will be monitoring developments and additional guidance to determine the potential impact the new standard will have on our financial condition and results of operations.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU provides guidance for entities that grant their employees share-based payment awards where a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. This ASU stipulates that compensation expense should be recognized in the period where the performance target becomes probable of being achieved as opposed to the date that the award was granted. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We do not expect this ASU to have a material impact on our financial condition or results of operations.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this ASU provide guidance about a customer's accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, then the customer should account for the arrangement as a service contract. The two criteria that must be met to be considered a software license are: 1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and 2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2015. We do not expect this ASU to have a material impact on our financial condition or results of operations.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the amendments, an acquirer was required to retrospectively adjust the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. ASU 2015-16 is effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. We do not expect this ASU to have a material impact on our financial condition or results of operations.



Page-9



Note 3:  Fair Value of Assets and Liabilities
 
Fair Value Hierarchy and Fair Value Measurement
 
We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
 
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
 
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
 
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant Management judgment and estimation.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. 

Page-10



The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.
(in thousands)  
Description of Financial Instruments
Carrying Value

 
Quoted Prices in Active Markets for Identical Assets (Level 1)

 
Significant Other Observable Inputs (Level 2)

 
Significant Unobservable Inputs (Level 3)

At September 30, 2015:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies
$
171,417

 
$

 
$
169,677

 
$
1,740

Debentures of government-sponsored agencies
$
102,165

 
$

 
$
102,165

 
$

Privately-issued collateralized mortgage obligations
$
4,891

 
$

 
$
4,891

 
$

Obligations of state and political subdivisions
$
50,377

 
$

 
$
50,377

 
$

Corporate bonds
$
5,006

 
$

 
5,006

 
$

Derivative financial liabilities (interest rate contracts)
$
2,328

 
$

 
$
2,328

 
$

At December 31, 2014:
 

 
 
 
 

 
 

Securities available-for-sale:
 

 
 
 
 

 
 

Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies
$
158,119

 
$

 
$
155,421

 
$
2,698

Debentures of government-sponsored agencies
$
14,557

 
$

 
$
14,557

 
$

Privately-issued collateralized mortgage obligations
$
7,294

 
$

 
$
7,294

 
$

Obligations of state and political subdivisions
$
15,880

 
$

 
$
15,771

 
$

Corporate bonds
$
4,998

 
$

 
$
5,437

 
$

Derivative financial assets (interest rate contracts)
$
61

 
$

 
$
61

 
$

Derivative financial liabilities (interest rate contracts)
$
1,996

 
$

 
$
1,996

 
$

 
Securities available-for-sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available-for-sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).   Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government sponsored agencies' debt securities, mortgage-backed securities, government agency-issued and privately-issued collateralized mortgage obligations. As of September 30, 2015 and December 31, 2014, there were no securities that were considered Level 1 securities. As of September 30, 2015, we had one available-for-sale security that was considered a Level 3 security. The security is a U.S. government agency obligation collateralized by a small pool of business equipment loans guaranteed by the Small Business Administration program. This security is not actively traded and is owned only by a few investors. The significant unobservable data that is reflected in the fair value measurement include dealer quotes, projected prepayment speeds/average life and credit information, among other things. It was transferred to a Level 3 security during the second quarter of 2014. The decrease in unrealized gain during the first nine months of 2015 was $8 thousand.

Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of an other-than-temporary impairment, if any.
 
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement

Page-11



date.  Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction.  Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals.  Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements.  We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using either LIBOR or OIS curves depending on the collateral posted as of the measurement date.  When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties.  We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to Bank of Marin.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans and other real estate owned ("OREO").
 
The following table presents the carrying value of assets and liabilities measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of September 30, 2015 and December 31, 2014. Impaired loans are only included in the following table when they are collateral dependent and the recorded investments of these loans are at the net realizable value of the collateral based on an impairment analysis.
(in thousands)
Carrying Value1

 
Quoted Prices in Active Markets for Identical Assets
(Level 1)

 
Significant Other Observable Inputs
(Level 2)

 
Significant Unobservable Inputs 
(Level 3)

At September 30, 2015:
 
 
 

 
 

 
 

Other real estate
$
421

 
$

 
$

 
$
421

At December 31, 2014:
 

 
 

 
 

 
 

Impaired loans:
 
 
 
 
 
 


Installment and other consumer 1
$
77

 
$

 
$

 
$
77

Other real estate
$
461

 
$

 
$

 
$
461


1 Represents collateral-dependent loan principal balances that had been generally written down to the values of the underlying collateral, net of specific valuation allowances. At December 31, 2014, the $77 thousand carrying value of a consumer loan was net of a $26 thousand specific valuation allowance. The carrying value of loans fully charged-off, which includes unsecured lines of credit, overdrafts and all other loans, is zero.

When a loan is identified as impaired, it is reported at the lower of cost or fair value, measured based on the loan's observable market price (Level 1) or the current net realizable value of the underlying collateral securing the loan, if the loan is collateral dependent (Level 3).  Net realizable value of the underlying collateral is the fair value of the collateral less estimated selling costs and any prior liens. Appraisals, recent comparable sales, offers and listing prices are factored in when valuing the collateral. We review and verify the qualifications and licenses of  the certified general appraisers used for appraising commercial properties or certified residential appraisers for residential properties. Real estate appraisals may utilize a combination of approaches including replacement cost, sales comparison and the income approach. Comparable sales and income data are analyzed by the appraisers and adjusted to reflect differences between them and the subject property such as property type, leasing status and physical condition. When appraisals are received, Management reviews the assumptions and methodology utilized in the appraisal, as well as the overall resulting value in conjunction with independent data sources such as recent market data and industry-wide statistics. We generally use a 6% discount for selling costs which is applied to all properties, regardless of size. Appraised values may be adjusted to reflect changes in market conditions that have occurred subsequent to the appraisal date, or for revised estimates regarding the timing or cost of the property sale. These adjustments are based on qualitative judgments made by Management on a case-by-case basis and are generally unobservable valuation inputs as they are specific to the underlying collateral. There have been no significant changes in the valuation techniques during the nine months ended September 30, 2015.


Page-12



OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal, adjusted for disposition costs. Subsequently, OREO is measured at lower of cost or fair value. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is determined based on independent appraisals, similar to the process used for impaired loans, discussed above, and is classified as Level 3. All OREO was acquired from Bank of Alameda as part of the Acquisition. There was a $40 thousand decline in the estimated fair value of the OREO during the first nine months ended September 30, 2015 recorded in other non-interest expense.

 Disclosures about Fair Value of Financial Instruments
 
The table below is a summary of fair value estimates for financial instruments as of September 30, 2015 and December 31, 2014, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. We have excluded non-financial assets and non-financial liabilities defined by the Codification (ASC 820-10-15-1A), such as Bank premises and equipment, deferred taxes and other liabilities.  In addition, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements of the Financial Instruments Topic of the Codification (ASC 825-10-50-8), such as Bank-owned life insurance policies. 
 
September 30, 2015
 
December 31, 2014
(in thousands)
Carrying Amounts

Fair Value

Fair Value Hierarchy
 
Carrying Amounts

Fair Value

Fair Value Hierarchy
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
35,315

$
35,315

Level 1
 
$
41,367

$
41,367

Level 1
Investment securities held-to-maturity
86,471

88,104

Level 2
 
116,437

118,643

Level 2
Loans, net
1,348,743

1,364,940

Level 3
 
1,348,252

1,361,244

Level 3
Interest receivable
5,606

5,606

Level 2
 
5,909

5,909

Level 2
Financial liabilities
 

 

 
 
 

 

 
Deposits
1,635,482

1,636,088

Level 2
 
1,551,619

1,552,446

Level 2
Federal Home Loan Bank borrowings
15,000

15,437

Level 2
 
15,000

15,484

Level 2
Subordinated debentures
5,343

5,178

Level 3
 
5,185

5,290

Level 3
Interest payable
200

200

Level 2
 
213

213

Level 2

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:
 
Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate their fair value because of the short-term nature of these instruments.
 
Held-to-maturity Securities - Held-to-maturity securities, which generally consist of mortgage-backed securities, obligations of state and political subdivisions and corporate bonds, are recorded at their amortized cost. The fair value for disclosure purposes is determined using methodologies similar to those described above for available-for-sale securities using Level 2 inputs. If Level 2 inputs are not available, we may utilize pricing models that incorporate unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3).  As of September 30, 2015 and December 31, 2014, we did not hold any held-to-maturity securities whose fair value was measured using significant unobservable inputs.
 
Loans - The fair value of loans with variable interest rates approximates current carrying value, because their rates are regularly adjusted to current market rates. The fair value of fixed rate loans or variable loans at negotiated interest rate floors or ceilings with remaining maturities in excess of one year is estimated by discounting the future cash flows using current market rates at which similar loans would be made to borrowers with similar creditworthiness and similar remaining maturities. The allowance for loan losses (“ALLL”) is considered to be a reasonable estimate of the portion of loan discount attributable to credit risks.
 
Interest Receivable and Payable - The interest receivable and payable balances approximate their fair value due to the short-term nature of their settlement dates.

Page-13




Deposits - The fair value of deposits without stated maturity, such as transaction accounts, savings accounts and money market accounts, is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the future cash flows using current rates offered for deposits of similar remaining maturities.
 
Federal Home Loan Bank Borrowings - The fair value is estimated by discounting the future cash flows using current rates offered by the Federal Home Loan Bank of San Francisco ("FHLB") for similar credit advances corresponding to the remaining duration of our fixed-rate credit advances.

Subordinated Debentures - As part of the Acquisition, we assumed two subordinated debentures from NorCal. See Note 6 for further information. The fair values of the subordinated debentures were estimated by discounting the future cash flows (interest payment at a rate of three-month LIBOR plus 3.05% and 1.40%) to their present values using current market rates at which similar debt securities would be issued with similar credit ratings as ours and similar remaining maturities. Each interest payment was discounted at the spot rate for the corresponding term, determined based on the yields and terms of comparable trust preferred securities, plus a liquidity premium. In July 2010, the Dodd-Frank Act was signed into law and limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. This law effectively closed the trust-preferred securities markets for new issuances and led to the absence of observable or comparable transactions in the market place. Due to the use of unobservable inputs of trust preferred securities, we consider the fair value to be a Level 3 measurement.

Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material at September 30, 2015 and December 31, 2014.


 

Page-14



Note 4:  Investment Securities
 
Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued or guaranteed by Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), or Government National Mortgage Association ("GNMA"), debentures issued by government-sponsored agencies such as FNMA, Federal Farm Credit Bureau, FHLB and FHLMC, as well as privately issued CMOs, as reflected in the table below:
 
September 30, 2015
 
December 31, 2014
 
Amortized
Fair
Gross Unrealized
 
Amortized
Fair
Gross Unrealized
(in thousands)
Cost
Value
Gains
(Losses)
 
Cost
Value
Gains
(Losses)
Held-to-maturity
 
 
 
 
 
 
 
 
 
  Obligations of state and
  political subdivisions
$
50,570

$
51,867

$
1,302

$
(5
)
 
$
63,425

$
65,121

$
1,736

$
(40
)
  Corporate bonds
23,578

23,662

87

(3
)
 
40,257

40,448

216

(25
)
MBS pass-through securities issued by FHLMC and FNMA
12,323

12,575

259

(7
)
 
12,755

13,074

319


Total held-to-maturity
86,471
88,104
1,648
(15
)
 
116,437
118,643
2,271
(65
)
 
 
 
 
 
 
 
 
 
 
Available-for-sale
 
 
 
 
 
 
 
 
 
Securities of U.S. government agencies:
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
116,513

117,963

1,488

(38
)
 
92,963

94,214

1,262

(11
)
CMOs issued by FNMA
16,211

16,385

208

(34
)
 
14,771

14,790

77

(58
)
CMOs issued by FHLMC
24,645

24,869

239

(15
)

31,238

31,260

109

(87
)
CMOs issued by GNMA
11,951

12,200

254

(5
)

17,573

17,855

298

(16
)
Debentures of government- sponsored agencies
101,987

102,165

229

(51
)
 
14,694

14,557

95

(232
)
Privately issued CMOs
4,700

4,891

193

(2
)
 
7,137

7,294

172

(15
)
Obligations of state and
political subdivisions
50,073

50,377

345

(41
)
 
15,733

15,880

155

(8
)
Corporate bonds
4,944

5,006

62


 
4,936

4,998

66

(4
)
Total available-for-sale
331,024
333,856
3,018
(186
)
 
199,045

200,848

2,234

(431
)
 
 
 
 
 
 
 
 
 
 
Total investment securities
$
417,495

$
421,960

$
4,666

$
(201
)
 
$
315,482

$
319,491

$
4,505

$
(496
)
 
 
 
 
 
 
 
 
 
 

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2015 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
September 30, 2015
 
December 31, 2014
 
Held-to-Maturity
 
Available-for-Sale
 
Held-to-Maturity
 
Available-for-Sale
(in thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Within one year
$
34,325

 
$
34,459

 
$
11,955

 
$
12,019

 
$
39,778

 
$
39,913

 
$
2,378

 
$
2,388

After one year but within five years
31,072

 
31,821

 
127,221

 
127,607

 
50,983

 
51,953

 
43,866

 
43,919

After five years through ten years
9,876

 
10,352

 
51,686

 
51,885

 
11,679

 
12,426

 
9,644

 
9,749

After ten years
11,198

 
11,472

 
140,162

 
142,345

 
13,997

 
14,351

 
143,157

 
144,792

Total
$
86,471

 
$
88,104

 
$
331,024

 
$
333,856

 
$
116,437

 
$
118,643

 
$
199,045

 
$
200,848

 


Page-15



Sales of investment securities and gross realized gains and losses are shown in the following table. The sales of the held-to-maturity securities were due to evidence of significant deterioration of the issuers' creditworthiness since purchase.
 
Three months ended
 
Nine months ended
(in thousands)
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
Available-for-sale:
 
 
 
 
 
 
 
  Sales proceeds
$

 
$
413

 
$
1,559

 
$
2,435

  Gross realized gains
$

 
$
4

 
$
8

 
$
4

  Gross realized (losses)
$

 
$

 
$

 
$
(15
)
Held-to-maturity:


 


 


 


  Sales proceeds
$
1,015

 
$

 
$
1,015

 
$
2,146

  Gross realized gains
$
72

 
$

 
$
72

 
$
104

  Gross realized (losses)
$

 
$

 
$

 
$


Investment securities carried at $66.0 million and $74.7 million at September 30, 2015 and December 31, 2014, respectively, were pledged to the State of California: $65.2 million and $73.8 million to secure public deposits in compliance with the Local Agency Security Program at September 30, 2015 and December 31, 2014, respectively, and $844 thousand and $856 thousand to provide collateral for trust deposits at September 30, 2015 and December 31, 2014, respectively. In addition, investment securities carried at $1.1 million were pledged to collateralize a Wealth Management and Trust Services (“WMTS”) checking account at both September 30, 2015 and December 31, 2014.

Other-Than-Temporarily Impaired Debt Securities
 
We have evaluated the credit of our investment securities and their issuers and/or insurers. Based on our evaluation, Management has determined that no investment security in our investment portfolio is other-than-temporarily impaired as of September 30, 2015. We do not have the intent, and it is more likely than not that we will not have to sell securities temporarily impaired at September 30, 2015 before recovery of the cost basis.
 
Twenty-nine and twenty-eight investment securities were in unrealized loss positions at September 30, 2015 and December 31, 2014, respectively. Those securities are summarized and classified according to the duration of the loss period in the table below:
 

Page-16



September 30, 2015
 
< 12 continuous months
 
 
≥ 12 continuous months
 
 
Total securities
 in a loss position
(in thousands)
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state & political subdivisions
 
$
2,751

 
$
(5
)
 
$

 
$

 
$
2,751

 
$
(5
)
Corporate bonds
 
5,540

 
(3
)
 

 

 
5,540

 
(3
)
MBS pass-through securities issued by FHLMC and FNMA
 
2,344

 
(7
)
 

 

 
2,344

 
(7
)
Total held-to-maturity
 
10,635

 
(15
)
 

 

 
10,635

 
(15
)
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
 
21,640

 
(38
)
 

 

 
21,640

 
(38
)
CMOs issued by FNMA
 

 

 
3,428

 
(34
)
 
3,428

 
(34
)
CMOs issued by FHLMC
 

 

 
2,089

 
(15
)
 
2,089

 
(15
)
CMOs issued by GNMA
 
2,570

 
(5
)
 

 

 
2,570

 
(5
)
Debentures of government- sponsored agencies
 

 

 
9,949

 
(51
)
 
9,949

 
(51
)
Privately issued CMOs
 

 

 
379

 
(2
)
 
379

 
(2
)
Obligations of state & political subdivisions
 
9,867

 
(39
)
 
582

 
(2
)
 
10,449

 
(41
)
Total available-for-sale
 
34,077

 
(82
)
 
16,427

 
(104
)
 
50,504

 
(186
)
Total temporarily impaired securities
 
$
44,712

 
$
(97
)
 
$
16,427

 
$
(104
)
 
$
61,139

 
$
(201
)
 

Page-17



December 31, 2014
 
< 12 continuous months
 
 
 12 continuous months
 
 
Total securities
 in a loss position
 
(dollars in thousands)
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of state & political subdivisions
 
$
5,830

 
$
(27
)
 
$
359

 
$
(13
)
 
$
6,189

 
$
(40
)
Corporate bonds
 
3,009

 
(1
)
 
3,533

 
(24
)
 
6,542

 
(25
)
Total held-to-maturity
 
8,839

 
(28
)
 
3,892

 
(37
)
 
12,731

 
(65
)
Available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
 
1,960

 
(11
)
 

 

 
1,960

 
(11
)
CMOs issued by FNMA
 

 

 
4,115

 
(58
)
 
4,115

 
(58
)
CMOs issued by FHLMC
 
17,157

 
(44
)
 
2,291

 
(43
)
 
19,448

 
(87
)
CMOs issued by GNMA
 
3,262

 
(16
)
 

 

 
3,262

 
(16
)
Debentures of government- sponsored agencies
 
494

 
(1
)
 
9,769

 
(231
)
 
10,263

 
(232
)
Privately issued CMOs
 
817

 
(15
)
 

 

 
817

 
(15
)
Obligations of state & political subdivisions
 
2,695

 
(3
)
 
1,112

 
(5
)
 
3,807

 
(8
)
Corporate bonds
 
1,002

 
(1
)
 
990

 
(3
)
 
1,992

 
(4
)
Total available-for-sale
 
27,387

 
(91
)
 
18,277

 
(340
)
 
45,664

 
(431
)
Total temporarily impaired securities
 
$
36,226

 
$
(119
)
 
$
22,169

 
$
(377
)
 
$
58,395

 
$
(496
)

As of September 30, 2015, there were six investment positions that had been in a continuous loss position for twelve months or more. These securities consisted of government-sponsored agency debentures, obligations of U.S. state and political subdivisions, and CMOs. We have evaluated each of the bonds and believe that the decline in fair value is primarily driven by factors other than credit. It is probable that we will be able to collect all amounts due according to the contractual terms and no other-than-temporary impairment exists on these securities. The government-sponsored agency debentures and CMOs issued by FNMA and FHLMC are supported by the U.S. Federal Government to protect us from credit losses. The obligations of state and political subdivisions were deemed creditworthy based on our review of the issuers' recent financial information and their insurers, if any. Based upon our assessment of the credit fundamentals and the credit enhancements, we concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

Twenty-three investment securities in our portfolio were in a temporary loss position for less than twelve months as of September 30, 2015. They consisted of U.S. agency CMO and MBS pass-through securities, obligations of U.S. state and political subdivisions, and corporate bonds. We determine that the strength of GNMA through the U.S. Federal Government guarantee is sufficient to protect us from credit losses. Other temporarily impaired securities are deemed creditworthy after internal analysis. Additionally, all are rated as investment grade by at least one major rating agency. As a result of this impairment analysis, we have concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

Non-Marketable Securities

As a member of the FHLB, we are required to maintain a minimum investment in the FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $8.4 million and $8.2 million of FHLB stock recorded at cost in other assets on the consolidated statements of condition at September 30, 2015 and December 31, 2014, respectively. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Management does not believe that the FHLB stock is other-than-temporarily-impaired, as we expect to be able to redeem this stock at cost.

Page-18



On October 28, 2015, FHLB announced a cash dividend for the third quarter of 2015 at an annualized dividend rate of 8.79% to be distributed in mid November. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock with a carrying value of zero, which is equal to our cost basis. These shares are restricted from resale until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s covered litigation escrow account. As a result of the restriction, these shares are not considered available-for-sale and are not carried at fair value. When converting this Class B common stock to Class A common stock under the current conversion rate of 1.6483 and the closing stock price of Class A shares, the value of our shares of Class B common stock would have been $1.9 million at September 30, 2015 and $1.8 million at December 31, 2014. The conversion rate is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. See Note 8 herein.

We invest in low income housing tax credit funds as a limited partner, which totaled $2.7 million and $1.8 million recorded in other assets as of September 30, 2015 and December 31, 2014, respectively. In the first nine months of 2015, we recognized $169 thousand of low income housing tax credits and other tax benefits, net of $131 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense. As of September 30, 2015, our unfunded commitments for these low income housing tax credit funds totaled $1.8 million. We did not recognize any impairment losses on these low income housing tax credit investments during the first nine months of 2015, or the year ended December 31, 2014.


Note 5:  Loans and Allowance for Loan Losses

Credit Quality of Loans
 
Past due and non-accrual loans by class as of September 30, 2015 and December 31, 2014 were as follows:
(dollars in thousands)
Commercial and industrial

 
Commercial real estate, owner-occupied

 
Commercial real estate, investor

 
Construction

 
Home equity

 
Other residential 1

 
Installment and other consumer

 
Total

September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 30-59 days past due
$
1,780

 
$
139

 
$
421

 
$

 
$
862

 
$

 
$
7

 
$
3,209

 60-89 days past due
150

 

 

 

 
99

 

 
2

 
251

90 days or more past due
21

 

 

 

 
100

 

 
72

 
193

Total past due
1,951

 
139

 
421

 

 
1,061

 

 
81

 
3,653

Current
188,016

 
239,196

 
671,256

 
54,921

 
112,670

 
71,682

 
21,806

 
1,359,547

Total loans 3
$
189,967

 
$
239,335

 
$
671,677

 
$
54,921

 
$
113,731

 
$
71,682

 
$
21,887

 
$
1,363,200

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-accrual 2
354

 

 
2,020

 
2

 
172

 

 
90

 
2,638

 


 


 


 


 


 


 


 


December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 30-59 days past due
$
183

 
$

 
$

 
$

 
$
646

 
$

 
$
180

 
$
1,009

Non-accrual 2

 
1,403

 
2,429

 
5,134

 
280

 

 
104

 
9,350

Total past due
183

 
1,403

 
2,429

 
5,134

 
926

 

 
284

 
10,359

Current
210,040

 
229,202

 
671,070

 
43,279

 
109,862

 
73,035

 
16,504

 
1,352,992

Total loans 3
$
210,223

 
$
230,605

 
$
673,499

 
$
48,413

 
$
110,788

 
$
73,035

 
$
16,788

 
$
1,363,351