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~~June 30, ~~2016~~2017

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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.

Yes o No x

As of ~~October~~July 31, ~~2016,~~2017, there were ~~6,123,181~~6,165,751 shares of common stock outstanding.

TABLE OF CONTENTS




PART I	FINANCIAL INFORMATION	Page-3

ITEM 1.	Financial Statements	Page-3

	Consolidated Statements of Condition	Page-3
	Consolidated Statements of Comprehensive Income	Page-4
	Consolidated Statements of Changes in Stockholders' Equity	Page-5
	Consolidated Statements of Cash Flows	Page-6
	Notes to Consolidated Financial Statements	Page-7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page-30

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	Page-44

ITEM 4.	Controls and Procedures	~~Page-44~~Page-45

PART II	OTHER INFORMATION	Page-45

ITEM 1.	Legal Proceedings	Page-45

ITEM 1A.	Risk Factors	Page-45

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~Page-45~~Page-46

ITEM 3.	Defaults Upon Senior Securities	~~Page-45~~Page-46

ITEM 4.	Mine Safety Disclosures	~~Page-45~~Page-47

ITEM 5.	Other Information	~~Page-45~~Page-47

ITEM 6.	Exhibits	~~Page-46~~Page-48

SIGNATURES		~~Page-48~~Page-49

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CONDITION

at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016


(in thousands, except share data; unaudited)	September 30, 2016		December 31, 2015		June 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	96,930	$	26,343	$	137,906		$	48,804
Investment securities
Held-to-maturity, at amortized cost	46,423		69,637		163,018			44,438
Available-for-sale, at fair value	378,996		417,787		238,870			372,580
Total investment securities	425,419		487,424		401,888			417,018
Loans, net of allowance for loan losses of $15,713 and $14,999 at September 30, 2016 and December 31, 2015, respectively	1,451,950		1,436,229
Loans, net of allowance for loan losses of $15,232 and $15,442 at June 30, 2017 and December 31, 2016, respectively					1,476,253			1,471,174
Bank premises and equipment, net	8,611		9,305		8,390			8,520
Goodwill	6,436		6,436		6,436			6,436
Core deposit intangible	2,713		3,113		2,344			2,580
Interest receivable and other assets	62,762		62,284		67,499			68,961
Total assets	$	2,054,821	$	2,031,134	$	2,100,716		$	2,023,493

Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing	$	860,638	$	770,087	$	892,988		$	817,031
Interest bearing
Transaction accounts	91,979		114,277		87,866			100,723
Savings accounts	156,225		141,316		165,596			163,516
Money market accounts	533,682		541,089		546,586			539,967
Time accounts	158,945		161,457		147,504			151,463
Total deposits	1,801,469		1,728,226		1,840,540			1,772,700
Federal Home Loan Bank ("FHLB") and other borrowings	—		67,000
Subordinated debentures	5,540		5,395		5,666			5,586
Interest payable and other liabilities	16,032		16,040		13,777			14,644
Total liabilities	1,823,041		1,816,661		1,859,983			1,792,930

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 - 6,123,181 and 6,068,543 at September 30, 2016 and December 31, 2015, respectively	86,926		84,727
Common stock, no par value, Authorized - 15,000,000 shares; Issued and outstanding - 6,160,952 and 6,127,314 at June 30, 2017 and December 31, 2016, respectively					88,949			87,392
Retained earnings	142,427		129,553		152,883			146,464
Accumulated other comprehensive income, net	2,427		193
Accumulated other comprehensive loss, net					(1,099		)	(3,293		)
Total stockholders' equity	231,780		214,473		240,733			230,563
Total liabilities and stockholders' equity	$	2,054,821	$	2,031,134	$	2,100,716		$	2,023,493

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

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three months ended					Nine months ended						Three months ended						Six months ended
(in thousands, except per share amounts; unaudited)	September 30, 2016			September 30, 2015		September 30, 2016			September 30, 2015			June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Interest income
Interest and fees on loans	$	17,840		$	15,498	$	51,078		$	46,164		$	16,423		$	16,097		$	32,272		$	33,238
Interest on investment securities
Securities of U.S. government agencies	1,283			1,223		3,826			3,248			1,534			1,191			3,052			2,543
Obligations of state and political subdivisions	569			527		1,743			1,578			553			588			1,121			1,174
Corporate debt securities and other	38			162		220			546			36			77			73			182
Interest on Federal funds sold and short-term investments	104			35		155			107			157			40			217			51
Total interest income	19,834			17,445		57,022			51,643			18,703			17,993			36,735			37,188
Interest expense
Interest on interest-bearing transaction accounts	27			28		82			88			21			28			50			55
Interest on savings accounts	15			12		43			37			16			14			31			28
Interest on money market accounts	112			125		330			375			114			107			227			218
Interest on time accounts	190			212		579			649			139			193			285			389
Interest on FHLB and other borrowings	—			80		478			236
Interest on Federal Home Loan Bank ("FHLB") and other borrowings												—			378			—			478
Interest on subordinated debentures	109			105		325			314			109			107			217			216
Total interest expense	453			562		1,837			1,699			399			827			810			1,384
Net interest income	19,381			16,883		55,185			49,944			18,304			17,166			35,925			35,804
(Reversal of) provision for loan losses	(1,550		)	—		(1,550		)	—
Provision for loan losses												—			—			—			—
Net interest income after provision for loan losses	20,931			16,883		56,735			49,944			18,304			17,166			35,925			35,804
Non-interest income
Service charges on deposit accounts	447			489		1,344			1,518			447			441			899			897
Wealth Management and Trust Services	506			568		1,599			1,809			504			527			1,007			1,093
Debit card interchange fees	393			372		1,112			1,087			384			381			756			719
Merchant interchange fees	114			171		355			430			112			128			208			241
Earnings on bank-owned life insurance	216			204		626			610			210			209			419			410
Dividends on FHLB stock	223			209		577			817			176			185			408			354
Gains on investment securities, net	—			72		394			80			10			284			10			394
Other income	215			213		691			744			253			266			504			476
Total non-interest income	2,114			2,298		6,698			7,095			2,096			2,421			4,211			4,584
Non-interest expense
Salaries and related benefits	6,683			6,300		20,155			19,762			7,287			6,724			14,762			13,472
Occupancy and equipment	1,275			1,346		3,731			4,181			1,380			1,175			2,699			2,456
Depreciation and amortization	449			441		1,343			1,512			463			441			944			894
Federal Deposit Insurance Corporation insurance	253			250		760			739			162			246			323			507
Data processing	894			835		2,666			2,413			963			916			1,902			1,772
Professional services	476			493		1,528			1,572			522			554			1,044			1,052
Directors' expense	143			182		448			620			224			116			382			305
Information technology	307			186		665			554			186			165			384			358
Provision for losses on off-balance sheet commitments	—			324		150			14
(Reversal) provision for losses on off-balance sheet commitments												(208		)	150			(43		)	150
Other expense	1,430			1,281		4,491			4,447			1,652			1,530			3,245			3,061
Total non-interest expense	11,910			11,638		35,937			35,814			12,631			12,017			25,642			24,027
Income before provision for income taxes	11,135			7,543		27,496			21,225			7,769			7,570			14,494			16,361
Provision for income taxes	4,171			2,770		10,049			7,709			2,583			2,733			4,760			5,878
Net income	$	6,964		$	4,773	$	17,447		$	13,516		$	5,186		$	4,837		$	9,734		$	10,483
Net income per common share:
Basic	$	1.14		$	0.80	$	2.87		$	2.27		$	0.85		$	0.80		$	1.60		$	1.73
Diluted	$	1.14		$	0.79	$	2.86		$	2.23		$	0.84		$	0.79		$	1.58		$	1.72
Weighted average shares:
Basic	6,083			5,963		6,070			5,943			6,110			6,078			6,101			6,063
Diluted	6,117			6,067		6,106			6,059			6,174			6,109			6,173			6,100
Dividends declared per common share	$	0.25		$	0.22	$	0.75		$	0.66		$	0.27		$	0.25		$	0.54		$	0.50
Comprehensive income:
Net income	$	6,964		$	4,773	$	17,447		$	13,516		$	5,186		$	4,837		$	9,734		$	10,483
Other comprehensive income
Change in net unrealized (loss) gain on available-for-sale securities	(831		)	1,523		4,211			1,037
Change in net unrealized gain or loss on available-for-sale securities												1,961			2,119			3,635			5,042
Amortization of net unrealized loss on available for sale securities transferred to held-to-maturity securities												124			—			165			—
Reclassification adjustment for gains on available-for-sale securities included in net income	—			—		(394		)	(8		)	(10		)	(284		)	(10		)	(394		)
Net change in unrealized (loss) gain on available-for-sale securities, before tax	(831		)	1,523		3,817			1,029
Deferred tax (benefit) expense	(367		)	654		1,583			517
Other comprehensive (loss) income, net of tax	(464		)	869		2,234			512
Net change in unrealized loss on available-for-sale securities, before tax												2,075			1,835			3,790			4,648
Tax effect												892			776			1,596			1,950
Other comprehensive income, net of tax												1,183			1,059			2,194			2,698
Comprehensive income	$	6,500		$	5,642	$	19,681		$	14,028		$	6,369		$	5,896		$	11,928		$	13,181

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

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

for the year ended December 31, ~~2015~~2016 and the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017


(in thousands, except share data; unaudited)	Common Stock				Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Total			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Taxes			Total
	Shares		Amount											Shares	Amount
Balance at December 31, 2014	5,939,482		$	82,436	$	116,502		$	1,088		$	200,026
Balance at December 31, 2015														6,068,543	$	84,727	$	129,553		$	193		$	214,473
Net income	—		—		18,441			—			18,441			—	—		23,134			—			23,134
Other comprehensive loss	—		—		—			(895		)	(895		)	—	—		—			(3,486		)	(3,486		)
Stock options exercised	37,071		1,139		—			—			1,139
Excess tax benefit - stock-based compensation	—		212		—			—			212
Stock issued under employee stock purchase plan	339		17		—			—			17
Restricted stock granted	15,970		—		—			—			—
Restricted stock forfeited / cancelled	(450	)	—		—			—			—
Stock-based compensation - stock options	—		252		—			—			252
Stock-based compensation - restricted stock	—		384		—			—			384
Cash dividends paid on common stock	—		—		(5,390		)	—			(5,390		)
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 December 31, 2015	6,068,543		$	84,727	$	129,553		$	193		$	214,473
Net income	—		—		17,447			—			17,447
Other comprehensive income	—		—		—			2,234			2,234
Stock options exercised	32,117		1,087		—			—			1,087			36,117	1,227		—			—			1,227
Excess tax benefit - stock-based compensation	—		119		—			—			119			—	161		—			—			161
Stock issued under employee stock purchase plan	488		23		—			—			23			621	32		—			—			32
Restricted stock granted	16,910		—		—			—			—			16,910	—		—			—			—
Stock-based compensation - stock options	—		266		—			—			266			—	347		—			—			347
Stock-based compensation - restricted stock	—		444		—			—			444			—	638		—			—			638
Cash dividends paid on common stock	—		—		(4,573		)	—			(4,573		)	—	—		(6,223		)	—			(6,223		)
Stock purchased by directors under director stock plan	516		26		—			—			26			516	26		—			—			26
Stock issued in payment of director fees	4,607		234		—			—			234			4,607	234		—			—			234
Balance at September 30, 2016	6,123,181		$	86,926	$	142,427		$	2,427		$	231,780
Balance at December 31, 2016														6,127,314	$	87,392	$	146,464		$	(3,293	)	$	230,563
Net income														—	—		9,734			—			9,734
Other comprehensive income														—	—		—			2,194			2,194
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings														5,893	28		—			—			28
Stock issued under employee stock purchase plan														280	17		—			—			17
Stock issued to employee stock ownership plan														11,732	698		—			—			698
Restricted stock granted														14,230	—		—			—			—
Stock-based compensation - stock options														—	282		—			—			282
Stock-based compensation - restricted stock														—	428		—			—			428
Cash dividends paid on common stock														—	—		(3,315		)	—			(3,315		)
Stock purchased by directors under director stock plan														315	22		—			—			22
Stock issued in payment of director fees														1,188	82		—			—			82
Balance at June 30, 2017														6,160,952	$	88,949	$	152,883		$	(1,099	)	$	240,733

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

BANK OF MARIN BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016


(in thousands; unaudited)	September 30, 2016			September 30, 2015			June 30, 2017			June 30, 2016
Cash Flows from Operating Activities:
Net income	$	17,447		$	13,516		$	9,734		$	10,483
Adjustments to reconcile net income to net cash provided by operating activities:
(Reversal of) provision for loan losses	(1,550		)	—
Provision for losses on off-balance sheet commitments	150			14
Compensation expense via common stock for director fees	146			207
(Reversal of) provision for losses on off-balance sheet commitments							(43		)	150
Compensation expense--common stock for director fees							106			97
Stock-based compensation expense	710			477			710			478
Excess tax benefits from exercised or vested stock-based awards	(119		)	(150		)
Amortization of core deposit intangible	400			464			236			267
Amortization of investment security premiums, net of accretion of discounts	2,293			2,038			1,496			1,466
Accretion of discount on acquired loans	(1,526		)	(1,569		)	(498		)	(832		)
Accretion of discount on subordinated debentures	145			158			80			98
Net amortization of deferred loan origination costs/fees	100			(374		)	60			43
Write-down of other real estate owned	13			40			—			13
Gain on sale of investment securities	(394		)	(80		)	(10		)	(394		)
Depreciation and amortization	1,343			1,512			944			894
Loss on disposal of premises and equipment	3			4
Gain on sale of repossessed assets							(1		)	—
Earnings on bank-owned life insurance policies	(626		)	(610		)	(419		)	(410		)
Net change in operating assets and liabilities:
Interest receivable	998			303
Interest payable	(49		)	(13		)
Deferred rent and other rent-related expenses	(287		)	42			114			(262		)
Other assets	1,364			1,930
Other liabilities	(246		)	(819		)
Interest receivable and other assets							93			2,439
Interest payable and other liabilities							(389		)	(4,035		)
Total adjustments	2,868			3,574			2,479			12
Net cash provided by operating activities	20,315			17,090			12,213			10,495
Cash Flows from Investing Activities:
Purchase of held-to-maturity securities	(2,424		)	(2,375		)	(4,496		)	(2,424		)
Purchase of available-for-sale securities	(138,432		)	(189,755		)	(9,377		)	(19,916		)
Proceeds from sale of available-for-sale securities	68,673			1,559			1,321			68,673
Proceeds from sale of held-to-maturity securities	—			1,015
Proceeds from paydowns/maturities of held-to-maturity securities							14,601			13,243
Proceeds from paydowns/maturities of available-for-sale securities							15,385			49,576
Loans originated and principal collected, net							(4,563		)	4,996
Purchase of bank-owned life insurance policies	(2,133		)	—			—			(1,864		)
Proceeds from paydowns/maturity of held-to-maturity securities	25,150			30,529
Proceeds from paydowns/maturity of available-for-sale securities	110,978			54,966
Proceeds from the sale of loan	—			1,502
Loans originated and principal collected, net	(11,723		)	403
Purchase of FHLB stock	(1,792		)	(136		)
Purchase of premises and equipment	(652		)	(1,194		)	(814		)	(239		)
Cash paid for low income housing tax credit investment	(298		)	(645		)
Net cash provided by (used in) investing activities	47,347			(104,131		)
Proceeds from sale of repossessed assets							170			—
Purchase of Federal Home Loan Bank stock							—			(1,792		)
Cash paid for low-income housing investment							(628		)	(225		)
Net cash provided by investing activities							11,599			110,028
Cash Flows from Financing Activities:
Net increase in deposits	73,243			83,863
Net increase (decrease) in deposits							67,840			(22,611		)
Proceeds from stock options exercised	1,087			888			88			1,200
Payment of tax withholdings for stock options exercised							(60		)	—
Proceeds from stock issued under employee and director stock purchase plans	49			24			737			27
Repayment of Federal Home Loan Bank borrowings	(67,000		)	—
Federal Home Loan Bank repayments							—			(67,000		)
Cash dividends paid on common stock	(4,573		)	(3,936		)	(3,315		)	(3,044		)
Excess tax benefits from exercised or vested stock-based awards	119			150
Net cash provided by financing activities	2,925			80,989
Net increase (decrease) in cash and cash equivalents	70,587			(6,052		)
Net cash provided by (used in) financing activities							65,290			(91,428		)
Net increase in cash and cash equivalents							89,102			29,095
Cash and cash equivalents at beginning of period	26,343			41,367			48,804			26,343
Cash and cash equivalents at end of period	$	96,930		$	35,315		$	137,906		$	55,438
Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,741		$	1,554
Cash paid for income taxes	$	9,095		$	6,603
Cash paid in interest							$	751		$	1,336
Cash paid in income taxes							$	4,620		$	7,095
Supplemental disclosure of non-cash investing and financing activities:
Change in unrealized gain on available-for-sale securities	$	3,817		$	(1,029	)
Transfer of loan to loans held-for-sale at fair value	$	—		$	1,502
Subscription in low income housing tax credit investment	$	—		$	1,023
Change in net unrealized gain or loss on available-for-sale securities							$	3,635		$	5,042
Securities transferred from available-for-sale to held-to-maturity							$	128,965		$	—
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity							$	165		$	—
Stock issued in payment of director fees	$	234		$	275		$	82		$	137

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

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 U.S. 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 annual financial statements and the notes thereto included in our ~~2015~~2016 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.~~

The NorCal Community Bancorp Trusts I and II, respectively (the "Trusts") were formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the subordinated debentures are shown as a liability on our consolidated statements of condition (See Note 6, Borrowings). Bancorp's investment in the securities 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 and 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. The number of potentially dilutive common shares ~~which~~included in the quarterly diluted EPS is ~~based on~~computed using the average market prices during the three months ofincluded in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. We have two forms of ~~our~~ outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. ~~Therefore, under~~Under the two-class method, the difference in EPS is not significant for these participating securities.


	Three months ended				Nine months ended				Three months ended				Six months ended
(in thousands, except per share data)	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015		June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Weighted average basic shares outstanding	6,083		5,963		6,070		5,943		6,110		6,078		6,101		6,063
Potentially dilutive common shares related to:
Stock options	27		35		30		41		52		27		57		31
Unvested restricted stock awards	7		5		6		5		12		4		15		6
Warrant	—		64		—		70
Weighted average diluted shares outstanding	6,117		6,067		6,106		6,059		6,174		6,109		6,173		6,100
Net income	$	6,964	$	4,773	$	17,447	$	13,516	$	5,186	$	4,837	$	9,734	$	10,483
Basic EPS	$	1.14	$	0.80	$	2.87	$	2.27	$	0.85	$	0.80	$	1.60	$	1.73
Diluted EPS	$	1.14	$	0.79	$	2.86	$	2.23	$	0.84	$	0.79	$	1.58	$	1.72
Weighted average anti-dilutive shares not included in the calculation of diluted EPS	71		42		65		35		33		70		23		60

Note 2: Recently Adopted and Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. A contract novation refers to replacing one of the parties to a derivative instrument with a new party. This ASU clarifies that a change in counterparty in a derivative instrument does not, in and of itself, require dedesignation of that hedging relationship and therefore discontinue the application of hedge accounting. We adopted the amendments prospectively effective January 1, 2017, which did not have a material impact on our financial condition or results of operations as there were no changes in counterparties.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as equity or liabilities, forfeiture accounting, and classifications on the statement of cash flows. We adopted the requirements of this ASU effective January 1, 2017, which impacted the following areas:

Forfeiture rates: We have elected to account for forfeitures as they occur. Previously, we accounted for forfeitures based on an estimate of the number of awards expected to vest. The policy change was applied using a modified retrospective approach and did not have a material effect on our financial condition or results of operations.

Income taxes: We have recorded excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable. Previous to the adoption of this ASU, excess tax benefits (deficiencies) were recognized as an increase (decrease) to common stock in the consolidated statements of changes in stockholders' equity. In addition, we have reflected excess tax benefits as an operating activity in the consolidated statements of cash flows. Previous to the adoption of this ASU, excess tax benefits were shown as a financing activity. We applied the amendment prospectively and prior period financial statements have not been restated. For the six months ended June 30, 2017, we recognized $169 thousand in excess tax benefits recorded as a reduction to income tax expense.

Statutory tax withholding: Cash paid for tax withholdings when shares are surrendered in a cashless stock option exchange has been classified as a financing activity in the consolidated statements of cash flows. There were no shares surrendered for tax withholdings prior to the adoption of ASU 2016-09.

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium and require the premium to be amortized to the earliest call date. The ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. We early adopted this ASU effective January 1, 2017, which did not have a material impact on our financial condition and results of operations.

In May 2014, the ~~Financial Accounting Standards Board (FASB)~~FASB issued ~~Accounting Standards Update (ASU)~~ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This 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. Subsequent updates related to Revenue from Contracts with Customers (Topic 606) are as follows:

August 2015 ASU No. 2015-14 - Deferral of the Effective Date, institutes a one-year deferral of the effective date of this amendment to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

March 2016 ASU No. 2016-08 - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), clarifies the implementation guidance on principal versus agent considerations and on the use of indicators that assist an entity in determining whether it controls a specified good or service before it is transferred to the customer.

April 2016 ASU No. 2016-10 - Identifying Performance Obligations and Licensing, provides guidance in determining performance obligations in a contract with a customer and clarifies whether a promise to grant a license provides a right to access or the right to use intellectual property.

May 2016 ASU No. 2016-12 - Narrow Scope Improvements and Practical Expedients, gives further guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.

December 2016 ASU No. 2016-20 - Technical Corrections and Improvements to Topic 606, further clarifies specific aspects of previously issued guidance or corrects unintended application of the guidance.

Our revenue is mainly comprised of interest income on financial instruments, which is explicitly excluded from the scope of ASU 2014-09. We have identified applicable sources of non-interest income and are ~~currently~~gathering and reviewing related contracts and evaluating ~~the provisions of these updates and will be monitoring developments and additional guidance to determine the~~their potential impact to our revenue recognition under the new ~~standards will~~standards. While the recognition of certain components of our non-interest income may be affected by the ASU, we do not expect it to have a material impact on our financial condition and results of operations.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to ~~GAAP~~accounting standards related to financial instruments, ~~that include~~including the ~~following as applicable to us.~~following:

~~Equity~~Requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, ~~are required~~ to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify ~~impairment - if~~impairment. When impairment exists, ~~this requires measuring~~an entity is required to measure the investment at fair value.

Eliminates the requirement ~~for public companies~~ to disclose the method(s) and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

~~Public~~Requires public companies ~~will be required~~ to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

~~The reporting~~Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

ASU 2016-01 is effective for ~~public business entities for~~ fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU ~~will impact~~may affect our financial statement ~~disclosures, however,~~presentation and related footnotes, but we do not expect it to have a material impact on our financial condition or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ~~This~~The amendments in this ASU ~~was issued~~intend to increase transparency and comparability among organizations by recognizing an asset, which represents the right to use the asset for the lease ~~assets~~term, and a lease ~~liabilities, including leases classified as operating leases under previous GAAP,~~liability, which is a lessee's obligation to make lease payments measured on ~~the balance sheet and requiring additional disclosures of key information about leasing arrangements.~~a discounted basis. This ASU generally applies to leasing arrangements exceeding a twelve month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method ~~upon~~of adoption. Early application of the amendments is permitted. We intend to adopt this ASU during the first quarter of 2019, as required, and are continuing to evaluate our lease agreements and potential accounting software solutions as they become available. As of June 30, 2017, our undiscounted operating lease obligations that were off-balance sheet totaled $19.4 million (See Note 8, Commitments and Contingencies). Upon adoption of this ASU, the present values of leases currently classified as operating leases will be recognized as lease assets and liabilities on our balance sheet. Additional disclosures of key information about our leasing arrangements will also be required. We do not expect that the ASU will have a material impact on our capital ratios or return on average assets when adopted and we are currently evaluating the ~~provisions of this~~effect that the ASU ~~and will be monitoring developments and additional guidance to determine the timing of our adoption and the potential outcome the amendments~~ will have on other components of our financial condition and results of operations.

~~In March 2016, the FASB issued ASU No. 2016-05,~~ ~~Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships~~. A contract novation refers to replacing one of the parties to a derivative instrument with a new party. This ASU clarifies that a change in counterparty in a derivative instrument does not, in and of itself, require dedesignation of that hedging relationship and therefore discontinue the application of hedge accounting. ASU 2016-05 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. We do not expect this ASU to have a material impact on our financial condition or results of operations.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting~~. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, forfeiture accounting, and classifications on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. We are currently evaluating the the provisions of this ASU and will be monitoring developments and additional guidance to determine the potential outcome the amendments will have on our financial condition and results of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses, requiring a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Under the new guidance, entities will be required to measure expected credit losses by utilizing forward-looking information to assess an ~~entity recognizes as an~~entity's allowance ~~its estimate~~for credit losses. The measurement of expected credit losses ~~which is likely to result in more timely recognition~~will be based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of ~~such losses.~~a credit over its remaining life. In addition, the ASU amends the accounting for ~~purchased credit impaired financial assets will make the allowance for~~potential credit losses ~~more comparable between originated assets~~on available-for-sale debt securities and purchased financial assets ~~as well as reduce complexity~~ with ~~the accounting for interest income.~~credit deterioration. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management refined our allowance for loan loss model in 2016 and enhanced our loan-level data collection and methodology for analyzing credit losses in preparation for the new accounting standards. We ~~are currently evaluating~~will continue our evaluation of the provisions of this ASU and will be monitoring developments, ~~and~~ additional guidance ~~to determine the timing of our adoption~~ and the potential outcome the amendments will have on our financial condition and results of ~~operations.~~operations upon adoption in the first quarter of 2020.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on how to present and classify eight specific cash flow ~~issues~~topics in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented, if practical. This ASU may affect our presentation of certain cash flows and their categorization as operating, investing or financing activities in the consolidated statements of cash flows, but we do not expect it to have a material impact on our financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments are intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses and provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments are effective for annual periods after December 31, 2017, including interim periods within those periods. The amendments will be adopted prospectively. We will consider these amendments in our evaluation of the accounting for any future business acquisitions or asset disposals.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This amendment simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test, which would measure a goodwill impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. Instead, an entity will perform only Step 1 of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment, which Bancorp currently uses. The ASU is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We anticipate that this ASU will simplify our evaluation of the impairment of goodwill and do not expect it to have a material impact on our financial condition and results of operations.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU applies to entities that change the terms or conditions of a share-based payment award. The FASB adopted this ASU to provide clarity in what constitutes a modification and to reduce diversity in practice in applying Topic 718. In order for a change to a share-based arrangement to not require Topic 718 modification accounting treatment, all of the following must be met: no change in fair value, no change in vesting conditions and no change in the balance sheet classification of the modified award. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted, including adoption in an interim period. The amendments should be applied prospectively to an award modified on or after the adoption date. We do not expect this ASU to have a material impact on our financial condition or results of operations.

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~~in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

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

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

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

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


(in thousands) Description of Financial Instruments	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2016
June 30, 2017
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	252,824	$	—	$	252,199	$	625
Debentures of government-sponsored agencies	40,576		—		40,576		—
Privately-issued collateralized mortgage obligations	560		—		560		—
Obligations of state and political subdivisions	80,027		—		80,027		—
Corporate bonds	5,009		—		5,009		—
Derivative financial liabilities (interest rate contracts)	2,480		—		2,480		—
December 31, 2015
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	190,093	$	—	$	188,381	$	1,712
Debentures of government-sponsored agencies	160,892		—		160,892		—
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies									$	120,914	$	—	$	120,343	$	571
Debentures of government sponsored agencies									35,378		—		35,378		—
Privately-issued collateralized mortgage obligations	4,150		—		4,150		—		130		—		130		—
Obligations of state and political subdivisions	57,673		—		57,673		—		77,423		—		77,423		—
Corporate bonds	4,979		—		4,979		—		5,025		—		5,025		—
Derivative financial assets (interest rate contracts)	3		—		3		—		39		—		39		—
Derivative financial liabilities (interest rate contracts)	1,658		—		1,658		—		935		—		935		—
December 31, 2016
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies									$	254,041	$	—	$	253,434	$	607
Debentures of government sponsored agencies									35,403		—		35,403		—
Privately-issued collateralized mortgage obligations									419		—		419		—
Obligations of state and political subdivisions									77,701		—		77,701		—
Corporate bonds									5,016		—		5,016		—
Derivative financial assets (interest rate contracts)									55		—		55		—
Derivative financial liabilities (interest rate contracts)									933		—		933		—

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.~~obligations, and corporate bonds. As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, there were no securities that were considered Level 1 securities. As of ~~September~~June 30, ~~2016~~2017, 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 number of business equipment loans guaranteed by the Small Business Administration ("SBA") program. ~~This~~The 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. The ~~decrease in fair value during 2016 was due to the pay-off of one of the larger loans in the pool collateralizing the security. The~~ unrealized gain or loss on this SBA-guaranteed security ~~decreased~~increased by ~~$15~~$1 thousand in the same period recorded as part of other comprehensive income.

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.~~and we did not record any write-downs during 2017 or 2016.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using either LIBOR or OIS curves depending on whether the swap positions are fully collateralized 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.~~the Bank. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9.9, Derivative Financial Instruments and Hedging Activities.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans 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~~June 30, ~~2016~~2017 and December 31, ~~2015~~.2016.

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

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)

September 30, 2016

Impaired loans ¹
$ 124
$ —
$ —
$ 124
Other real estate owned 408
—
—
408
December 31, 2015

Impaired loans $ —
$ —
$ —
$ —
Other real estate owned 421
—
—
421

¹Represents collateral-dependent loan principal balances that had been generally written down to the values of the underlying collateral and reflected net of specific valuation allowances. At September 30, 2016, the $124 thousand carrying value of a consumer loan was net of a $52 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.



(in thousands)	Carrying Value	Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
June 30, 2017
Other real estate owned	238	—	—	238
December 31, 2016
Other real estate owned	408	—	—	408

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 characteristics, leasing status and physical condition. When

appraisals are received, Management reviews the underlying assumptions and methodology utilized, 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 ~~2016.~~2017. As of June 30, 2017 and December 31, 2016, there were no collateral-dependent loans whose principal balances had been written down to the values of the underlying collateral.

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 resulted from an acquisition. ~~Decreases~~There were no changes in the estimated fair ~~value~~values of OREO ~~totaled $13 thousand and $40 thousand~~ during the first ~~nine~~six months of ~~2016 and 2015, respectively.~~2017 or 2016.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, 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,Further, 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 ("BOLI"). Additionally, we hold shares of FHLB stock and Visa Inc. Class B common stock at cost. These shares are restricted from resale, except among member banks, and their values are discussed in Note 4, Investment Securities.


	September 30, 2016					December 31, 2015					June 30, 2017					December 31, 2016
(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets
Cash and cash equivalents	$	96,930	$	96,930	Level 1	$	26,343	$	26,343	Level 1	$	137,906	$	137,906	Level 1	$	48,804	$	48,804	Level 1
Investment securities held-to-maturity	46,423		47,867		Level 2	69,637		71,054		Level 2	163,018		165,028		Level 2	44,438		45,097		Level 2
Loans, net	1,451,950		1,471,861		Level 3	1,436,229		1,470,380		Level 3	1,476,253		1,454,371		Level 3	1,471,174		1,473,360		Level 3
Interest receivable	5,645		5,645		Level 2	6,643		6,643		Level 2	6,003		6,003		Level 2	6,319		6,319		Level 2
Financial liabilities
Deposits	1,801,469		1,801,932		Level 2	1,728,226		1,728,717		Level 2	1,840,540		1,840,737		Level 2	1,772,700		1,773,102		Level 2
Federal Home Loan Bank and other borrowings	—		—		Level 2	67,000		67,279		Level 2
Subordinated debentures	5,540		5,156		Level 3	5,395		5,132		Level 3	5,666		5,153		Level 3	5,586		5,083		Level 3
Interest payable	138		138		Level 2	187		187		Level 2	114		114		Level 2	134		134		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 obligations of state and political subdivisions and corporate bonds, are recorded at their amortized cost. ~~The~~Their fair value for disclosure purposes is determined using methodologies similar to those described above for available-for-sale securities using Level 2 inputs. If Level 2 inputs are not available, we may utilize pricing models that incorporate unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities (Level 3). As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, 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 their current carrying value, because their rates are regularly adjusted to current market rates. The fair value of fixed rate loans or variable loans at negotiated interest rate floors or ceilings with remaining maturities in excess of one year is estimated by discounting the future

cash flows using current market rates at which similar loans would be made to borrowers with similar 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.

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

Subordinated Debentures - The fair values of the subordinated debentures ~~were~~are 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 bonds would be issued with similar credit ratings as ours and similar remaining maturities. Each interest payment ~~was~~is discounted at the spot rate ~~for~~of the corresponding term, determined based on the yields and terms of comparable trust preferred securities, plus a liquidity premium. In July 2010, the Dodd-Frank Act was signed into law and limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. This law effectively closed the ~~trust-preferred~~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. See Note 6, Borrowings, for further information.

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~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Note 4: Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including residential and commercial 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, 2016									December 31, 2015									June 30, 2017									December 31, 2016
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)
Held-to-maturity:
Obligations of state and political subdivisions	$	32,765	$	33,868	$	1,106	$	(3	)	$	42,919	$	44,146	$	1,246	$	(19	)	$	24,059	$	24,729	$	671	$	(1	)	$	30,856	$	31,544	$	694	$	(6	)
Corporate bonds	3,524		3,523		0		(1		)	15,072		15,098		42		(16		)	—		—		—		—			3,519		3,518		—		(1		)
MBS pass-through securities issued by FHLMC and FNMA	10,134		10,476		342		—			11,646		11,810		171		(7		)	107,526		108,360		897		(63		)	10,063		10,035		126		(154		)
CMOs issued by FHLMC																			31,433		31,940		507		—			—		—		—		—
Total held-to-maturity	46,423		47,867		1,448		(4		)	69,637		71,054		1,459		(42		)	163,018		165,029		2,075		(64		)	44,438		45,097		820		(161		)
Available-for-sale:
Securities of U.S. government or government-sponsored agencies:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	196,987		198,999		2,239		(227		)	138,222		138,462		694		(454		)	89,422		89,836		630		(216		)	193,998		190,566		145		(3,577		)
CMOs issued by FNMA	14,885		15,104		219		—			18,266		18,219		97		(144		)	12,182		12,237		80		(25		)	13,790		13,772		91		(109		)
CMOs issued by FHLMC	30,555		30,887		332		—			22,889		22,932		82		(39		)	9,381		9,405		24		—			43,452		42,758		37		(731		)
CMOs issued by GNMA	7,654		7,834		180		—			10,326		10,480		169		(15		)	9,361		9,436		77		(2		)	6,844		6,945		102		(1		)
Debentures of government- sponsored agencies	40,486		40,576		98		(8		)	161,690		160,892		28		(826		)	35,490		35,378		—		(112		)	35,486		35,403		7		(90		)
Privately issued CMOs	560		560		1		(1		)	3,960		4,150		190		—			129		130		1		—			419		419		1		(1		)
Obligations of state and political subdivisions	78,719		80,027		1,401		(93		)	57,110		57,673		580		(17		)	76,955		77,423		772		(304		)	79,306		77,701		135		(1,740		)
Corporate bonds	4,956		5,009		53		—			4,947		4,979		43		(11		)	4,964		5,025		61		—			4,959		5,016		57		—
Total available-for-sale	374,802		378,996		4,523		(329		)	417,410		417,787		1,883		(1,506		)	237,884		238,870		1,645		(659		)	378,254		372,580		575		(6,249		)
Total investment securities	$	421,225	$	426,863	$	5,971	$	(333	)	$	487,047	$	488,841	$	3,342	$	(1,548	)	$	400,902	$	403,899	$	3,720	$	(723	)	$	422,692	$	417,677	$	1,395	$	(6,410	)

The amortized cost and fair value of investment debt securities by contractual maturity at ~~September~~June 30, ~~2016~~2017 are shown below. Expected maturities ~~will~~may differ from contractual maturities ~~because~~if the issuers of the securities ~~may~~ have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2016								December 31, 2015								June 30, 2017								December 31, 2016
	Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale				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		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	14,037	$	14,115	$	17,067	$	17,080	$	18,853	$	18,920	$	12,135	$	12,176	$	4,501	$	4,524	$	22,959	$	22,942	$	13,473	$	13,506	$	20,136	$	20,109
After one year but within five years	16,583		17,212		67,087		67,487		31,677		32,360		188,007		187,326
After one but within five years																	15,894		16,300		57,536		57,592		16,706		17,150		58,334		58,267
After five years through ten years	4,467		4,739		87,774		88,871		8,580		8,969		64,899		64,999		43,392		44,274		79,739		80,018		3,000		3,125		113,576		110,842
After ten years	11,336		11,801		202,873		205,558		10,527		10,805		152,369		153,286		99,231		99,931		77,650		78,318		11,259		11,316		186,208		183,362
Total	$	46,423	$	47,867	$	374,801	$	378,996	$	69,637	$	71,054	$	417,410	$	417,787	$	163,018	$	165,029	$	237,884	$	238,870	$	44,438	$	45,097	$	378,254	$	372,580

Sales of investment securities and gross ~~realized~~ gains and losses are shown in the following table.


	Three months ended				Nine months ended					Three months ended					Six months ended
(in thousands)	September 30, 2016		September 30, 2015		September 30, 2016			September 30, 2015		June 30, 2017			June 30, 2016		June 30, 2017			June 30, 2016
Available-for-sale:
Sales proceeds	$	—	$	—	$	68,673		$	1,559	$	1,321		$	13,688	$	1,321		$	68,673
Gross realized gains	—		—		458			8		13			284		13			458
Gross realized losses	—		—		(64		)	—		(3		)	—		(3		)	(64		)

Held-to-Maturity:
Sales proceeds	$	—	$	1,015	$	—		$	1,015
Gross realized gains	—		72		—			72
Gross realized losses	—		—		—			—

Investment securities carried at $~~70.7~~119.8 million and ~~$87.9~~$109.1 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, were pledged towith the State of California: $~~69.9~~119.0 million and ~~$87.1~~$108.3 million to secure public deposits in compliance with the Local Agency Security Program at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, and $~~827~~814 thousand and ~~$840~~$822 thousand to provide collateral for trust deposits at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. In addition, investment securities carried at ~~$2.1~~$2.0 million and ~~$1.1~~$2.1 million were pledged to collateralize a

Wealth Management and Trust Services (“WMTS”) checking account at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain MBS pass-through and CMOs securities issued by FHLMC and FNMA. Effective February 24, 2017, we transferred $129 million of these securities, which we intend and have the ability to hold to maturity, from available-for-sale securities to held-to-maturity at fair value. The unrealized pre-tax loss of $3.0 million at the date of transfer remained in accumulated other comprehensive income and is amortized over the remaining lives of the securities.

Other-Than-Temporarily Impaired ("OTTI") 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 ~~securities~~security in our investment portfolio is other-than-temporarily impaired as of ~~September~~June 30, ~~2016.~~2017. We do not have the intent and it is more likely than not that we will not have to sell the remaining securities temporarily impaired at ~~September~~June 30, ~~2016~~2017 before recovery of the amortized cost basis.

~~Thirty-seven~~There were 59 and 134~~fifty-four~~investment securities ~~were~~ in unrealized loss positions at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


September 30, 2016	< 12 continuous months					≥ 12 continuous months				Total securities in a loss position
June 30, 2017															< 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			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity:
Obligations of state and political subdivisions	$	547	$	(3	)	$	—	$	—	$	547	$	(3	)	$	132	$	(1	)	$	545	$	—		$	677	$	(1	)
Corporate bonds	3,523		(1		)	—		—		3,523		(1		)
MBS pass-through securities issued by FHLMC and FNMA															2,321		(63		)	—		—			2,321		(63		)
Total held-to-maturity	4,070		(4		)	—		—		4,070		(4		)	2,453		(64		)	545		—			2,998		(64		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	69,229		(227		)	—		—		69,229		(227		)	25,380		(201		)	9,117		(15		)	34,497		(216		)
CMOs issued by FNMA															8,452		(25		)	—		—			8,452		(25		)
CMOs issued by GNMA															1,278		(2		)	—		—			1,278		(2		)
Debentures of government- sponsored agencies	14,992		(8		)	—		—		14,992		(8		)	24,926		(66		)	9,953		(46		)	34,879		(112		)
Privately issued CMOs	162		(1		)	—		—		162		(1		)
Obligations of state & political subdivisions	14,236		(93		)	—		—		14,236		(93		)
Obligations of state add political subdivisions															21,434		(290		)	1,391		(14		)	22,825		(304		)
Total available-for-sale	98,619		(329		)	—		—		98,619		(329		)	81,470		(584		)	20,461		(75		)	101,931		(659		)
Total temporarily impaired securities	$	102,689	$	(333	)	$	—	$	—	$	102,689	$	(333	)	$	83,923	$	(648	)	$	21,006	$	(75	)	$	104,929	$	(723	)


December 31, 2015	< 12 continuous months					≥ 12 continuous months					Total securities in a loss position
December 31, 2016																< 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			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity:
Obligations of state and political subdivisions	$	8,297	$	(19	)	$	—	$	—		$	8,297	$	(19	)	$	2,250	$	(154	)	$	—	$	—		$	2,250	$	(154	)
Corporate bonds	3,523		(15		)	1,999		(1		)	5,522		(16		)	3,362		(6		)	—		—			3,362		(6		)
MBS pass-through securities issued by FHLMC and FNMA	2,332		(7		)	—		—			2,332		(7		)	3,518		(1		)	—		—			3,518		(1		)
Total held-to-maturity	14,152		(41		)	1,999		(1		)	16,151		(42		)	9,130		(161		)	—		—			9,130		(161		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	68,809		(454		)	—		—			68,809		(454		)	162,016		(3,577		)	—		—			162,016		(3,577		)
CMOs issued by FNMA	9,277		(80		)	3,158		(64		)	12,435		(144		)	9,498		(109		)	—		—			9,498		(109		)
CMOs issued by FHLMC	—		—			1,989		(39		)	1,989		(39		)	31,545		(731		)	—		—			31,545		(731		)
CMOs issued by GNMA	164		—			2,374		(15		)	2,538		(15		)	1,583		(1		)	—		—			1,583		(1		)
Debentures of government- sponsored agencies	136,064		(713		)	9,887		(113		)	145,951		(826		)	19,951		(38		)	9,946		(52		)	29,897		(90		)
Obligations of state & political subdivisions	4,557		(15		)	579		(2		)	5,136		(17		)
Obligations of state and political subdivisions																59,567		(1,740		)	—		—			59,567		(1,740		)
Corporate bonds	2,986		(11		)	—		—			2,986		(11		)	154		(1		)	—		—			154		(1		)
Total available-for-sale	221,857		(1,273		)	17,987		(233		)	239,844		(1,506		)	284,314		(6,197		)	9,946		(52		)	294,260		(6,249		)
Total temporarily impaired securities	$	236,009	$	(1,314	)	$	19,986	$	(234	)	$	255,995	$	(1,548	)	$	293,444	$	(6,358	)	$	9,946	$	(52	)	$	303,390	$	(6,410	)

As of June 30, 2017, there was one debenture of government-sponsored agency security, one MBS pass-through security issued by FNMA and two obligations of U.S. state and political subdivisions security that have been in a continuous loss position for twelve months or more. We have evaluated the securities and believe that the decline in fair value is primarily driven by factors other than credit. It is probable that we will be able to collect all amounts due according to the contractual terms and no other-than-temporary impairment exists on these securities. The ~~thirty-seven~~debenture of government-sponsored agency security is supported by the U.S. Federal Government, which protects us from credit losses. Based upon our assessment of the credit fundamentals, we concluded that these securities were not other-than-temporarily impaired at June 30, 2017.

There were 55 investment securities in our portfolio that had been in a temporary loss ~~position~~positions for less than twelve months as of ~~September~~June 30, ~~2016~~2017, and their temporary loss positions mainly arose from changes in interest rates since purchase. They consisted of two debentures of U.S. government-sponsored agencies, ~~twenty-three~~36 obligations of U.S. state and political subdivisions, ~~ten~~twelve MBS ~~securities~~and five CMOs issued by government-sponsored ~~agencies, one privately issued CMO and one corporate bond. The debentures~~agencies. Securities of government-sponsored agencies are supported by the U.S. Federal Government, which protects us from credit losses. Other temporarily impaired securities are deemed creditworthy after internal analysis of the issuers' latest financial information and credit enhancement. 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~~June 30, ~~2016.~~2017.

Non-Marketable Securities

As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $10.2 million ~~and $8.4 million~~ of FHLB stock recorded at cost in other assets on the consolidated statements of condition at both ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016~~, 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~~due to ~~be able to redeem this stock at cost.~~FHLB's current financial condition. On ~~October 19, 2016, FHLB declared a special cash dividend of $3.41 per share on capital stock outstanding during the third quarter of 2016. In addition, on October~~July 27, ~~2016,~~2017, FHLB announced a cash dividend for the ~~third~~second quarter of ~~2016~~2017 at an annualized dividend rate of ~~8.94%. Both dividends will~~7.00% to be distributed in ~~mid November 2016.~~mid-August 2017. 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~~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~~based on the conversion rate of 1.6483 ~~as of the latest SEC Form 10-Q filed by Visa, Inc. on July 25, 2016,~~ and the closing stock price of Class A shares, the value of our shares of Class B common stock would have been ~~$2.3~~$2.6 million ~~at September 30, 2016~~ and $2.2 million at June 30, 2017 and December 31, ~~2015.~~2016, respectively. The conversion

rate is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. ~~See~~For further information, see Note 8, ~~herein.~~Commitments and Contingencies.

We invest in ~~low income~~low-income housing tax credit funds as a limited partner, which totaled ~~$2.5~~$2.3 million and ~~$2.7~~$2.5 million recorded in other assets ~~on the consolidated statements~~as of ~~condition at~~ ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively. In the first ~~nine~~six months of ~~2016,~~2017, we recognized ~~$223~~$175 thousand of ~~low income~~low-income housing tax credits and other tax benefits, net of ~~$177~~$139 thousand of amortization expense of ~~low income~~low-income housing tax credit investment, as a component of income tax expense. As of ~~September~~June 30, ~~2016,~~2017, our unfunded commitments for these ~~low income~~low-income housing tax credit funds totaled ~~$1.5 million.~~$820 thousand. We did not recognize any impairment losses on these ~~low income~~low-income housing tax credit investments during the first ~~nine~~six months of ~~2016~~2017 or ~~2015.~~2016.

Note 5: Loans and Allowance for Loan Losses

Credit Quality of Loans

~~Outstanding~~The following table shows outstanding loans by class and payment aging as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 ~~were as follows:~~.

																																	Loan Aging Analysis by Loan Class
(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		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, 2016
June 30, 2017
30-59 days past due	$	2	$	135	$	—	$	—	$	90	$	—	$	83	$	310	$	—	$	—	$	—	$	—	$	244	$	—	$	150	$	394
60-89 days past due	—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
90 days or more past due	44		176		—		—		99		—		—		319		—		—		—		—		—		—		—		—
Total past due	46		311		—		—		189		—		83		629		—		—		—		—		244		—		150		394
Current	221,161		237,227		715,051		80,491		111,022		77,769		24,313		1,467,034		217,417		265,249		717,197		54,990		119,256		92,421		24,561		1,491,091
Total loans ³	$	221,207	$	237,538	$	715,051	$	80,491	$	111,211	$	77,769	$	24,396	$	1,467,663	$	217,417	$	265,249	$	717,197	$	54,990	$	119,500	$	92,421	$	24,711	$	1,491,485
Non-accrual ²	$	44	$	176	$	—	$	—	$	260	$	—	$	60	$	540
December 31, 2015
Non-accrual loans ²																	$	—	$	—	$	1,041	$	—	$	87	$	—	$	51	$	1,179
December 31, 2016
30-59 days past due	$	36	$	—	$	1,096	$	1	$	—	$	—	$	249	$	1,382	$	283	$	—	$	—	$	—	$	77	$	—	$	2	$	362
60-89 days past due	—		—		—		—		633		—		89		722		—		—		—		—		—		—		49		49
90 days or more past due	21		—		—		—		99		—		—		120		—		—		—		—		91		—		—		91
Total past due	57		—		1,096		1		732		—		338		2,224		283		—		—		—		168		—		51		502
Current	219,395		242,309		714,783		65,494		111,568		73,154		22,301		1,449,004		218,332		247,713		724,228		74,809		117,039		78,549		25,444		1,486,114
Total loans ³	$	219,452	$	242,309	$	715,879	$	65,495	$	112,300	$	73,154	$	22,639	$	1,451,228	$	218,615	$	247,713	$	724,228	$	74,809	$	117,207	$	78,549	$	25,495	$	1,486,616
Non-accrual ²	$	21	$	—	$	1,903	$	1	$	171	$	—	$	83	$	2,179
Non-accrual loans ²																	$	—	$	—	$	—	$	—	$	91	$	—	$	54	$	145

¹ Our residential loan portfolio does not include sub-prime loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.

² ~~Amounts include $1 thousand of~~There were no purchased credit impaired ("PCI") loans that had stopped accreting interest at June 30, 2017 and December 31, ~~2015.~~2016. Amounts exclude accreting PCI loans of $2.3 million and $2.9 million ~~and $3.7 million~~ at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. ~~These accreting PCI loans are included in current loans.~~ There were no accruing loans past due more than ninety days ~~past due~~ at ~~September~~June 30, ~~2016~~2017 or December 31, ~~2015.~~2016.

³ Amounts include net deferred loan origination costs of ~~$869~~$823 thousand and ~~$768~~$883 thousand at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of ~~$1.9~~$1.4 million and ~~$3.2~~$1.8 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Our commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases ~~and/or~~and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral ~~and/or~~and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable ~~and/or~~and inventory, and typically include a personal guarantee. We target stable businesses

with guarantors that have proven to be resilient in periods of economic stress. Typically, the guarantors provide an additional source of repayment for most of our credit extensions.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, ~~the vast majority~~substantially all of our loans are guaranteed by the owners of the properties. Commercial

real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. In the event of a vacancy, guarantors are expected to carry the loans until a replacement tenant can be found. ~~Regardless of the guaranty status, the~~The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.

Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. The construction industry can be affected by significant events, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit and other residential ~~(tenancy-in-common, or “TIC”)~~tenancy-in-common fractional interest loans ("TIC"), floating homes and mobile homes along with a small number of installment ~~and other consumer~~ loans. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. ~~Additionally, trend reports are reviewed by Management on a regular basis.~~ Our other residential ~~loan portfolio includes~~loans include TIC units located almost entirely in San ~~Francisco. Installment and other consumer loans include mostly loans for floating homes and mobile homes along with a small number of installment loans.~~Francisco County.

We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and ~~ultimately~~ in the loan portfolio. Definitions of loans that are risk graded “Special Mention” or worse are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:

Pass and Watch: Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.

Special Mention: Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.

Substandard: Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments inof the borrower’s financial condition, managerial weaknesses ~~and/or~~and significant collateral deficiencies.

Doubtful: Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

We regularly review our credits for accuracy of risk grades whenever new information is received. Borrowers are required to submit financial information at regular ~~intervals:~~

intervals. Generally, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit

size, risk and complexity.

Investor commercial real estate borrowers are generally required to submit rent rolls or property income statements annually.

Construction loans are monitored monthly, and reviewed on an ongoing basis.

Home equity and other consumer loans are reviewed based on delinquency.

Loans graded “Watch” or ~~more severe,~~worse, regardless of loan type, are reviewed no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, including ~~the~~ PCI loans, at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015:~~2016.


Credit Risk Profile by Internally Assigned Grade
Credit Risk Profile by Internally Assigned Risk Grade																			Credit Risk Profile by Internally Assigned Risk Grade
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Purchased credit-impaired		Total		Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Purchased credit-impaired		Total
September 30, 2016
June 30, 2017
Pass	$	203,784	$	224,502	$	711,192	$	77,253	$	108,908	$	77,769	$	23,976	$	2,874	$	1,430,258	$	201,289	$	250,534	$	713,341	$	51,752	$	118,191	$	92,421	$	24,372	$	2,255	$	1,454,155
Special Mention	8,859		4,478		356		—		1,120		—		—		—		14,813		3,535		4,533		—		—		—		—		—		—		8,068
Substandard	8,524		7,505		1,793		3,238		1,112		—		420		—		22,592		12,555		9,066		2,855		3,238		1,209		—		339		—		29,262
Total loans	$	221,167	$	236,485	$	713,341	$	80,491	$	111,140	$	77,769	$	24,396	$	2,874	$	1,467,663	$	217,379	$	264,133	$	716,196	$	54,990	$	119,400	$	92,421	$	24,711	$	2,255	$	1,491,485
December 31, 2015
December 31, 2016
Pass	$	192,560	$	219,060	$	710,042	$	62,255	$	109,959	$	73,154	$	22,307	$	3,260	$	1,392,597	$	201,987	$	234,849	$	720,417	$	71,564	$	115,680	$	78,549	$	25,083	$	2,920	$	1,451,049
Special Mention	22,457		12,371		372		—		1,100		—		—		—		36,300		9,197		4,799		607		—		1,334		—		—		—		15,937
Substandard	4,260		9,167		3,739		3,239		1,173		—		332		421		22,331		7,391		6,993		1,498		3,245		91		—		412		—		19,630
Total loans	$	219,277	$	240,598	$	714,153	$	65,494	$	112,232	$	73,154	$	22,639	$	3,681	$	1,451,228	$	218,575	$	246,641	$	722,522	$	74,809	$	117,105	$	78,549	$	25,495	$	2,920	$	1,486,616

Troubled Debt Restructuring

Our loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”), where economic concessions have been granted to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.

A loan may no longer be reported as a TDR if all of the following conditions are met:

The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;

The borrower is no longer considered to be in financial difficulty;

Performance on the loan is reasonably assured; and;

Existing loan did not have any forgiveness of principal or interest.

The removal of TDR status must be approved by the same ~~management~~Management level that approved the upgrading of the loan classification.

There were no loans removed from TDR designation during 2017 and 2016. ~~During the first nine months of 2015, four loans with a recorded investment totaling $1.4 million were removed from TDR designation as they met our criteria outlined above.~~

The following table ~~below~~ summarizes ~~outstanding~~the carrying amount of TDR loans by loan class as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015. The summary includes both TDRs that are on non-accrual status and those that continue to accrue interest.~~2016.


(in thousands)
Recorded investment in Troubled Debt Restructurings ¹	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Commercial and industrial	$	2,964	$	4,698	$	2,075	$	2,207
Commercial real estate, owner-occupied	6,993		6,993		7,000		6,993
Commercial real estate, investor	2,299		514		2,214		2,256
Construction ²	3,238		3,238
Construction					3,238		3,245
Home equity	696		460		487		625
Other residential	1,974		2,010		1,170		1,965
Installment and other consumer	1,024		1,168		888		877
Total	$	19,188	$	19,081	$	17,072	$	18,168

¹~~Includes $19.1 million and $19.0 million of~~There were no TDR loans ~~that were accruing interest as of September~~on non-accrual status at June 30, ~~2016~~2017 and December 31, ~~2015, respectively. Includes noacquired loans at September 30, 2016 and $137 thousand of acquired loans at December 31, 2015.~~2016.

²In June 2015, one TDR loan was transferred to loans held-for-sale at fair value totaling $1.5 million, net of an $839 thousand charge-off to the allowance for loan losses. The loan was subsequently sold in June 2015 for no additional gain or loss.

The following table ~~below~~ presents ~~the following~~ information for loans modified in a TDR during the presented ~~periods:~~periods, including the number of contracts modified, the recorded investment in the loans prior to modification, and the recorded investment in the loans after being restructured. The table ~~below~~ excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented.

(dollars in thousands) Number of Contracts Modified
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment at Period End
Troubled Debt Restructurings during the three months ended September 30, 2016:
None —
$ —
$ —
$ —

Troubled Debt Restructurings during the three months ended September 30, 2015:

Commercial and industrial 1
$ 700
$ 700
$ 700



(dollars in thousands)	Number of Contracts Modified	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment at Period End
Troubled Debt Restructurings during the three months ended June 30, 2017:
None	—	$	—	$	—	$	—

Troubled Debt Restructurings during the three months ended June 30, 2016:
Commercial real estate, investor	1	$	281	$	281	$	281
Home equity ¹	1	87		222		222
Total	2	$	368	$	503	$	503


Troubled Debt Restructurings during the nine months ended September 30, 2016:
Troubled Debt Restructurings during the six months ended June 30, 2017:
Installment and consumer								1	$	50	$	50	$	49

Troubled Debt Restructurings during the six months ended June 30, 2016:
Commercial real estate, investor	2	$	1,830	$	1,826	$	1,808	2	$	1,830	$	1,826	$	1,808
Home equity ¹	1	87		222		222		1	87		222		222
Total	3	$	1,917	$	2,048	$	2,030	3	$	1,917	$	2,048	$	2,030

Troubled Debt Restructurings during the nine months ended September 30, 2015:
Commercial and industrial	5	$	1,482	$	1,582	$	1,463
Commercial real estate, investor	1	222		221		217
Total	6	$	1,704	$	1,803	$	1,680
¹The home equity TDR modification during the second quarter of 2016 included debt consolidation, which increased the post-modification balance.								¹The home equity TDR modification during the second quarter of 2016 included debt consolidation, which increased the post-modification balance.

¹~~The home equity TDR modification during the second quarter of 2016 included debt consolidation which increased the post-modification balance.~~

~~Modifications~~The modifications during the ~~nine~~six months ended ~~September~~June 30, 2017 and 2016 primarily involved interest rate concessions, renewals, and other changes to loan terms. ~~Modifications during the nine months ended September 30, 2015 primarily involved maturity extensions and other changes to loan terms.~~ During the first ~~nine~~six months of ~~2016~~2017 and ~~2015,~~2016, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Impaired ~~Loan Balances and Their Related Allowance by Major Classes of~~ Loans

The following tables ~~below~~ summarize information by class on impaired loans and their related ~~allowance.~~allowances. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.

(in thousands) Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Total
September 30, 2016

Recorded investment in impaired loans:
With no specific allowance recorded $ 1,102
$ —
$ —
$ 2,688
$ 260
$ 1,189
$ 108
$ 5,347
With a specific allowance recorded 1,906
7,169
2,299
550
625
785
976
14,310
Total recorded investment in impaired loans $ 3,008
$ 7,169
$ 2,299
$ 3,238
$ 885
$ 1,974
$ 1,084
$ 19,657
Unpaid principal balance of impaired loans $ 3,008
$ 7,169
$ 2,299
$ 3,238
$ 885
$ 1,974
$ 1,084
$ 19,657
Specific allowance 569
108
474
5
34
59
94
1,343
Average recorded investment in impaired loans during the quarter ended
September 30, 2016 3,352
7,169
3,146
3,238
1,140
1,981
1,113
21,139
Interest income recognized on impaired loans during the quarter ended
September 30, 2016 ¹
44
67
1,385
32
38
22
12
1,600
Average recorded investment in impaired loans during the nine months ended
September 30, 2016
3,802
7,081
3,397
3,238
1,098
1,993
1,179
21,788
Interest income recognized on impaired loans during the nine months ended
September 30, 2016 ¹
142
133
1,489
105
48
67
37
2,021
Average recorded investment in impaired loans during the quarter ended
September 30, 2015
4,473
7,695
2,886
3,262
610
2,025
1,439
22,390
Interest income recognized on impaired loans during the quarter ended
September 30, 2015
58
84
10
22
5
23
15
217
Average recorded investment in impaired loans during the nine months ended
September 30, 2015
4,121
8,183
2,916
4,473
616
2,033
1,579
23,921
Interest income recognized on impaired loans during the nine months ended
September 30, 2015
176
228
24
40
14
69
51
602



(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
June 30, 2017
Recorded investment in impaired loans:
With no specific allowance recorded	$	345	$	—	$	1,041	$	2,688	$	87	$	1,003	$	98	$	5,262
With a specific allowance recorded	1,730		7,000		2,214		550		487		167		841		12,989
Total recorded investment in impaired loans	$	2,075	$	7,000	$	3,255	$	3,238	$	574	$	1,170	$	939	$	18,251
Unpaid principal balance of impaired loans	$	2,053	$	6,993	$	3,268	$	3,238	$	572	$	1,168	$	939	$	18,231
Specific allowance	31		121		374		5		7		2		97		637
Average recorded investment in impaired loans during the quarter ended June 30, 2017	2,072		7,000		3,283		3,240		642		1,173		943		18,353
Interest income recognized on impaired loans during the quarter ended June 30, 2017 ¹	25		66		20		37		7		14		10		179
Average recorded investment in impaired loans during the six months ended June 30, 2017	2,117		6,998		2,941		3,241		667		1,437		939		18,340
Interest income recognized on impaired loans during the six months ended June 30, 2017 ¹	48		132		43		71		14		34		20		362
Average recorded investment in impaired loans during the quarter ended June 30, 2016	3,771		7,081		3,917		3,238		1,286		1,993		1,184		22,470
Interest income recognized on impaired loans during the quarter ended June 30, 2016¹	44		66		22		32		6		23		12		205
Average recorded investment in impaired loans during the six months ended June 30, 2016	4,027		7,037		3,523		3,238		1,077		1,998		1,211		22,111
Interest income recognized on impaired loans during the six months ended June 30, 2016 ¹	98		133		38		70		11		45		25		420

¹Interest income recognized on a cash basis totaled $1.4 million for the three and nine months ended September 30, 2016 and was primarily related to the interest recovery upon the pay-off of a partially charged off non-accrual commercial real estate loan during the third quarter. No ~~interest~~ interest income on impaired loans was recognized on a cash basis during the three and ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2017 and 2016.


(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total		Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
December 31, 2015
December 31, 2016																	December 31, 2016
Recorded investment in impaired loans:	Recorded investment in impaired loans:																Recorded investment in impaired loans:
With no specific allowance recorded	$	2,198	$	4,111	$	2,416	$	2,687	$	171	$	1,214	$	131	$	12,928	$	315	$	—	$	—	$	2,692	$	91	$	1,008	$	103	$	4,209
With a specific allowance recorded	2,522		2,882		—		551		388		797		1,120		8,260		1,892		6,993		2,256		553		624		957		829		14,104
Total recorded investment in impaired loans	$	4,720	$	6,993	$	2,416	$	3,238	$	559	$	2,011	$	1,251	$	21,188	$	2,207	$	6,993	$	2,256	$	3,245	$	715	$	1,965	$	932	$	18,313
Unpaid principal balance of impaired loans	$	4,763	$	6,993	$	4,408	$	3,424	$	559	$	2,011	$	1,251	$	23,409	$	2,177	$	6,993	$	2,252	$	3,238	$	713	$	1,965	$	932	$	18,270
Specific allowance	$	912	$	70	$	—	$	1	$	3	$	67	$	116	$	1,169	$	285	$	163	$	375	$	8	$	7	$	55	$	98	$	991

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded substandard or worse, loans on non-accrual status and loans modified in a TDR, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were no ~~amounts charged off for impaired loans outstanding at September 30, 2016. The~~ charged-off ~~portion~~portions of impaired loans outstanding at June 30, 2017 and December 31, ~~2015 totaled $2.1 million.~~2016. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired ~~loans.~~loans and deferred fees and costs. At ~~both September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled ~~$1.3~~$963 thousand and $1.6 million.

The following tables disclose ~~loans by major portfolio category and~~ activity in the ~~ALLL,~~allowance for loan losses ("ALLL") and the recorded investment in loans by class, as well as the related ALLL disaggregated by impairment evaluation method.

Allowance for Loan Losses Rollforward for the Period
(in thousands) Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Unallocated
Total
Three months ended September 30, 2016

Allowance for loan losses:
Beginning balance $ 2,637
$ 1,631
$ 6,595
$ 831
$ 1,076
$ 426
$ 437
$ 1,454
$ 15,087
Provision (reversal) 828
(10 ) (2,416 ) 105
(125 ) 22
(73 ) 119
(1,550 )
Charge-offs —
—
—
—
—
—
—
—
—
Recoveries 29
—
2,146
—
1
—
—
—
2,176
Ending balance $ 3,494
$ 1,621
$ 6,325
$ 936
$ 952
$ 448
$ 364
$ 1,573
$ 15,713
Three months ended September 30, 2015
Allowance for loan losses:
Beginning balance $ 2,540
$ 2,052
$ 5,944
$ 535
$ 843
$ 435
$ 444
$ 1,561
$ 14,354
Provision (reversal) 86
17
128
158
9
(50 ) 32
(380 ) —
Charge-offs (2 ) —
—
—
—
—
(1 ) —
(3 )
Recoveries 92
—
12
—
1
—
1
—
106
Ending balance $ 2,716
$ 2,069
$ 6,084
$ 693
$ 853
$ 385
$ 476
$ 1,181
$ 14,457

																																																				Allowance for Loan Losses Rollforward for the Period
(in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total			Commercial and industrial			Commercial real estate, owner-occupied		Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
Nine months ended September 30, 2016
Allowance for loan losses:
Three months ended June 30, 2017																											Three months ended June 30, 2017
Beginning balance	$	3,023		$	2,249		$	6,178		$	724		$	910		$	394		$	425		$	1,096	$	14,999		$	4,413		$	1,992	$	6,133		$	546		$	990		$	444		$	359		$	342	$	15,219
Provision (reversal)	388			(628		)	(2,009		)	212			40			54			(84		)	477		(1,550		)	(490		)	90		(68		)	(135		)	(9		)	65			(23		)	570		—
Charge-offs	(9		)	—			—			—			—			—			(4		)	—		(13		)	—			—		—			—			—			—			—			—		—
Recoveries	92			—			2,156			—			2			—			27			—		2,277			9			—		—			—			—			—			4			—		13
Ending balance	$	3,494		$	1,621		$	6,325		$	936		$	952		$	448		$	364		$	1,573	$	15,713		$	3,932		$	2,082	$	6,065		$	411		$	981		$	509		$	340		$	912	$	15,232
Nine months ended September 30, 2015
Allowance for loan losses:
Three months ended June 30, 2016																											Three months ended June 30, 2016
Beginning balance	$	2,837		$	1,924		$	6,672		$	839		$	859		$	433		$	566		$	969	$	15,099		$	2,799		$	1,619	$	6,571		$	822		$	1,044		$	430		$	434		$	1,309	$	15,028
Provision (reversal)	(306		)	145			(606		)	693			(9		)	(48		)	(81		)	212		—			(192		)	12		19			9			31			(4		)	(20		)	145		—
Charge-offs	(5		)	—			—			(839		)	—			—			(12		)	—		(856		)	—			—		—			—			—			—			(4		)	—		(4		)
Recoveries	190			—			18			—			3			—			3			—		214			30			—		5			—			1			—			27			—		63
Ending balance	$	2,716		$	2,069		$	6,084		$	693		$	853		$	385		$	476		$	1,181	$	14,457		$	2,637		$	1,631	$	6,595		$	831		$	1,076		$	426		$	437		$	1,454	$	15,087



Allowance for Loan Losses Rollforward for the Period
(in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity		Other residential		Installment and other consumer			Unallocated			Total
Six months ended June 30, 2017
Allowance for loan losses:
Beginning balance	$	3,248		$	1,753		$	6,320		$	781		$	973	$	454	$	372		$	1,541		$	15,442
Provision (reversal)	896			329			(255		)	(370		)	8		55		(34		)	(629		)	—
Charge-offs	(284		)	—			—			—			—		—		(3		)	—			(287		)
Recoveries	72			—			—			—			—		—		5			—			77
Ending balance	$	3,932		$	2,082		$	6,065		$	411		$	981	$	509	$	340		$	912		$	15,232
Six months ended June 30, 2016
Allowance for loan losses:
Beginning balance	$	3,023		$	2,249		$	6,178		$	724		$	910	$	394	$	425		$	1,096		$	14,999
Provision (reversal)	(440		)	(618		)	407			107			165		32		(11		)	358			—
Charge-offs	(9		)	—			—			—			—		—		(4		)	—			(13		)
Recoveries	63			—			10			—			1		—		27			—			101
Ending balance	$	2,637		$	1,631		$	6,595		$	831		$	1,076	$	426	$	437		$	1,454		$	15,087

																																																					Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total			Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
September 30, 2016
June 30, 2017																											June 30, 2017
Ending ALLL related to loans collectively evaluated for impairment	$	2,925		$	1,513		$	5,851		$	931		$	918		$	389		$	270		$	1,573	$	14,370		$	3,901		$	1,961		$	5,691		$	406		$	974		$	507		$	243		$	912	$	14,595
Ending ALLL related to loans individually evaluated for impairment	569			108			474			5			34			59			94			—		1,343			31			121			374			5			7			2			97			—		637
Ending ALLL related to purchased credit-impaired loans	—			—			—			—			—			—			—			—		—			—			—			—			—			—			—			—			—		—
Total	$	3,494		$	1,621		$	6,325		$	936		$	952		$	448		$	364		$	1,573	$	15,713
Loans outstanding:
Ending balance																											$	3,932		$	2,082		$	6,065		$	411		$	981		$	509		$	340		$	912	$	15,232
Recorded Investment:																											Recorded Investment:
Collectively evaluated for impairment	$	218,159		$	229,316		$	711,042		$	77,253		$	110,255		$	75,795		$	23,312		$	—	$	1,445,132		$	215,304		$	257,133		$	712,941		$	51,752		$	118,826		$	91,251		$	23,772		$	—	$	1,470,979
Individually evaluated for impairment	3,008			7,169			2,299			3,238			885			1,974			1,084			—		19,657			2,075			7,000			3,255			3,238			574			1,170			939			—		18,251
Purchased credit-impaired	40			1,053			1,710			—			71			—			—			—		2,874			38			1,116			1,001			—			100			—			—			—		2,255
Total	$	221,207		$	237,538		$	715,051		$	80,491		$	111,211		$	77,769		$	24,396		$	—	$	1,467,663		$	217,417		$	265,249		$	717,197		$	54,990		$	119,500		$	92,421		$	24,711		$	—	$	1,491,485
Ratio of allowance for loan losses to total loans	1.58		%	0.68		%	0.88		%	1.16		%	0.86		%	0.58		%	1.49		%	NM		1.07		%	1.81		%	0.78		%	0.85		%	0.75		%	0.82		%	0.55		%	1.38		%	NM		1.02		%
Allowance for loan losses to non-accrual loans	7,941		%	921		%	NM			NM			366		%	NM			607		%	NM		2,910		%	NM			NM			583		%	NM			1,128		%	NM			667		%	NM		1,292		%

NM - Not Meaningful

Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) Commercial and industrial
Commercial real estate, owner-occupied
Commercial real estate, investor
Construction
Home equity
Other residential
Installment and other consumer
Unallocated
Total
December 31, 2015
Ending ALLL related to loans collectively evaluated for impairment $ 2,111
$ 2,179
$ 6,178
$ 723
$ 907
$ 327
$ 309
$ 1,096
$ 13,830
Ending ALLL related to loans individually evaluated for impairment 904
70
—
—
3
67
116
—
1,160
Ending ALLL related to purchased credit-impaired loans 8
—
—
1
—
—
—
—
9
Total $ 3,023
$ 2,249
$ 6,178
$ 724
$ 910
$ 394
$ 425
$ 1,096
$ 14,999
Loans outstanding:

Collectively evaluated for impairment $ 214,695
$ 233,605
$ 711,737
$ 62,256
$ 111,673
$ 71,143
$ 21,388
$ —
$ 1,426,497
Individually evaluated for impairment¹
4,582
6,993
2,416
3,238
559
2,011
1,251
—
21,050
Purchased credit-impaired 175
1,711
1,726
1
68
—
—
—
3,681
Total $ 219,452
$ 242,309
$ 715,879
$ 65,495
$ 112,300
$ 73,154
$ 22,639
$ —
$ 1,451,228
Ratio of allowance for loan losses to total loans 1.38 % 0.93 % 0.86 % 1.11 % 0.81 % 0.54 % 1.88 % NM
1.03 %
Allowance for loan losses to non-accrual loans 14,395 % NM
325 % 72,400 % 532 % NM
512 % NM
688 %

¹ Total excludes $138 thousand PCI loans as of December 31, 2015 that have experienced credit deterioration post-acquisition declines in cash flows expected to be collected. These loans are included in the "purchased credit-impaired" amount in the next line below.



Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)	Commercial and industrial			Commercial real estate, owner-occupied			Commercial real estate, investor			Construction			Home equity			Other residential			Installment and other consumer			Unallocated		Total
December 31, 2016
Ending ALLL related to loans collectively evaluated for impairment	$	2,963		$	1,590		$	5,945		$	773		$	966		$	399		$	274		$	1,541	$	14,451
Ending ALLL related to loans individually evaluated for impairment	285			163			375			8			7			55			98			—		991
Ending ALLL related to purchased credit-impaired loans	—			—			—			—			—			—			—			—		—
Ending balance	$	3,248		$	1,753		$	6,320		$	781		$	973		$	454		$	372		$	1,541	$	15,442
Recorded Investment:
Collectively evaluated for impairment	$	216,368		$	239,648		$	720,266		$	71,564		$	116,390		$	76,584		$	24,563		$	—	$	1,465,383
Individually evaluated for impairment	2,207			6,993			2,256			3,245			715			1,965			932			—		18,313
Purchased credit-impaired	40			1,072			1,706			—			102			—			—			—		2,920
Total	$	218,615		$	247,713		$	724,228		$	74,809		$	117,207		$	78,549		$	25,495		$	—	$	1,486,616
Ratio of allowance for loan losses to total loans	1.49		%	0.71		%	0.87		%	1.04		%	0.83		%	0.58		%	1.46		%	NM		1.04		%
Allowance for loan losses to non-accrual loans	NM			NM			NM			NM			1,071		%	NM			683		%	NM		10,650		%

NM - Not Meaningful

Purchased Credit-Impaired Loans

~~We evaluated loans purchased in acquisitions in accordance with accounting guidance in ASC 310-30 related to loans acquired with deteriorated credit quality.~~ Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in our two bank acquisitions to be PCI loans based on credit indicators such as ~~non-accrual~~nonaccrual status, past due status, loan risk grade,

loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.

For acquired loans not considered credit-impaired, the difference between the contractual amounts due (principal amount) and the fair value is accounted for subsequently through accretion. We recognize discount accretion based on the acquired loan’s contractual cash flows using an effective interest rate method. The accretion is recognized through the net interest margin.

The following table ~~presents~~reflects the ~~outstanding balances~~unpaid principal balance and related carrying ~~values~~value of PCI ~~loans as of September 30, 2016andDecember 31, 2015.~~loans.


	September 30, 2016				December 31, 2015
PCI Loans (in thousands)	Unpaid principal balance		Carrying value		Unpaid principal balance		Carrying value
PCI Loans									June 30, 2017				December 31, 2016
(in thousands)									Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and industrial	$	47	$	40	$	237	$	175	$	38	$	38	$	45	$	40
Commercial real estate	3,080		2,763		4,329		3,437
Construction	—		—		187		1
Commercial real estate, owner occupied									1,320		1,116		1,344		1,072
Commercial real estate, investor									1,001		1,001		1,713		1,706
Home equity	220		71		224		68		242		100		248		102
Total purchased credit-impaired loans	$	3,347	$	2,874	$	4,977	$	3,681	$	2,601	$	2,255	$	3,350	$	2,920

The activities in the accretable yield, or income expected to be earned ~~for~~over the remaining lives of the PCI loans were as follows:


Accretable Yield	Three months ended						Nine months ended						Three months ended						Six months ended
(in thousands)	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015			June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Balance at beginning of period	$	1,655		$	3,711		$	2,618		$	4,027		$	1,386		$	1,742		$	1,476		$	2,618
Removals ¹	—			(837		)	(778		)	(914		)	—			—			—			(778		)
Accretion	(89		)	(128		)	(274		)	(367		)	(80		)	(87		)	(170		)	(185		)
Reclassifications from nonaccretable difference ²	—			—			—			—			—			—			—			—
Balance at end of period	$	1,566		$	2,746		$	1,566		$	2,746		$	1,306		$	1,655		$	1,306		$	1,655

¹Represents the accretable difference that is relieved when a loan exits the PCI population due to pay-off, full charge-off, or transfer to repossessed assets, etc.

²Primarily relates to changes in expected credit performance and changes in expected timing of cash flows.

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with an unpaid principal balance of ~~$863.2~~$877.3 million and ~~$833.8~~$869.2 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. In addition, we pledge a certain residential loan portfolio, which totaled ~~$48.7~~$64.3 million and ~~$45.2~~$54.6 million at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, to secure our borrowing capacity with the Federal Reserve Bank ~~of San Francisco.~~("FRB"). Also see Note 6, Borrowings.

Related Party Loans

The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These transactions, including loans, are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. During the first quarter of 2017, a new director joined our Board of Directors resulting in the reclassification of existing loans to the director's business to related party status. Related party loans totaled $9.1 million at June 30, 2017 compared to $2.0 million at December 31, 2016. In addition, undisbursed commitments to related parties totaled $9.2 million and $1.1 million at June 30, 2017 and December 31, 2016, respectively.

Note 6: Borrowings

Federal Funds Purchased – The Bank had unsecured lines of credit totaling ~~$92.0~~$92.0 million with correspondent banks for overnight borrowings at ~~September~~both June 30, ~~2016~~2017 and December 31, ~~2015.~~2016. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at ~~September~~June 30, ~~2016 and~~2017 or December 31, ~~2015~~2016.

Federal Home Loan Bank Borrowings – As of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, the Bank had lines of credit with the FHLB totaling ~~$487.6~~$508.4 million and ~~$470.6~~$513.7 million, respectively, based on eligible collateral of certain loans. At ~~September 30, 2016, we~~We had no FHLB overnight borrowings ~~and~~ at June 30, 2017or December 31, ~~2015, we had $52.0 million in FHLB overnight borrowings. On February 5, 2008, the Bank entered into a~~ ~~ten-year borrowing agreement under the same FHLB line of credit for~~ ~~$15.0 million~~ ~~at a fixed rate of~~ ~~2.07%. On June 15, 2016, the Bank repaid the $15.0 million early and incurred a prepayment fee of $312 thousand recorded in interest expense. At~~ ~~September 30, 2016~~ ~~and December 31, 2015,~~ ~~$487.6 million~~ ~~and $403.4 million, respectively, were remaining as available for borrowing from the FHLB, net of the overnight borrowings and term borrowings.~~2016.

Federal Reserve Line of Credit – The Bank has a line of credit with the Federal Reserve Bank of San Francisco ("FRBSF") secured by certain residential loans. At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, the Bank had borrowing

~~borrowing~~ capacity under this line totaling ~~$38.8~~$50.1 million and ~~$37.8~~$43.1 million, respectively, and had no outstanding borrowings with the FRBSF.

As part of an acquisition, Bancorp assumed two subordinated debentures due to NorCal Community Bancorp Trusts I and II (the "Trusts"), established for the sole purpose of issuing trust preferred securities on September 22, 2003 and December 29, 2005, respectively. The subordinated debentures were recorded at fair values totaling $4.95 million at acquisition date with contractual values totaling $8.2 million. The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the lives of the debentures. Accretion on the subordinated debentures totaled $145 thousand in the first nine months of 2016 and $158 thousand in the first nine months of 2015. Bancorp has the option to defer payment of the interest on the subordinated debentures for a period of up to five years, as long as there is no default on the subordinated debentures. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited. The trust preferred securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $8.0 million issued by the Trusts which have identical maturity, repricing and payment terms as the subordinated debentures. The subordinated debentures were recorded at fair values totaling $4.95 million at acquisition date with contractual values totaling $8.2 million. The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the lives of the debentures. Accretion on the subordinated debentures totaled $80 thousand and $98 thousand in the first six months of 2017 and 2016, respectively. Bancorp has the option to defer payment of the interest on the subordinated debentures for a period of up to five years, as long as there is no default on the subordinated debentures. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited.

The following is a summary of the contractual terms of the subordinated debentures due to the Trusts as of ~~September~~June 30, ~~2016:~~2017:


(in thousands)
Subordinated debentures due to NorCal Community Bancorp Trust I on October 7, 2033 with interest payable quarterly, based on 3-month LIBOR plus 3.05%, repricing quarterly (3.73% as of September 30, 2016), redeemable, in whole or in part, on any interest payment date	$	4,124
Subordinated debentures due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly, based on 3-month LIBOR plus 1.40%, repricing quarterly (2.25% as of September 30, 2016), redeemable, in whole or in part, on any interest payment date	4,124
Subordinated debentures due to NorCal Community Bancorp Trust I on October 7, 2033 with interest payable quarterly, based on 3-month LIBOR plus 3.05%, repricing quarterly (4.21% as of June 30, 2017), redeemable, in whole or in part, on any interest payment date			$	4,124
Subordinated debentures due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly, based on 3-month LIBOR plus 1.40%, repricing quarterly (2.65% as of June 30, 2017), redeemable, in whole or in part, on any interest payment date			4,124
Total	$	8,248	$	8,248

Note 7: Stockholders' Equity

~~Warrant~~

~~Under the United States Department of the Treasury Capital Purchase Program (the “TCPP”), Bancorp issued to the U.S. Treasury a warrant to purchase~~ ~~154,242 shares~~ ~~of common stock at a per share exercise price of~~ ~~$27.23~~. The warrant was immediately exercisable and had an expiration date of December 5, 2018. The warrant was subsequently auctioned to two institutional investors in November 2011 and was exercised in September 2015. The warrant represented the right to purchase 157,711 shares of common stock at $26.63 per share. The cashless exercise resulted in the net issuance of 70,591 shares of common stock in September 2015.

Dividends

Presented below is a summary of cash dividends paid to common shareholders, recorded as a reduction of retained earnings.


	Three months ended				Nine months ended				Three months ended				Six months ended
(in thousands, except per share data)	September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015		June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Cash dividends to common stockholders	$	1,528	$	1,316	$	4,573	$	3,936	$	1,660	$	1,526	$	3,315	$	3,044
Cash dividends per common share	$	0.25	$	0.22	$	0.75	$	0.66	$	0.27	$	0.25	$	0.54	$	0.50

The Board of Directors declared a cash dividend of ~~$0.27~~$0.29 per share on ~~October~~July 21, ~~2016~~2017 payable on ~~November 14, 2016~~August 11, 2017 to shareholders of record at the close of business on ~~November~~August 4, ~~2016.~~2017.

Pursuant to a Rights Agreement filed with the SEC on July, 7, 2017, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of common stock, no par value, of Bancorp. The dividend will be paid July 23, 2017 to shareholders of record on that date. Each right entitles the registered holder to purchase from Bancorp one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, of Bancorp at a price of $90 per one one-hundredth of a preferred share, subject to adjustment. The description and terms of the rights are set forth in the Rights Agreement. The Rights Agreement is designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders. The Rights Agreement replaces similar Rights Agreements dated June 14, 2007 and June 17, 2016 (Amendment No.1), which expire on July 23, 2017. The new Rights Agreement expires on July 23, 2022.

Share-Based Payments

The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period with a corresponding increase in common stock.

Stock-based compensation also includes compensation expense related to the issuance of unvested restricted stock awards and performance-based stock awards pursuant to the 2007 Equity Plan. The grant-date fair value of the restricted stock awards and performance-based stock awards, which is equal to the intrinsic value on that date, is being recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest.

~~Beginning in 2015, performance-based~~Performance-based stock awards ~~were~~are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

~~In addition, we~~We adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting effective January 1, 2017 as discussed in Note 2, which requires us to record excess tax benefits on(deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as ~~an addition to common stock~~income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease in(increase) to current taxes payable. Previous to the adoption of this ASU, excess tax benefits (deficiencies) were recognized as an increase to common stock in the consolidated statements of changes in stockholders' equity.

The holders of unvested restricted stock awards and performance-based stock awards are entitled to dividends on the same per-share ratio as holders of common stock. ~~Dividends~~Upon the adoption of the above ASU, tax benefits on dividends paid on unvested restricted stock awards are recorded as tax benefits in the ~~portion~~consolidated statements of ~~share-based~~comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards ~~not expected to vest~~ are ~~also~~ included in stock-based compensation expense. ~~Tax~~Previous to the adoption of the ASU, tax benefits on dividends ~~paid on the portion of share-based awards expected to vest are recorded~~were recognized as an increase to common stock ~~with~~in the consolidated statements of changes in stockholders' equity.

On March 17, 2017, the Board of Directors approved the 2017 Equity Plan, which was affirmed by Bancorp's shareholders on May 16, 2017 and replaced the 2007 Equity Plan. As of the 2017 Equity Plan's effective date, there were 118,668 shares available for future grants, which represented the remaining shares available under the 2007 Equity Plan. There were no material differences in the design, terms or conditions of the 2017 and 2007 Equity Plans.

Under the 2017 Equity Plan, stock options may be net settled by a ~~corresponding decrease~~reduction in ~~current taxes payable.~~the number of shares otherwise deliverable upon exercise in satisfaction of the exercise payment and applicable tax withholding requirements. During the first six months of 2017, we withheld 5,651 shares totaling $385 thousand at a weighted-average price of $68.04 for cashless stock option exercises. There were no stock options exercised under net settlement arrangements in 2016. Shares withheld under net settlement arrangements are available for future grants under the 2017 Equity Plan.

Note 8: Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn upon, the total commitment amount does not necessarily represent future cash requirements.

We are exposed to credit loss equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on Management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of undrawn loan commitments and standby letters of credit not reflected on the consolidated statements of condition was $416.5 million and $376.6 million at September 30, 2016 and December 31, 2015, respectively. Commitments at September 30, 2016 included $212.6 million under commercial lines of credit (these commitments are generally contingent upon customers maintaining specific credit standards), $149.0 million under revolving home equity lines, $40.7 million under construction loans, $3.5 million under standby letters of credit, and a remaining $10.7 million under personal and other lines of credit. as follows:



(in thousands)	June 30, 2017		December 31, 2016
Commercial lines of credit	$	205,471	$	216,774
Revolving home equity lines	156,168		148,143
Undisbursed construction loans	26,711		44,798
Personal and other lines of credit	10,377		10,635
Standby letters of credit	1,829		1,939
Total commitments and standby letters of credit	$	400,556	$	422,289

We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of these commitments being drawn upon according to our historical utilization experience on different types of commitments and expected ~~loss severity.~~loss. We set aside an allowance for losses on off-balance sheet commitments in the amount of ~~$899~~$856 thousand and ~~$749~~$899 thousand as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, which is recorded in interest payable and other liabilities on the consolidated statements of condition. ~~The increase in the reserve for off-balance sheet commitments for the first nine months of 2016 was primarily due to an increase in commitments and a decrease in utilization.~~

Operating Leases

We rent certain premises ~~and equipment~~ under long-term, non-cancelable operating leases expiring at various dates through the year 2032. Most of the leases contain certain renewal options and escalation clauses. At ~~September~~June 30, ~~2016,~~2017, the approximate minimum future commitments payable under non-cancelable contracts for leased premises are as follows:


(in thousands)	2016		2017		2018		2019		2020		Thereafter		Total		2017		2018		2019		2020		2021		Thereafter		Total
Operating leases¹	$	903	$	3,832	$	3,898	$	3,707	$	3,385	$	6,321	$	22,046	$	1,964	$	3,932	$	3,739	$	3,420	$	2,138	$	4,234	$	19,427

¹Minimum payments have not been reduced by minimum sublease rentals of ~~$175~~$101 thousand due in the future under non-cancelable subleases.

Rent expense included in occupancy expense totaled ~~$2.8~~$2.0 million and ~~$3.2~~$1.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016, respectively.

Litigation Matters

We may be party to legal actions which arise from time to time ~~as part of~~during the normal course of ~~our~~ business. We believe, after consultation with legal counsel, that ~~we have meritorious defenses in these actions, and that~~ litigation contingent liability, if any, ~~will~~would not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

We are responsible for our proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Visa maintains an escrow account from which settlements of, or judgments in, the Covered Litigation are paid. While the accrual related to the Covered Litigation could be higher or lower than the litigation escrow account balance, Visa did not record an additional accrual for the Covered Litigation during ~~2016.~~2017. At June 30, ~~2016,~~2017, according to the latest SEC Form 10-Q filed by Visa, Inc. on July ~~25, 2016,~~20, 2017, the balance of the escrow account was ~~$1.0 billion.~~$978.0 million. In 2012, Visa ~~had~~ reached a $4.0 billion interchange multidistrict litigation class settlement agreement. However, in February 2017, a number of ~~objectors have appealed and on June 30, 2016,~~class plaintiffs sought to either file an ~~appellate court reversed the approval~~amended complaint for damages or file a new class complaint against Visa claiming for putative injunction relief. Visa has reached settlement agreements with individual merchants representing 34% of the ~~settlement by~~sales volume of merchants who opted out of the ~~lower court. Until~~2012 Settlement Agreement. Litigation is ongoing and until the appeal process is complete, Visa is uncertain whether it will resolve the claims as contemplated by the settlement agreement and additional lawsuits may arise. The conversion rate of Visa Class B common stock held by us to Class A common stock (as discussed in Note 4 ~~Investment Securities)~~above) may decrease if Visa makes more Covered Litigation settlement payments in the future, and the full effect on member banks is still uncertain. However, we are not aware of significant future cash settlement payments required by us on the Covered Litigation.

Note 9: Derivative Financial Instruments and Hedging Activities

We have entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments

to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

The fixed-rate payment features of the interest rate swap agreements are generally structured at inception to mirror substantially all of the provisions of the hedged loan agreements. These interest rate swaps, designated and qualified as fair value hedges, are carried on the consolidated statements of condition at their fair value in ~~other assets~~ (when the fair value is positive) or in other liabilities (when the fair value is negative). The unrealized gain or loss in fair value of the hedged fixed-rate loan due to LIBOR interest rate movements is recorded as an adjustment to the hedged loan.

From time to time, we make firm commitments to enter into long-term fixed-rate loans with borrowers backed by yield maintenance agreements and simultaneously enter into forward interest rate swap agreements with correspondent banks to mitigate the change in fair value of the yield maintenance agreement. Prior to loan funding, yield maintenance agreements with net settlement features that meet the definition of a derivative are considered as non-designated hedges and are carried on the consolidated statements of condition at their fair value in other assets (when the fair value is positive) or in other liabilities (when the fair value is negative). The offsetting changes in the fair value of the forward swap and the yield maintenance agreement are recorded in interest income. When the fixed-rate loans are originated, the forward swaps are designated to offset the change in fair value in the loans. Subsequent to the point

of the swap designations, the related yield maintenance agreements are no longer considered derivatives. Their fair value at the designation date is recorded in other assets and is amortized using the effective yield method over the life of the respective designated loans.

The net effect of the change in fair value of interest rate swaps, the amortization of the yield maintenance agreements and the change in the fair value of the hedged loans result in an insignificant amount of hedge ineffectiveness recognized in interest income.

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of ~~September~~June 30, ~~2016~~2017, we had five interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, August 2037 and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. In September 2016, one interest rate swap scheduled to mature in August 2020 was terminated as the hedged loan was paid off. In April 2016, one interest rate swap scheduled to mature in June 2020 was terminated as the hedged loan was paid off. In both cases, prepayment fees were collected from the borrowers to settle our interest rate swap liability, resulting in no net gain or loss on the terminations of the swaps and loan pay-offs. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $1510 thousand and $2813 thousand as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016, respectively.

Information on our derivatives follows:

Asset derivatives Liability derivatives
(in thousands) September 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
Fair value hedges:
Interest rate contracts notional amount $ —
$ 4,407
$ 19,928
$ 22,187
Interest rate contracts fair value¹
$ —
$ 3
$ 2,480
$ 1,658

Three months ended
(in thousands) September 30, 2016 September 30, 2015
Increase (decrease) in value of designated interest rate swaps recognized in interest income $ 241
$ (813 )
Payment on interest rate swaps recorded in interest income (132 ) (231 )
(Decrease) increase in value of hedged loans recognized in interest income (268 ) 905
Decrease in value of yield maintenance agreement recognized against interest income (67 ) (13 )
Net loss on derivatives recognized against interest income ²
$ (226 ) $ (152 )


	Nine months ended						Asset derivatives				Liability derivatives
(in thousands)	September 30, 2016			September 30, 2015			June 30, 2017		December 31, 2016		June 30, 2017			December 31, 2016
Decrease in value of designated interest rate swaps recognized in interest income	$	(825	)	$	(393	)
Fair value hedges:
Interest rate contracts notional amount							$	4,119	$	4,217	$	15,155		$	15,495
Interest rate contracts fair value¹							$	39	$	55	$	935		$	933

											Three months ended
(in thousands)							(in thousands)				June 30, 2017			June 30, 2016
Increase (decrease) in value of designated interest rate swaps due to LIBOR interest rate movements recognized in interest income							Increase (decrease) in value of designated interest rate swaps due to LIBOR interest rate movements recognized in interest income				$	(129	)	$	(190	)
Payment on interest rate swaps recorded in interest income							Payment on interest rate swaps recorded in interest income				$	(87	)	$	(138	)
(Decrease) increase in value of hedged loans recognized in interest income							(Decrease) increase in value of hedged loans recognized in interest income				$	191		$	240
Decrease in value of yield maintenance agreement recognized against interest income							Decrease in value of yield maintenance agreement recognized against interest income				$	(4	)	$	(11	)
Net loss on derivatives recognized against interest income ²							Net loss on derivatives recognized against interest income ²				$	(29	)	$	(99	)

											Six months ended
(in thousands)							(in thousands)				June 30, 2017			June 30, 2016
Decrease in value of designated interest rate swaps due to LIBOR interest rate movements recognized in interest income							Decrease in value of designated interest rate swaps due to LIBOR interest rate movements recognized in interest income				$	(18	)	$	(1,066	)
Payment on interest rate swaps recorded in interest income	(445		)	(700		)	Payment on interest rate swaps recorded in interest income				$	(185	)	$	(313	)
Increase in value of hedged loans recognized in interest income	1,022			453			Increase in value of hedged loans recognized in interest income				$	78		$	1,290
Decrease in value of yield maintenance agreement recognized against interest income	(90		)	(39		)	Decrease in value of yield maintenance agreement recognized against interest income				$	(7	)	$	(23	)
Net loss on derivatives recognized against interest income ²	$	(338	)	$	(679	)	Net loss on derivatives recognized against interest income²				$	(132	)	$	(112	)

¹See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.

²Includes hedge ineffectiveness ~~loss~~gain of ~~$94~~$58 thousand and gain of ~~$79~~$39 thousand for the quarters ended ~~September~~June 30, 2017 and June 30, 2016, ~~and September 30, 2015,~~ respectively. Ineffectiveness ~~gains~~gain of ~~$107~~$53 thousand and ~~$21~~gain of $201 thousand ~~were~~was recorded in interest income during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~September~~June 30, ~~2015,~~2016, respectively. Changes in value of swaps were included in the assessment of hedge effectiveness. Hedge ineffectiveness is the measure of the extent to which the change in the fair value of the hedging instruments does not exactly offset the change in the fair value of the hedged items from period to period.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights

to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:

																											Offsetting of Financial Assets and Derivative Assets
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in									Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Assets Presented		the Statements of Condition							Gross Amounts		Offset in the		Assets Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial			Cash Collateral				of Recognized		Statements of		in the Statements		Financial			Cash Collateral
(in thousands)	Assets¹		Condition		of Condition¹		Instruments			Received		Net Amount		Assets¹		Condition		of Condition¹		Instruments			Received		Net Amount
September 30, 2016
Derivatives by Counterparty:
None	$	—	$	—	$	—	$	—		$	—	$	—

December 31, 2015
June 30, 2017
Derivatives by Counterparty:
Counterparty A	$	3	$	—	$	3	$	(3	)	$	—	$	—	$	39	$	—	$	39	$	(39	)	$	—	$	—
December 31, 2016
Derivatives by Counterparty:
Counterparty A														$	55	$	—	$	55	$	(55	)	$	—	$	—

¹Amounts exclude accrued interest totaling ~~zero and~~ $1 thousand at ~~September~~both June 30, ~~2016~~2017 and December 31, ~~2015~~,2016, respectively.

																													Offsetting of Financial Liabilities and Derivative Liabilities
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in										Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition								Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial			Cash Collateral					of Recognized		Statements of		in the Statements		Financial			Cash Collateral
(in thousands)	Liabilities²		Condition		of Condition²		Instruments			Pledged			Net Amount		Liabilities²		Condition		of Condition²		Instruments			Pledged			Net Amount
September 30, 2016
June 30, 2017
Derivatives by Counterparty:
Counterparty A	$	2,480	$	—	$	2,480	$	—		$	(2,480	)	$	—	$	935	$	—	$	935	$	(39	)	$	(896	)	$	—

December 31, 2015
December 31, 2016
Derivatives by Counterparty:
Counterparty A	$	1,390	$	—	$	1,390	$	(3	)	$	(1,387	)	$	—	$	933	$	—	$	933	$	(55	)	$	(878	)	$	—
Counterparty B	268		—		268		—			(268		)	—
Total	$	1,658	$	—	$	1,658	$	(3	)	$	(1,655	)	$	—

²Amounts exclude accrued interest totaling $9 thousand and $12 thousand at June 30, 2017 and December 31, 2016, respectively.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2016 Form 10-K filed with the SEC on March 14, 2017.

Note 10: Subsequent Event

On July 31, 2017, Bancorp entered into a definitive agreement to acquire Bank of Napa, N.A. ("Napa"). Napa has two branch offices serving Napa County, and had assets of $246.1 million, total deposits of $217.7 million, and total loans of $139.3 million as of June 30, 2017. The transaction is expected to close in the fourth quarter of 2017 and is subject to a number of conditions, including approvals of the regulatory agencies and Napa's shareholders. For more information concerning the transaction, please see the 8-K Reports filed by Bancorp with the Securities and Exchange Commission on July 31 and August 1, 2017, respectively. For other important factors regarding the Napa acquisition, please see the ~~$15 thousand~~Forward-Looking Statements and ~~$27 thousand~~Risk Factors at ~~September 30, 2016~~ ~~and~~ ~~December 31, 2015, respectively.~~sections of this Form 10-Q.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our ~~2015~~2016 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

Forward-Looking Statements

This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

Our forward-looking statements include descriptions of plans or objectives of Management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often

include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."

Forward-looking statements are based on Management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond Management’s control, could cause future results to vary materially from current Management expectations. Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including changes in interest rates, deposit flows, real estate values, and expected future cash flows on loans and securities; integration of ~~acquisitions and~~acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; natural disasters; adverse weather ~~conditions, including droughts in California;~~conditions; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

The events or factors that could cause results or performance to materially differ from those expressed in the forward-looking statements concerning the Napa acquisition include, but are not limited to:

the businesses of Bancorp and Napa may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;

expected cost savings from the acquisition may not be fully realized or realized within the expected time frame;

revenues following the merger may be lower than expected;

customer and employee relationships and business operations may be disrupted by the acquisition;

the ability to obtain required regulatory and shareholder approvals, and the ability to complete the acquisition on the expected timeframe may be more difficult, time-consuming or costly than expected;

changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve; the quality and composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the companies’ respective market areas; their implementation of new technologies; their ability to develop and maintain secure and reliable electronic systems; and accounting principles, policies, and guidelines, and

other risk factors detailed from time to time in filings made by Bancorp with the SEC.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in the Risk Factors section of this Form 10-Q and in Item 1A~~1A.~~. Risk Factors section of our ~~2015~~2016 Form 10-K as filed with the SEC, copies of which are available from us at no charge. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Estimates

Critical accounting policies are those that are both very important to the portrayal of our financial condition and results of operations and require Management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and imprecise.

~~Except for the Allowance for Loan Losses, as described below, there~~ There have been no material changes to our critical accounting policies, which ~~are described in Item 7, Management's Discussion~~include: Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and ~~Analysis of Financial Condition and Results of Operations and~~Fair Value Measurements. For a detailed discussion, refer to Note 1 to the Consolidated Financial Statements included in our ~~2015~~2016 Form 10-K filed with the SEC on March ~~11, 2016.~~

~~Allowance for Loan Losses~~

The overall allowance consists of 1) specific allowances for individually identified impaired loans ("ASC 310-10") and 2) general allowances for pools of loans ("ASC 450-20"), which incorporate quantitative (e.g., loan loss rates) and qualitative risk factors (e.g., portfolio growth and trends, credit concentrations, economic and regulatory factors, etc.).

The first component, specific allowances, results from the analysis of identified problem credits and the evaluation of sources of repayment including collateral, as applicable. Through Management's ongoing loan grading and credit monitoring process, individual loans are identified that have conditions indicating the borrower may be unable to pay all amounts due in accordance with the contractual terms. These loans are evaluated for impairment individually by Management. Management considers an originated loan to be impaired when it is probable we will be unable to collect

all amounts due according to the contractual terms of the loan agreement. When the fair value of the impaired loan is less than the recorded investment in the loan, the difference is recorded as an impairment through the establishment of a specific allowance. For loans determined to be impaired, the extent of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate at origination (for originated loans), based on the loan's observable market price, or based on the fair value of the collateral if the loan is collateral dependent or if foreclosure is imminent. Generally with problem credits that are collateral dependent, we obtain appraisals of the collateral at least annually. We may obtain appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has occurred to the collateral, or if we believe foreclosure is imminent.

The second component is an estimate of the probable inherent losses in each loan pool with similar characteristics. This analysis encompasses the entire loan portfolio, excluding individually identified impaired loans and acquired loans whose purchase discount has not been fully accreted. Under our allowance model, loans are evaluated on a pool basis by Federal regulatory reporting codes ("CALL codes" or "segments"), which are further delineated by assigned credit risk ratings, as described in Note 5 to the Consolidated Financial Statements of this Form 10-Q. Segments include the following:

~~Loans secured by real estate:~~

~~- 1-4 family residential construction loans~~

~~- Other construction loans and all land development and other land loans~~

~~- Secured by farmland (including residential and other improvements)~~

~~- Revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit~~

~~- Closed-end loans secured by 1-4 family residential properties, secured by first liens~~

~~- Closed-end loans secured by 1-4 family residential properties, secured by junior liens~~

~~- Secured by multifamily (5 or more) residential properties~~

~~- Loans secured by owner-occupied non-farm nonresidential properties~~

~~- Loans secured by other non-farm nonresidential properties~~

~~Loans to finance agricultural production and other loans to farmers~~

~~Commercial and industrial loans~~

~~Loans to individuals for household, family and other personal expenditures (i.e., consumer loans)~~

~~Other loans~~

The model determines general allowances by loan segment based on quantitative (loss history) and qualitative risk factors. Qualitative internal and external risk factors include, but are not limited to, the following:

~~Changes in the nature and volume of the loan portfolio.~~

~~Changes in the volume and severity of past due loans, the volume of non-accruals loans, and the volume and severity of adversely classified or graded loans.~~

~~The existence and effect of individual loan and loan segment concentrations.~~

~~Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere.~~

~~Changes in the experience, ability, and depth of lending management and other relevant staff.~~

~~Changes in the quality of our systematic loan review processes.~~

~~Changes in economic and business conditions, and developments that affect the collectability of the portfolio.~~

~~Changes in the value of underlying collateral, where applicable.~~

~~The effect of other external factors such as legal and regulatory requirements on the level of estimated credit losses in the portfolio.~~

~~The effect of acquisitions of other loan portfolios on our infrastructure, including risk associated with entering new geographic areas as a result of such acquisitions.~~

~~The presence of specialized lending segments in the portfolio.~~

Beginning with the quarter ended March 31, 2016, Management enhanced its methodology for determining the quantitative and qualitative risk factors assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, increase efficiencies related to performing the calculations, and refine how we incorporate environmental and other unique risk elements into our estimation of credit losses. The changes in methodology did not result in a material difference in general allowances. Prior to March 31, 2016, under the Bank's allowance model, each segment was assigned a quantitative loss factor that was primarily based on a rolling twenty-quarter look-back at our historical losses for that particular segment, as well as a number of other assumptions. Under the current methodology, the quantitative risk factor for each segment utilizes the greater of

~~either the historical loss method based on a rolling twenty-four-quarter look-back period or migration analysis loss method based on loss history beginning March 2010.~~

Under the historical loss method, quarterly loss rates are calculated for each segment by dividing annualized net charge-offs during each quarter by the quarter's average segment balances. The quarterly loss rates are averaged over the entire loss history period. Under the migration analysis method, loss rates are calculated at the risk grade and segment levels by dividing the net charge-off amount by the total segment balance at the beginning of each migration period where the charged-off loan in question was present. Migration loss rates are averaged for each risk grade and segment for the entire loss history period. For each segment, the larger of the migration loss reserves or segment historical loss reserves is applied to the current loan balance. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. A decline in local and national economic conditions, or significant changes in other assumptions, could result in a material increase in the allowance for loan losses and may adversely affect our financial condition and results of operations. In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators, as part of their routine examination process, which may result in the establishment of additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.

~~For further information regarding the allowance for loan losses, see Note 5 - Loans and Allowance for Loan Losses in the Consolidated Financial Statements of this Form 10-Q.~~14, 2017.

Executive Summary

On July 31, 2017, Bancorp entered into a definitive agreement to acquire Bank of Napa, N.A. ("Napa"). Pursuant to the definitive agreement, Napa will be merged with and into our subsidiary, Bank of Marin, and we will issue shares of our common stock to the shareholders of Napa. Napa has two branch offices serving Napa County, and had assets of $246.1 million, total deposits of $217.7 million, and total loans of $139.3 million as of June 30, 2017. We expect the acquisition to be immediately accretive to our earnings and to increase our presence in Napa County. Upon closing of the transaction, our assets will increase to approximately $2.4 billion. The transaction is expected to close in the fourth quarter of 2017 and is subject to a number of conditions, including receipt of regulatory approvals and approval of Napa's shareholders. For other important factors regarding the Napa acquisition, please see the Forward-Looking Statements and Risk Factors sections of this Form 10-Q.

Earnings in the ~~third~~second quarter of ~~2016~~2017 totaled ~~$7.0~~$5.2 million, compared to $4.8 million in the ~~third~~second quarter of ~~2015.~~2016. Diluted earnings per share ~~of $1.14~~were $0.84 in the ~~third~~second quarter of ~~2016 increased $0.35 from~~2017, compared to $0.79 in the same quarter a year ~~ago, due~~ago. Earnings for the first six months of 2017 totaled $9.7 million compared to ~~the recovery of a problem credit and accelerated accretion of an acquired loan discount upon early pay-off. Year-to-date earnings of $17.4~~$10.5 million ~~grew 29.1% from $13.5 million for~~in the same period ~~a year ago.~~last year. Diluted earnings per share were ~~$2.86~~$1.58 and $1.72 in the first ~~nine~~six months of 2017 and 2016, ~~an increase from $2.23 for the same period in 2015.~~respectively.

The following are highlights of our operating and financial performance for the periods presented:

The Board of Directors declared a cash dividend of $0.29 per share on July 21, 2017, an increase of $0.02 per share and the 49th consecutive dividend paid by the Bank.

Return on assets was ~~1.35%~~1.01% for the quarter and ~~1.17%~~0.96% for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, compared to ~~1.00%~~0.99% for the quarter and ~~0.97%~~1.07% for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~2016. Return on equity was ~~12.08%~~8.74% for the quarter and ~~10.40%~~8.34% for the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, compared to ~~9.00%~~8.68% for the quarter and ~~8.75%~~9.52% for the ~~nine~~six months ended ~~September~~June 30, ~~2015.~~

The resolution of a problem commercial real estate credit during the third quarter added $1.4 million in interest recoveries to net interest income and resulted in a $1.6 million reversal of the provision for loan losses.

Credit quality remains strong with non-accrual loans totaling $540 thousand, or 0.04% of total loans at September 30, 2016, compared to $2.2 million, or 0.15% of total loans at December 31, 2015. Accruing loans past due 30 to 89 days totaled $160 thousand at September 30, 2016, compared to $2.1 million at December 31, 2015.

Loans increased by $16.5 million and totaled $1,467.7 million at September 30, 2016, compared to $1,451.2 million at December 31, 2015. Year-to-date loan originations of $129.9 million are consistent with 2015, while pay-offs of $116.1 million are lower than the first nine months of 2015.

Deposits grew by $73.3 million and totaled $1,801.5 million at September 30, 2016, compared to $1,728.2 million at December 31, 2015. Non-interest bearing deposits increased by $90.6 million in the first nine months of 2016 and comprised 47.8% of total deposits at September 30, 2016. ~~The cost of total deposits was 0.08% for the first nine months of 2016 compared to 0.10% during the same period in 2015.~~

The tax-equivalent net interest margin was ~~4.05%~~3.85% in the ~~third~~second quarter of ~~2016,~~2017, compared to ~~3.79%~~3.77% in the same quarter a year ago. Net interest income totaled ~~$19.4~~$18.3 million in the ~~third~~second quarter of ~~2016~~2017, compared to ~~$16.9~~$17.2 million in the same quarter last year.

Loans increased by $4.9 million and totaled $1,491.5 million at June 30, 2017, compared to $1,486.6 million at December 31, 2016. New loan originations in the first six months of 2017 of $79.4 million were primarily in commercial real estate, including both owner-occupied and investor-owned, spread throughout our markets, and tenancy-in-common fractional interest loans. Loan originations combined with changes in the utilization of loan commitments, pay-offs of $80.8 million, and scheduled payments, produced the net increase from December 31, 2016. Our current pipeline approximates last year at this time, and should translate into loan growth throughout the year.

Excellent credit quality remains the hallmark of our culture. Non-accrual loans totaled $1.2 million, or 0.08% of loans at June 30, 2017, compared to $145.0 thousand, or 0.01% of loans at December 31, 2016. A well secured $1.0 million commercial real estate loan was placed on non-accrual status during the first quarter of 2017. Classified loans totaled $29.3 million at June 30, 2017, up from $19.6 million at December 31, 2016. One relationship of $8.4 million and the non-accrual loan of $1.0 million previously mentioned were downgraded to substandard in the first quarter of 2017. Accruing loans past due 30 to 89 days totaled $393 thousand at June 30, 2017, compared to $410 thousand at December 31, 2016.

Deposits totaled $1,840.5 million at June 30, 2017, compared to $1,772.7 million at December 31, 2016, a ~~year ago. The increase was primarily due~~$67.8 million increase. We continue to see fluctuations from large deposit clients' seasonal cash flows and the placement by existing clients of funds from asset sales that will be distributed to the ~~$1.4 million interest recovery previously discussed~~beneficiaries of trusts or transitioned into real estate or other investments. Non-interest bearing deposits represented 48.5% of total deposits, and ~~an increase in purchased loan accretion.~~

~~Our efficiency ratio (the ratio~~the cost of ~~non-interest expense divided by~~total deposits dropped two basis points to 0.06%, from the ~~sum~~first six months of ~~net interest income and non-interest income) was 58.07% and 62.79% for the nine months ended September 30, 2016 and~~ ~~2015, respectively.~~

2016.

All capital ratios are above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio for Bancorp was ~~14.3%~~15.0% at ~~September~~June 30, ~~2016~~2017 compared to ~~13.4%~~14.3% at December 31, ~~2015.~~2016.

~~Going forward:~~

Looking forward into 2017, we believe we are well-positioned for future growth with strong capital and liquidity, potential net interest margin expansion and a low cost deposit base. With a robust loan pipeline, and credit quality that remains at the top of our peer group, we are looking forward to continued success.

We have ample liquidity and capital to support both organic growth and potential acquisitions, insuch as the ~~coming quarters.~~

Napa transaction described above.

Acquisitions continue to remain a component of our strategic plan. ~~The~~

While we are investing in a number of strategic initiatives that aim at our long-term profitability, our short-term non-interest expenses are likely to increase, primarily due to acquisition-related expenses and facility expansions. In addition to the announced acquisition, we have signed a lease for our new branch in Healdsburg, California, which is scheduled to open on August 7, 2017. We are also expanding our geographic reach by adding a commercial banking office in the East Bay by the end of the year, which continues to be one of the strongest growth markets in the Bay Area ~~is an economically attractive area~~region.

Our disciplined credit culture and ~~we intend~~relationship banking are keys to ~~expand~~ our ~~footprint through organic growth and strategic acquisitions.~~success.

~~Credit quality and expense control remain key priorities.~~

~~Our net interest margin could compress if current market interest rates do not increase.~~

~~Although we expect the number of early pay-offs of acquired loans to decline, we cannot predict the timing and their effect on our future net interest margin.~~

RESULTS OF OPERATIONS

Highlights of the financial results are presented in the following tables:


	At September 30,			At December 31,
(dollars in thousands)	2016			2015			June 30, 2017			December 31, 2016
Selected financial condition data:
Total assets	$	2,054,821		$	2,031,134		$	2,100,716		$	2,023,493
Loans, net	1,451,950			1,436,229			1,476,253			1,471,174
Deposits	1,801,469			1,728,226			1,840,540			1,772,700
Borrowings	5,540			72,395			5,666			5,586
Stockholders' equity	231,780			214,473			240,733			230,563
Asset quality ratios:
Allowance for loan losses to total loans	1.07%			1.03		%	1.02%			1.04		%
Allowance for loan losses to non-accrual loans	29.11		x	6.88		x	12.92		x	106.50		x
Non-accrual loans to total loans	0.04%			0.15		%	0.08%			0.01		%
Capital ratios:
Equity to total assets ratio	11.28		%	10.56		%	11.46		%	11.39		%
Total capital (to risk-weighted assets)	14.26		%	13.37		%	15.01		%	14.32		%
Tier 1 capital (to risk-weighted assets)	13.29		%	12.44		%	14.06		%	13.37		%
Tier 1 capital (to average assets)	11.13		%	10.67		%	11.61		%	11.39		%
Common equity Tier 1 capital (to risk weighted assets)	12.99		%	12.16		%	13.74		%	13.07		%


	Three months ended					Nine months ended					Three months ended				Six months ended
(dollars in thousands, except per share data)	September 30, 2016			September 30, 2015		September 30, 2016			September 30, 2015		June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Selected operating data:
Net interest income	$	19,381		$	16,883	$	55,185		$	49,944	$	18,304	$	17,166	$	35,925	$	35,804
Provision for loan losses	(1,550		)	—		(1,550		)	—
Non-interest income	2,114			2,298		6,698			7,095		2,096		2,421		4,211		4,584
Non-interest expense	11,910			11,638		35,937			35,814		12,631		12,017		25,642		24,027
Net income	6,964			4,773		17,447			13,516		5,186		4,837		9,734		10,483
Net income per common share:
Basic	$	1.14		$	0.80	$	2.87		$	2.27	$	0.85	$	0.80	$	1.60	$	1.73
Diluted	$	1.14		$	0.79	$	2.86		$	2.23	$	0.84	$	0.79	$	1.58	$	1.72
Performance and other financial ratios:
Return on average assets	1.35%			1.00%		1.17%			0.97%		1.01%		0.99%		0.96%		1.07%
Return on average equity	12.08%			9.00%		10.40%			8.75%		8.74%		8.68%		8.34%		9.52%
Tax-equivalent net interest margin	4.05%			3.79%		3.95%			3.88%		3.85%		3.77%		3.82%		3.90%
Efficiency ratio	55.41%			60.67%		58.07%			62.79%		61.92%		61.35%		63.89%		59.49%
Dividend payout ratio on common stock ¹	21.93%			27.50%		26.13%			29.07%
Dividend payout ratio on common stock											31.76%		31.25%		33.75%		28.90%

¹ Excluding the recovery of a problem credit and accelerated accretion of an acquired loan discount upon early pay-off as described herein, the dividend payout ratio would have been approximately 32% for the quarter ended September 30, 2016.

Net Interest Income

Net interest income is the difference between the interest earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the amounts and composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing orand maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income.

Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, ~~such as some~~which include demand deposits and stockholders’ equity.

~~The following table,~~ Average Statements of Condition and Analysis of Net Interest Income

The following table compares interest income, ~~and~~ average interest-earning assets, ~~with~~ interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.


	Average Statements of Condition and Analysis of Net Interest Income
		Three months ended						Three months ended							Three months ended						Three months ended
		September 30, 2016						September 30, 2015							June 30, 2017						June 30, 2016
				Interest						Interest							Interest						Interest
		Average		Income/		Yield/		Average		Income/		Yield/			Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets	Assets													Assets
	Interest-bearing due from banks¹	$	79,672	$	105	0.51	%	$	51,378	$	35	0.27	%	Interest-bearing due from banks¹	$	56,597	$	157	1.10	%	$	28,766	$	40	0.54	%
	Investment securities^{2, 3}	394,980		2,120		2.15	%	389,260		2,094		2.15	%	Investment securities^{2, 3}	408,335		2,355		2.31	%	389,023		2,080		2.14	%
	Loans ^{1, 3, 4}	1,454,617		18,182		4.89	%	1,352,023		15,800		4.57	%	Loans ^{1, 3, 4}	1,487,419		16,868		4.49	%	1,440,847		16,416		4.51	%
	Total interest-earning assets¹	1,929,269		20,407		4.14	%	1,792,661		17,929		3.91	%	Total interest-earning assets¹	1,952,351		19,380		3.93	%	1,858,636		18,536		3.95	%
	Cash and non-interest-bearing due from banks	48,901						43,054						Cash and non-interest-bearing due from banks	46,204						40,540
	Bank premises and equipment, net	8,808						9,680						Bank premises and equipment, net	8,390						8,827
	Interest receivable and other assets, net	61,649						57,589						Interest receivable and other assets, net	60,115						60,205
Total assets	Total assets	$	2,048,627					$	1,902,984					Total assets	$	2,067,060					$	1,968,208
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity													Liabilities and Stockholders' Equity
	Interest-bearing transaction accounts	$	91,035	$	27	0.12	%	$	93,933	$	28	0.12	%	Interest-bearing transaction accounts	$	94,799	$	21	0.09	%	$	93,355	$	28	0.12	%
	Savings accounts	152,370		15		0.04	%	135,202		13		0.04	%	Savings accounts	163,424		16		0.04	%	149,234		14		0.04	%
	Money market accounts	531,130		112		0.08	%	506,952		125		0.10	%	Money market accounts	539,192		114		0.08	%	510,727		107		0.08	%
	Time accounts including CDARS	160,595		190		0.47	%	157,252		212		0.53	%	Time accounts including CDARS	146,042		139		0.38	%	160,031		193		0.48	%
	Overnight borrowings ¹	—		—		—	%	188		—		—	%	Overnight borrowings ¹	—		—		—	%	1,082		1		0.40	%
	FHLB fixed-rate advances ¹	—		—		—	%	15,000		79		2.07	%	FHLB fixed-rate advances ¹	—		—		—	%	12,363		377		12.07	%
	Subordinated debentures ¹	5,516		109		7.68	%	5,316		105		7.73	%	Subordinated debentures ¹	5,646		109		7.59	%	5,471		107		7.78	%
	Total interest-bearing liabilities	940,646		453		0.19	%	913,843		562		0.24	%	Total interest-bearing liabilities	949,103		399		0.17	%	932,263		827		0.36	%
	Demand accounts	864,460						765,284						Demand accounts	868,070						797,935
	Interest payable and other liabilities	14,124						13,467						Interest payable and other liabilities	11,771						13,853
	Stockholders' equity	229,397						210,390						Stockholders' equity	238,116						224,157
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity	$	2,048,627					$	1,902,984					Total liabilities & stockholders' equity	$	2,067,060					$	1,968,208
Tax-equivalent net interest income/margin ¹	Tax-equivalent net interest income/margin ¹			$	19,954	4.05	%			$	17,367	3.79	%	Tax-equivalent net interest income/margin ¹			$	18,981	3.85	%			$	17,709	3.77	%
Reported net interest income/margin¹	Reported net interest income/margin¹			$	19,382	3.93	%			$	16,883	3.69	%	Reported net interest income/margin¹			$	18,304	3.71	%			$	17,166	3.65	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread					3.95	%					3.67	%	Tax-equivalent net interest rate spread					3.76	%					3.59	%


		Nine months ended						Nine months ended							Six months ended						Six months ended
		September 30, 2016						September 30, 2015							June 30, 2017						June 30, 2016
				Interest						Interest							Interest						Interest
		Average		Income/		Yield/		Average		Income/		Yield/			Average		Income/		Yield/		Average		Income/		Yield/
(dollars in thousands)	(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate		(dollars in thousands)	Balance		Expense		Rate		Balance		Expense		Rate
Assets	Assets													Assets
	Interest-bearing due from banks¹	$	39,293	$	155	0.52	%	$	55,509	$	107	0.25	%	Interest-bearing due from banks¹	$	43,043	$	217	1.00	%	$	18,881	$	51	0.53	%
	Investment securities^{2, 3}	403,986		6,458		2.13	%	340,373		5,864		2.30	%	Investment securities^{2, 3}	411,427		4,716		2.29	%	408,539		4,344		2.13	%
	Loans ^{1, 3, 4}	1,446,053		52,072		4.73	%	1,346,689		47,063		4.61	%	Loans ^{1, 3, 4}	1,482,977		33,090		4.44	%	1,441,724		33,872		4.65	%
	Total interest-earning assets¹	1,889,332		58,685		4.08	%	1,742,571		53,034		4.01	%	Total interest-earning assets¹	1,937,447		38,023		3.90	%	1,869,144		38,267		4.05	%
	Cash and non-interest-bearing due from banks	39,788						44,368						Cash and non-interest-bearing due from banks	42,189						35,182
	Bank premises and equipment, net	8,926						9,786						Bank premises and equipment, net	8,415						8,985
	Interest receivable and other assets, net	60,022						58,153						Interest receivable and other assets, net	59,071						59,200
Total assets	Total assets	$	1,998,068					$	1,854,878					Total assets	$	2,047,122					$	1,972,511
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity													Liabilities and Stockholders' Equity
	Interest-bearing transaction accounts	$	95,112	$	82	0.11	%	$	93,762	$	88	0.13	%	Interest-bearing transaction accounts	$	97,943	$	50	0.10	%	$	97,173	$	55	0.11	%
	Savings accounts	148,050		43		0.04	%	133,553		38		0.04	%	Savings accounts	162,175		31		0.04	%	145,866		28		0.04	%
	Money market accounts	523,641		330		0.08	%	494,142		375		0.10	%	Money market accounts	528,923		227		0.09	%	519,856		218		0.08	%
	Time accounts including CDARS	160,523		579		0.48	%	156,458		648		0.55	%	Time accounts including CDARS	146,501		285		0.39	%	160,486		389		0.49	%
	Overnight borrowings ¹	7,190		22		0.42	%	194		—		—	%	Overnight borrowings ¹	—		—		—	%	10,825		23		0.42	%
	FHLB fixed-rate advances ¹	9,087		456		6.59	%	15,000		236		2.07	%	FHLB fixed-rate advances ¹	—		—		—	%	13,681		455		6.59	%
	Subordinated debentures ¹	5,469		325		7.80	%	5,261		314		7.98	%	Subordinated debentures ¹	5,627		217		7.67	%	5,445		216		7.86	%
	Total interest-bearing liabilities	949,072		1,837		0.26	%	898,370		1,699		0.25	%	Total interest-bearing liabilities	941,169		810		0.17	%	953,332		1,384		0.29	%
	Demand accounts	810,190						735,487						Demand accounts	857,253						782,757
	Interest payable and other liabilities	14,651						14,466						Interest payable and other liabilities	13,200						14,917
	Stockholders' equity	224,155						206,555						Stockholders' equity	235,500						221,505
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity	$	1,998,068					$	1,854,878					Total liabilities & stockholders' equity	$	2,047,122					$	1,972,511
Tax-equivalent net interest income/margin ¹	Tax-equivalent net interest income/margin ¹			$	56,848	3.95	%			$	51,335	3.88	%	Tax-equivalent net interest income/margin ¹			$	37,213	3.82	%			$	36,883	3.90	%
Reported net interest income/margin¹	Reported net interest income/margin¹			$	55,185	3.84	%			$	49,944	3.78	%	Reported net interest income/margin¹			$	35,925	3.69	%			$	35,804	3.79	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread					3.82	%					3.76	%	Tax-equivalent net interest rate spread					3.73	%					3.76	%

¹Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.	¹Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.													¹Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
²Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.	²Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.													²Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
³Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 35 percent.	³Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 35 percent.													³Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 35 percent.
⁴Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.	⁴Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.													⁴Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.

~~Third~~Analysis of Changes in Net Interest Income

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.



	Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016												Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
(in thousands)	Volume			Yield/Rate			Mix			Total			Volume			Yield/Rate			Mix			Total
Interest-bearing due from banks	$	38		$	41		$	38		$	117		$	65		$	44		$	57		$	166
Investment securities ¹	103			164			8			275			31			339			2			372
Loans¹	531			(76		)	(3		)	452			969			(1,702		)	(49		)	(782		)
Total interest-earning assets	672			129			43			844			1,065			(1,319		)	10			(244		)
Interest-bearing transaction accounts	—			(7		)	—			(7		)	—			(6		)	1			(5		)
Savings accounts	1			1			—			2			3			—			—			3
Money market accounts	6			1			—			7			4			5			—			9
Time accounts, including CDARS	(17		)	(40		)	3			(54		)	(34		)	(77		)	7			(104		)
FHLB borrowings and overnight borrowings	(378		)	—			—			(378		)	(478		)	—			—			(478		)
Subordinated debentures	3			(1		)	—			2			7			(6		)	—			1
Total interest-bearing liabilities	(385		)	(46		)	3			(428		)	(498		)	(84		)	8			(574		)
	$	1,057		$	175		$	40		$	1,272		$	1,563		$	(1,235	)	$	2		$	330
¹ Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 35%.

Second Quarter of~~2016~~ 2017 Compared to ~~Third~~Second Quarter of ~~2015~~2016

Net interest income totaled ~~$19.4~~$18.3 million in the ~~third~~second quarter of ~~2016,~~2017, compared to ~~$16.9~~$17.2 million in the same quarter a year ago. The tax-equivalent net interest margin was ~~4.05%~~3.85% in the ~~third~~second quarter of ~~2016,~~2017, compared to ~~3.79%~~3.77% in the same quarter inof the previous year. The ~~$2.5~~$1.1 million increase was primarily driven by a $93.7 million increase in ~~net~~ interest ~~income was primarily due to an increase in average interest-earning assets of $136.6 million, or 7.6%, compared to~~earning assets. In addition, the same period in 2015. The increase was comprised of a $102.6 million increase in average loans, a $28.3 million increase in average interest-bearing due from banks, and a $5.7 million increase in average securities. Additional positive variances in both net interest income and margin in the thirdsecond quarter of 2016 included a $312 thousand prepayment fee on the ~~$1.4 million interest recovery previously discussed and an increase in purchased loan accretion as shown in the table below, partially offset by~~retirement of a ~~decline in the average~~FHLB fixed advance. Higher yields on ~~our loan portfolio. In addition,~~investment securities and interest-bearing cash, and upward repricing of variable rate loans also positively impacted interest ~~expense was lower as a result of the Federal Home Loan Bank fixed rate advance prepayment in 2016.~~income.

First ~~Nine~~Six Months of ~~2016~~2017 Compared to First ~~Nine~~Six Months of ~~2015~~2016

Net interest income totaled ~~$55.2~~$35.9 million in the first ~~nine~~six months of ~~2016~~2017, compared to ~~$49.9~~$35.8 million ~~for~~in the same period ~~in 2015.~~of 2016. The tax-equivalent net interest margin was ~~3.95%~~3.82% and 3.90% in the first ~~nine~~six months of 2017 and 2016, ~~compared to 3.88% in the same period in the previous year.~~respectively. The ~~$5.3 million~~$121 thousand increase in net interest income ~~was~~ primarily ~~due~~relates to ~~an increase in average interest-earning assets of $146.8 million, or 8.4%, compared to the same period in 2015. The increase was comprised of~~ a ~~$99.4~~$68.3 million increase in average ~~loans~~earning assets compared to June 30, 2016, a decrease in interest expense resulting from a prepayment fee and interest associated with the retirement of a FHLB fixed advance in June 2016 and a ~~$63.6 million increase~~decline in the average rate on deposits. Additionally, the higher yield on investment securities and interest-bearing cash, and the upward repricing of variable rate loans positively impacted interest income, partially offset by a ~~$16.2 million~~ decrease of $990 thousand in ~~average interest-bearing due from banks. Additional positive variances in both net interest~~acquired loan income and ~~margin in 2016 included the interest recovery of $1.4 million mentioned above and~~ a ~~$696 thousand increase in gains on payoffs of PCI loans as shown~~decline in the ~~table below, which were partially offset by lower average yields~~yield on fixed rate loans ~~and investments and prepayment fees of $312 thousand on a Federal Home Loan Bank advance in the second quarter of~~when compared to June 30, 2016.

Market Interest Rates

Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC"). ~~In December 2015,~~Actions by the FOMC ~~raised~~to increase the target federal funds rate by 25 basis points in December 2015, December 2016, March 2017 and June 2017, have positively impacted yields on our rate sensitive interest-earning assets. The increase in June 2017, to athe current target range for the federal funds rate of ~~0.25%~~1.00% to ~~0.50% from~~1.25%, was the ~~historic low of 0.00% to 0.25% that had not changed during the previous seven years. The prolonged low interest~~fourth rate ~~environment, especially the low long-term~~hike since 2008. If interest rates ~~has resulted in downward pricing pressure on our interest-earning assets. We have experienced significant net interest margin compression over the last several years and~~continue to rise, we anticipate that our net interest ~~margin~~income will increase. While short-term interest

rates have risen and improved the Bank’s yields on prime-rate adjustable assets, there has been little movement in ~~the future may compress if current market interest~~longer-term rates ~~do not increase.~~that influence competitive pricing for fixed-rate lending activities.

Impact of Acquired Loans on Net Interest Margin

Early pay-offs or prepayments of ~~our~~ acquired loans with significant unamortized purchase discount/premium ~~could result~~have resulted in ~~volatility in our~~ net interest margin volatility and cannot be predicted. As our acquired loans continue to pay off, we expect the accretion on acquired loans to continue to decline. Accretion and gains on pay-offs of purchased loans recorded to interest income were as follows:


	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015			June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
(dollars in thousands)	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin	Dollar Amount		Basis point impact to net interest margin
Accretion on PCI loans	$	89	2 bps	$	128	3 bps	$	274	2 bps	$	367	3 bps	$	80	2 bps	$	87	2 bps	$	170	2 bps	$	185	2 bps
Accretion on non-PCI loans	$	605	12 bps	$	366	8 bps	$	1,252	9 bps	$	1,202	9 bps	$	178	3 bps	$	317	7 bps	$	328	3 bps	$	647	7 bps
Gains on pay-offs of PCI loans	$	—	0 bps	$	1	0 bps	$	740	5 bps	$	44	0 bps	$	84	2 bps	$	—	0 bps	$	84	1 bps	$	740	8 bps

Provision for Loan Losses

Management assesses the adequacy of the allowance for loan losses ~~on a~~ quarterly ~~basis~~ based on several factors including growth of the loan portfolio, analysis of probable losses in the portfolio, historical loss experience and the current economic climate. Actual losses on loans are charged against the allowance, and the allowance is increased by loss recoveries and provisions for loan losses charged to expense.

~~A $1.6 million reversal of the~~There was no provision for loan losses ~~was~~ recorded in the ~~third~~second quarter of ~~2016 and resulted from the charged-off principal recovery of $2.2 million on the problem credit previously mentioned. No provision for loan losses was recorded in~~2017, consistent with the same quarter a year ~~ago.~~ago, as the level of reserves was deemed appropriate for the loan portfolio. Net recoveries in the ~~third~~second quarter of ~~2016~~2017 totaled ~~$2,176~~$13 thousand compared to ~~$102~~net recoveries of $59 thousand in the same quarter a year ago.

As described above, a $1.6 million reversal of the loan loss provision was recorded in the first nine months of 2016, compared to no provision for loan losses recognized in the first nine months of 2015. Net recoveries were $2,264 thousand in the first nine months of 2016, compared to net charge-offs of $643 thousand in the first nine months of 2015. A protracted problem land development loan was sold in the second quarter of 2015 resulting in an $839 thousand charge-off.

The ratio of loan loss reserves to total loans was ~~1.07%~~1.02% at ~~September~~June 30, ~~2016,~~2017, compared to ~~1.03%~~1.04% at December 31, ~~2015.~~2016. At June 30, 2017, total loan loss reserve to loans excluding acquired loans was 1.07%. Non-accrual loans totaled ~~$540 thousand,~~$1.2 million, or ~~0.04%~~0.08% of total loans, at ~~September~~June 30, ~~2016,~~2017, compared to ~~$2.2 million,~~$145 thousand, or ~~0.15%~~0.01%, at December 31, ~~2015.~~2016. A well secured $1.0 million commercial real estate loan was placed on non-accrual status during the first quarter of 2017.

No provision for loan losses was recorded in the first half of 2017 or 2016. Net charge-offs were $210 thousand in the first half of 2017, compared to net recoveries of $89 thousand in the first half of 2016.

Impaired loan balances totaled ~~$19.7~~$18.3 million at ~~September~~both June 30, ~~2016, compared to $21.2 million at~~2017 and December 31, ~~2015,~~2016, with specific valuation allowances of ~~$1.3 million~~$637 thousand and ~~$1.2 million~~$991 thousand for the same respective dates. The decrease in impaired loan balances primarily relates to the pay-off of a problem credit totaling $1.9 million as of December 31, 2015 and the pay-off/pay-down of three commercial loans, partially offset by the addition of a performing commercial real estate loan modified in a troubled debt restructuring. Classified assets (loans with substandard or doubtful risk grades) increased to ~~$22.6~~$29.3 million at ~~September~~June 30, ~~2016~~, 2017, from ~~$22.3~~$19.6 million atDecember 31, ~~2015.~~2016. The increase was primarily related to one relationship of $8.4 million and the non-accrual loan of $1.0 million mentioned above that were downgraded to substandard in the first quarter of 2017. There were no loans with doubtful risk grades at ~~September~~June 30, ~~2016~~2017 or December 31, ~~2015.~~2016.

For more information, refer to Note 5 to the Consolidated Financial Statements in this Form 10-Q.

Non-interest Income

The ~~table~~tables below ~~details~~detail the components of non-interest income.

Three months ended Amount Percent
(dollars in thousands) September 30, 2016 September 30, 2015 Increase (Decrease) Increase (Decrease)
Service charges on deposit accounts $ 447
$ 489
$ (42 ) (8.6 )%
Wealth Management and Trust Services 506
568
(62 ) (10.9 )%
Debit card interchange fees 393
372
21
5.6 %
Merchant interchange fees 114
171
(57 ) (33.3 )%
Earnings on bank-owned life insurance 216
204
12
5.9 %
Dividends on FHLB stock 223
209
14
6.7 %
Gains on investment securities, net —
72
(72 ) NM
Other income 215
213
2
0.9 %
Total non-interest income $ 2,114
$ 2,298
$ (184 ) (8.0 )%

Nine months ended Amount Percent
(dollars in thousands) September 30, 2016 September 30, 2015 Increase (Decrease) Increase (Decrease)
Service charges on deposit accounts $ 1,344
$ 1,518
$ (174 ) (11.5 )%
Wealth Management and Trust Services 1,599
1,809
(210 ) (11.6 )%
Debit card interchange fees 1,112
1,087
25
2.3 %
Merchant interchange fees 355
430
(75 ) (17.4 )%
Earnings on bank-owned life insurance 626
610
16
2.6 %
Dividends on FHLB stock 577
817
(240 ) (29.4 )%
Gains on investment securities, net 394
80
314
392.5 %
Other income 691
744
(53 ) (7.1 )%
Total non-interest income $ 6,698
$ 7,095
$ (397 ) (5.6 )%

~~NM - Not Meaningful~~



	Three months ended				Amount			Percent
(dollars in thousands)	June 30, 2017		June 30, 2016		Increase (Decrease)			Increase (Decrease)
Service charges on deposit accounts	$	447	$	441	$	6		1.4	%
Wealth Management and Trust Services	504		527		(23		)	(4.4	)%
Debit card interchange fees	384		381		3			0.8	%
Merchant interchange fees	112		128		(16		)	(12.5	)%
Earnings on bank-owned life insurance	210		209		1			0.5	%
Dividends on FHLB stock	176		185		(9		)	(4.9	)%
Gains on investment securities, net	10		284		(274		)	(96.5	)%
Other income	253		266		(13		)	(4.9	)%
Total non-interest income	$	2,096	$	2,421	$	(325	)	(13.4	)%

	Six months ended				Amount			Percent
(dollars in thousands)	June 30, 2017		June 30, 2016		Increase (Decrease)			Increase (Decrease)
Service charges on deposit accounts	$	899	$	897	$	2		0.2	%
Wealth Management and Trust Services	1,007		1,093		(86		)	(7.9	)%
Debit card interchange fees	756		719		37			5.1	%
Merchant interchange fees	208		241		(33		)	(13.7	)%
Earnings on bank-owned life insurance	419		410		9			2.2	%
Dividends on FHLB stock	408		354		54			15.3	%
Gains on investment securities, net	10		394		(384		)	(97.5	)%
Other income	504		476		28			5.9	%
Total non-interest income	$	4,211	$	4,584	$	(373	)	(8.1	)%

~~Third~~Second Quarter of~~2016~~ 2017 Compared to ~~Third~~Second Quarter of ~~2015~~2016

Non-interest income decreased by ~~$184~~$325 thousand in the ~~third~~second quarter of ~~2016~~2017 to $2.1 million, compared to ~~$2.3~~$2.4 million in the same quarter a year ago. The decrease was ~~partially~~primarily due to a ~~$72~~$274 thousand ~~gain on~~decrease in gains from the sale of four securities in the third quarter of 2015, lower merchant card interchange fees of $57 thousand related to a decline in sales volume and $62 thousand lower wealth management and trust services fees in the third quarter of 2016.investment securities.

First ~~Nine~~Six Months of ~~2016~~2017 Compared to First ~~Nine~~Six Months of ~~2015~~2016

Non-interest income decreased by ~~$397~~$373 thousand to ~~$6.7~~$4.2 million in the first six months of 2017, compared to $4.6 million for the first ~~nine~~six months of ~~2016, compared to $7.1 million for the first nine months of 2015.~~2016. The decrease ~~resulted from lower dividends on FHLB stock, lower wealth management-related fees, and lower service charges on business analysis accounts~~was primarily due to ~~higher average deposit balances, partially offset by higher~~a $384 thousand decrease in gains onfrom the sale of investment securities.

Non-interest Expense

The ~~table~~tables below ~~details~~detail the components of non-interest expense.

Three months ended Amount Percent
(dollars in thousands) September 30, 2016 September 30, 2015 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 6,683
$ 6,300
$ 383
6.1 %
Occupancy and equipment 1,275
1,346
(71 ) (5.3 )%
Depreciation and amortization 449
441
8
1.8 %
Federal Deposit Insurance Corporation insurance 253
250
3
1.2 %
Data processing 894
835
59
7.1 %
Professional services 476
493
(17 ) (3.4 )%
Directors' expense 143
182
(39 ) (21.4 )%
Information technology 307
186
121
65.1 %
Provision for losses on off-balance sheet commitments —
324
(324 ) NM
Other non-interest expense
Advertising 177
75
102
136.0 %
Other expense 1,253
1,206
47
3.9 %
Total other non-interest expense 1,430
1,281
149
11.6 %
Total non-interest expense $ 11,910
$ 11,638
$ 272
2.3 %

Nine months ended Amount Percent
(dollars in thousands) September 30, 2016 September 30, 2015 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 20,155
$ 19,762
$ 393
2.0 %
Occupancy and equipment 3,731
4,181
(450 ) (10.8 )%
Depreciation and amortization 1,343
1,512
(169 ) (11.2 )%
Federal Deposit Insurance Corporation insurance 760
739
21
2.8 %
Data processing 2,666
2,413
253
10.5 %
Professional services 1,528
1,572
(44 ) (2.8 )%
Directors' expense 448
620
(172 ) (27.7 )%
Information technology 665
554
111
20.0 %
Provision for losses on off-balance sheet commitments 150
14
136
NM
Other non-interest expense

Advertising 378
197
181
91.9 %
Other expense 4,113
4,250
(137 ) (3.2 )%
Total other non-interest expense 4,491
4,447
44
1.0 %
Total non-interest expense $ 35,937
$ 35,814
$ 123
0.3 %

~~NM - Not Meaningful~~



	Three months ended					Amount			Percent
(dollars in thousands)	June 30, 2017			June 30, 2016		Increase (Decrease)			Increase (Decrease)
Salaries and related benefits	$	7,287		$	6,724	$	563		8.4	%
Occupancy and equipment	1,380			1,175		205			17.4	%
Depreciation and amortization	463			441		22			5.0	%
Federal Deposit Insurance Corporation insurance	162			246		(84		)	(34.1	)%
Data processing	963			916		47			5.1	%
Professional services	522			554		(32		)	(5.8	)%
Directors' expense	224			116		108			93.1	%
Information technology	186			165		21			12.7	%
(Reversal) provision for losses on off-balance sheet commitments	(208		)	150		(358		)	(238.7	)%
Other non-interest expense
Advertising	131			98		33			33.7	%
Other expense	1,521			1,432		89			6.2	%
Total other non-interest expense	1,652			1,530		122			8.0	%
Total non-interest expense	$	12,631		$	12,017	$	614		5.1	%

	Six months ended					Amount			Percent
(dollars in thousands)	June 30, 2017			June 30, 2016		Increase (Decrease)			Increase (Decrease)
Salaries and related benefits	$	14,762		$	13,472	$	1,290		9.6	%
Occupancy and equipment	2,699			2,456		243			9.9	%
Depreciation and amortization	944			894		50			5.6	%
Federal Deposit Insurance Corporation insurance	323			507		(184		)	(36.3	)%
Data processing	1,902			1,772		130			7.3	%
Professional services	1,044			1,052		(8		)	(0.8	)%
Directors' expense	382			305		77			25.2	%
Information technology	384			358		26			7.3	%
(Reversal) provision for losses on off-balance sheet commitments	(43		)	150		(193		)	(128.7	)%
Other non-interest expense
Advertising	204			201		3			1.5	%
Other expense	3,041			2,860		181			6.3	%
Total other non-interest expense	3,245			3,061		184			6.0	%
Total non-interest expense	$	25,642		$	24,027	$	1,615		6.7	%

~~Third~~Second Quarter of~~2016~~ 2017 Compared to ~~Third~~Second Quarter of ~~2015~~2016

Non-interest expense increased by ~~$272~~$614 thousand to ~~$11.9~~$12.6 million in the ~~third~~second quarter of ~~2016,~~2017, compared to ~~$11.6~~$12.0 million in the same quarter a year ago. The increase was ~~partially~~primarily due to ~~an increase in~~higher salaries and benefits related to ~~annual~~filling open positions, merit increases and incentive bonuses, as well as higher ~~full time equivalents in 2016,~~occupancy expense from increased rent and ~~increases in information technology improvement~~maintenance costs, and advertising. The increases in expenses were partially offset by no provision for off-balance sheet commitments recorded in the third quarter of 2016 compared to $324 thousand in the same quarter last year.

~~First Nine Months of 2016 Compared to First Nine Months of 2015~~

~~Non-interest~~higher recruiting fees. Directors' expense increased ~~by $123 thousand~~primarily due to ~~$35.9 million for the first nine months~~a reclassification of ~~2016, compared to $35.8 million for the first nine months of 2015. The increase resulted from the same reasons described above~~director-related stock option compensation that was previously included in salaries and related benefits, and higher ~~expenses related to provision for off-balance sheet commitments, and data processing costs.~~compensation. These increases were partially offset by a $208 thousand reversal of the provision for losses on off-balance sheet commitments in the second quarter of 2017, compared to a $150 thousand provision in the second quarter of 2016, and lower FDIC assessment expense due to decreased assessment rates. The reversal of the provision for losses on off-balance sheet commitments in the second quarter of 2017 resulted from a decrease in ~~occupancy~~total

commitments during the quarter primarily driven by the completion and pay-off of a construction project, and a reduction of estimated loss factors.

First Six Months of 2017 Compared to First Six Months of 2016

Non-interest expense totaled $25.6 million in the first half of 2017, compared to $24.0 million in the first half of 2016. The increase was primarily due to merit increases, and added salaries and benefits related to filling open positions that resulted in higher incentive bonus, stock-based compensation and 401(k) employer match. Occupancy and equipment ~~expenses related~~expense increased primarily due to higher rent and maintenance costs. Data processing increased primarily due to more customer transaction volume and the ~~relocation~~addition of ~~offices~~new products and services. The increase in ~~2016, and lease accounting adjustments~~other expense is primarily due to recruiting fees. These increases were partially offset by a $43 thousand reversal of the provision for losses on off-balance sheet commitments recorded in the first ~~nine months~~half of ~~2015.~~2017, compared to a $150 thousand provision in the first half of 2016, and lower FDIC assessment expense due to decreased assessment rates.

Provision for Income Taxes

The provision for income taxes for the ~~third~~second quarter of ~~2016~~2017 totaled $~~4.2~~2.6 million at an effective tax rate of ~~37.5%~~33.2%, compared to $~~2.8~~2.7 million at an effective tax rate of ~~36.7%~~36.1% in the same quarter last year. The provision for income taxes for the first ~~nine months~~half of ~~2016~~2017 totaled ~~$10.0~~$4.8 million at an effective tax rate of ~~36.5%~~32.8%, compared to ~~$7.7~~$5.9 million at an effective tax rate of ~~36.3%~~35.9% for the first ~~nine months~~half of ~~2015. These~~2016. The decrease in the year-to-date effective tax rate is primarily due to higher tax-exempt interest on municipal securities and loans and lower pre-tax income. Additionally, discrete tax benefits from the exercise of stock options and vesting of restricted stock increased in 2017 as a result of the adoption of ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as discussed in Note 2 to the Consolidated Financial Statements in Item 1 of this report. Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, and ~~low income~~low-income housing tax credits). ~~We forecast annual pre-tax income and these permanent differences to project our effective tax rates. As a result, there are~~There may be fluctuations in the effective rate from period to period based on the relationship of net permanent differences to income before tax.

We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At ~~September~~June 30, ~~2016,~~2017, neither the Bank nor Bancorp had accruals for interest ornor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

Investment Securities

The investment securities portfolio totaled ~~$425.4~~$401.9 million at ~~September~~June 30, ~~2016,~~2017, a ~~$62.0~~$15.1 million decrease from December 31, ~~2015.~~2016. Year-to-date investment security purchases totaling ~~$140.9~~$13.9 million ~~were~~partially offset bythe paydowns and maturities totaling ~~$136.1~~$30.0 million. Effective February 24, 2017, $129 million ~~and sales totaling $68.7 million. The sales proceeds~~in mortgage-backed securities were ~~used~~transferred from available-for-sale securities to ~~pay down~~held-to-maturity at fair value to reduce balance sheet volatility, which was made possible by our ~~borrowings and resulted in net gains of $393.9 thousand.~~strong liquidity position.

~~Investment securities in our portfolio that may be backed by mortgages having sub-prime or Alt-A features (certain privately issued CMOs) represent 0.1% and 0.2% of our total investment portfolio at~~ ~~September 30, 2016~~ ~~and~~ ~~December 31, 2015, respectively.~~

The table below summarizes our investment in obligations of state and political subdivisions at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015.~~2016.


		September 30, 2016						December 31, 2015							June 30, 2017						December 31, 2016
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Fair Value		% of Total State and Political Subdivisions		Amortized Cost		Fair Value		% of Total State and Political Subdivisions		(dollars in thousands)	Amortized Cost		Fair Value		% of Total State and Political Subdivisions		Amortized Cost		Fair Value		% of Total State and Political Subdivisions
Within California:	Within California:													Within California:
	General obligation bonds	$	15,252	$	15,574	13.7	%	$	18,642	$	18,830	18.6	%	General obligation bonds	$	15,620	$	15,779	15.5	%	$	15,777	$	15,660	14.3	%
	Revenue bonds	10,942		11,307		9.7		15,453		15,767		15.5		Revenue bonds	8,193		8,424		8.1		10,895		11,127		9.9
	Tax allocation bonds	4,632		4,829		4.2		5,411		5,603		5.4		Tax allocation bonds	4,000		4,158		4.0		4,043		4,178		3.7
Total within California	Total within California	30,826		31,710		27.6		39,506		40,200		39.5		Total within California	27,813		28,361		27.6		30,715		30,965		27.9
Outside California:	Outside California:													Outside California:
	General obligation bonds	72,228		73,647		64.8		51,920		52,990		51.9		General obligation bonds	65,399		65,926		64.7		71,534		70,376		64.9
	Revenue bonds	8,430		8,538		7.6		8,603		8,629		8.6		Revenue bonds	7,802		7,865		7.7		7,913		7,904		7.2
Total outside California	Total outside California	80,658		82,185		72.4		60,523		61,619		60.5		Total outside California	73,201		73,791		72.4		79,447		78,280		72.1
Total obligations of state and political subdivisions	Total obligations of state and political subdivisions	$	111,484	$	113,895	100.0	%	$	100,029	$	101,819	100.0	%	Total obligations of state and political subdivisions	$	101,014	$	102,152	100.0	%	$	110,162	$	109,245	100.0	%

The portion of the portfolio outside the state of California is distributed among twenty states. The largest concentrations outside California are in Washington ~~(11.8%~~(12.9%), Minnesota ~~(11.7%~~(12.1%), and Texas ~~(11.3%~~(11.8%). Revenue bonds, both within and outside California, primarily ~~consisted~~consist of bonds relating to essential services (such as public improvements and utilities) and school district bonds.

Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include:

The soundness of a municipality’s budgetary position and stability of its tax revenues

Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer

Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values

For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength)

Credit ratings by major credit rating agencies

Loans

Loans totaled ~~$1,467.7~~$1,491.5 million at ~~September~~June 30, ~~2016,~~2017, an increase of ~~$16.5~~$4.9 million from ~~$1,451.2~~$1,486.6 million at December 31, ~~2015.~~2016. New loan ~~volume~~originations in the first ~~nine~~six months of ~~2016~~2017 of ~~$129.9~~$79.4 million were primarily in ~~investor~~ commercial real estate, ~~commercial~~including both owner-occupied and ~~industrial~~investor-owned, spread throughout our markets, and ~~owner-occupied~~Loans increased by $4.9 million and totaled $1,491.5 million at June 30, 2017, compared to $1,486.6 million at December 31, 2016. New loan originations in the first six months of 2017 of $79.4 million were primarily in commercial real estate, including both owner-occupied and ~~were~~investor-owned, spread throughout our ~~markets. Advances on new~~markets, and ~~existing construction loans during 2016 totaled $31.0 million, partially offset by~~tenancy-in-common fractional interest loans. Loan originations combined with changes in the utilization of loan commitments, pay-offs of ~~$14.2 million. Total pay-offs of $116.1~~$80.8 million, ~~combined with~~and scheduled payments, ~~and advances on existing loan commitments,~~ produced the net increase from December 31, ~~2015. Two investor commercial real estate loans totaling $22 million accounted for 20% of~~2016. Our current pipeline approximates last year at this time, and should translate into loan growth throughout the pay-offs. One of these loans was a $13 million credit for which the Bank chose not to match a competitor's highly aggressive loan terms as they were not consistent with our credit policy or lending appetite. The remaining $9 million loan was a planned pay-off, which facilitated new financing on a related property. We believe our loan pipeline is robust, reflecting growth prospects across our markets.year.

Liabilities

During the first ~~nine~~six months of ~~2016,~~2017, total liabilities increased by ~~$6.4~~$67.1 million to ~~$1,823.0~~$1,860.0 million. Deposits ~~totaled $1,801.5~~increased $67.8 million ~~at September 30, 2016, compared to $1,728.2 million at December 31, 2015. The $73.3 million increase was~~in the first half of 2017, primarily due to ~~new customer relationships~~fluctuations from large deposit clients' seasonal cash flows and ~~normal business activity for~~the placement by existing ~~commercial customers. The third quarter~~clients of ~~2016 included some higher than usual deposit increases~~funds from ~~a few of our largest business customers due~~their asset sales that will be distributed to the ~~nature~~beneficiaries of ~~their businesses, which could decline during the fourth quarter.~~trusts or transitioned into real estate or other investments. Non-interest bearing deposits totaled ~~$860.6~~$893.0 million, or ~~47.8%~~48.5% of total deposits at ~~September~~June 30, ~~2016,~~2017, compared to ~~44.6%~~46.1% at December 31, 2015. FHLB and other borrowings also declined $67.0 million. We retired a $15 million fixed rate FHLB advance in the second quarter to reduce our cost of funds going forward and there were no overnight borrowings at September 30, 2016.

Capital Adequacy

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the tables below can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

~~Quantitative measures established by regulation to ensure~~Management reviews capital ~~adequacy require Bancorp and the Bank to maintain minimum amounts and~~ ratios ~~(set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to quarterly average assets.~~

~~Capital ratios are reviewed by Management~~ on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed

the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for ~~capital adequacy~~prompt corrective action as of March 31, 2017. There are no conditions or events since that notification that Management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

In July 2013, the Federal Reserve Board of Governors, ~~of the Federal Reserve,~~ the FDIC and the Office of the Comptroller of the Currency finalized regulatory capital rules known as "Basel III". The rules became effective beginning January 2015, and will be phased-in ~~and become fully implemented~~ by January 2019. The guidelines, among other things, changed the minimum capital requirements of banks and bank holding companies by increasing the Tier 1 capital to risk-weighted assets ratio to 6%, and ~~introducing~~introduced a new requirement to maintain a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%. By 2019, when fully phased in, the rules will require further increases to certain minimum capital requirements and a capital conservation buffer of an additional 2.5% of risk-weighted assets. Basel III permits certain banks such as us to exclude accumulated other comprehensive income or loss from regulatory capital through a one-time election in the first quarter of 2015. As it was consistent with our existing treatment, there were no changes to our capital ratios as a result of making this election. The Basel III changes that affected us most significantly include:

shifting off-balance sheet items with an original maturity of one year or less from 0% to 20% risk weight,

moving past due loan balances from 100% to 150% risk weight,

deducting deferred tax assets associated with NOLs and tax credits from common equity Tier 1 capital, and

subjecting deferred tax assets related to temporary timing differences that exceed certain thresholds to 250% risk-weighting, beginning in 2018.

We have modeled our ratios under the fully phased-in Basel III rules, and based on present facts, we do not expect that we will be required to raise additional capital as a result of the fully phased-in rules.

To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage, and common equity Tier 1 ratios as set forth in the second table below. The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of June 30, 2016. There are no conditions or events since that notification that Management believes have changed the Bank’s categories, and we expect the Bank to remain well capitalized for prompt corrective action purposes.

The Bancorp’s and Bank’s capital adequacy ratios as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 are presented in the following tables. Bancorp's Tier 1 capital includes the subordinated debentures, which are not included at the Bank level. We continued to build capital in ~~2016~~2017 through the accumulation of net income.


Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold¹		Actual Ratio				Adequately Capitalized Threshold¹				Ratio to be a Well Capitalized Bank Holding Company
September 30, 2016	Amount		Ratio		Amount	Ratio
June 30, 2017							Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	243,126	14.26	%	≥ $147,041	≥ 8.625%	$	255,140	15.01	%	≥ $	157,238	≥ 9.250	%	≥ $	169,987	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	226,513	13.29	%	≥ $112,944	≥ 6.625%	$	239,051	14.06	%	≥ $	123,241	≥ 7.250	%	≥ $	135,990	≥ 8.00	%
Tier 1 Capital (to average assets)	$	226,513	11.13	%	≥ $ 81,413	≥ 4.000%	$	239,051	11.61	%	≥ $	82,339	≥ 4.000	%	≥ $	102,924	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	221,373	12.99	%	≥ $ 87,372	≥ 5.125%	$	233,570	13.74	%	≥ $	97,743	≥ 5.750	%	≥ $	110,492	≥ 6.50	%
December 31, 2015
December 31, 2016
Total Capital (to risk-weighted assets)	$	227,269	13.37	%	≥ $135,996	≥ 8.00%	$	247,453	14.32	%	≥ $	149,039	≥ 8.625	%	≥ $	172,799	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	211,521	12.44	%	≥ $101,997	≥ 6.00%	$	231,111	13.37	%	≥ $	114,479	≥ 6.625	%	≥ $	138,239	≥ 8.00	%
Tier 1 Capital (to average assets)	$	211,521	10.67	%	≥ $ 79,296	≥ 4.00%	$	231,111	11.39	%	≥ $	81,189	≥ 4.000	%	≥ $	101,486	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	206,724	12.16	%	≥ $ 76,498	≥ 4.50%	$	225,925	13.07	%	≥ $	88,559	≥ 5.125	%	≥ $	112,319	≥ 6.50	%

¹The ~~2016~~ adequately capitalized threshold includes the capital conservation buffer that was effective January 1, 2016. These ratios are not reflected on a fully phased-in basis, which will occur in January 2019.


Capital Ratios for the Bank (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold¹		Ratio to be Well Capitalized under Prompt Corrective Action Provisions		Actual Ratio				Adequately Capitalized Threshold¹				Ratio to be Well Capitalized under Prompt Corrective Action Provisions
September 30, 2016	Amount		Ratio		Amount	Ratio	Amount	Ratio
June 30, 2017									Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	237,345	13.92	%	≥ $147,011	≥ 8.625%	≥ $170,448	≥10.00%	$	250,894	14.76	%	≥ $	157,193	≥ 9.250	%	≥ $	169,938	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	220,733	12.95	%	≥ $112,922	≥ 6.625%	≥ $136,358	≥ 8.00%	$	234,805	13.82	%	≥ $	123,205	≥ 7.250	%	≥ $	135,951	≥ 8.00	%
Tier 1 Capital (to average assets)	$	220,733	10.85	%	≥ $ 81,398	≥ 4.000%	≥ $101,747	≥ 5.00%	$	234,805	11.41	%	≥ $	82,326	≥ 4.000	%	≥ $	102,908	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	220,733	12.95	%	≥ $ 87,355	≥ 5.125%	≥ $110,791	≥ 6.50%	$	234,805	13.82	%	≥ $	97,715	≥ 5.750	%	≥ $	110,460	≥ 6.50	%
December 31, 2015
December 31, 2016
Total Capital (to risk-weighted assets)	$	222,830	13.11	%	≥ $135,968	≥ 8.00%	≥ $169,960	≥10.00%	$	243,468	14.09	%	≥ $	149,016	≥ 8.625	%	≥ $	172,772	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	207,082	12.18	%	≥ $101,976	≥ 6.00%	≥ $135,968	≥ 8.00%	$	227,127	13.15	%	≥ $	114,462	≥ 6.625	%	≥ $	138,218	≥ 8.00	%
Tier 1 Capital (to average assets)	$	207,082	10.45	%	≥ $ 79,268	≥ 4.00%	≥ $ 99,085	≥ 5.00%	$	227,127	11.19	%	≥ $	81,176	≥ 4.000	%	≥ $	101,469	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	207,082	12.18	%	≥ $ 76,482	≥ 4.50%	≥ $110,474	≥ 6.50%	$	227,127	13.15	%	≥ $	88,546	≥ 5.125	%	≥ $	112,302	≥ 6.50	%

Liquidity

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as ~~needed.~~discussed in Note 6 to the consolidated financial statements. Our Asset Liability Management Committee ("ALCO"), which is comprised of certain Bank directors, ~~of the Bank,~~ is responsible for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency funding plan that provides early detection of a potential ~~shortfall~~liquidity issues in ~~liquidity below internal requirements~~the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales, as part of our cash management strategy.

We obtain funds from the repayment and maturity of loans, ~~as well as~~ deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and ~~other borrowings.~~cash flow from operations. Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings and dividends to common stockholders.

The most ~~volatile~~significant factor in our ~~short-term~~daily liquidity position has been the level of customer deposits. We attract and retain new deposits, which depends upon the variety and effectiveness of our customer account products, service and convenience, and rates paid to customers, as well as our financial strength. ~~However, the business model and cyclical nature of the~~The cash cycles of some of our large commercial depositors may ~~also~~ cause short-term ~~volatility~~fluctuations in their deposit balances held with us.

~~Any long-term decline in deposit funding would adversely affect~~At June 30, 2017 our ~~liquidity. Management monitors our liquidity position daily and regularly adjusts our investments in~~ liquid assets, ~~based upon~~which included unencumbered available-for-sale securities and cash, totaled $323.8 million, an increase of $9.0 million from December 31, 2016. Our cash and cash equivalents increased $89.1 million from December 31, 2016. The primary sources of funds during the first six months of 2017 included $31.3 million in pay-downs and maturities of investment securities, $12.2 million net cash provided by operating activities and an increase in net deposits of $67.8 million. The primary uses of liquidity during the first six months of 2017 was $13.9 million in investment securities purchased, $4.6 million in loans originated (net of loan principal collected) and $3.3 million in cash dividends paid on common stock to our assessment of expected loan demand and pay-off activities, expected deposit flows, desired mix and yields on interest-earning assets, and the objectives of our asset/liability management program. In addition, we have secured borrowing capacity through the FHLB and FRBSF, as discussed in Note 6 to the consolidated financial statements, that can be drawn upon.shareholders. Management anticipates that our current strong liquidity position and core deposit base will provide adequate liquidity to fund our operations.

At September 30, 2016 our liquid assets, which included unencumbered available-for-sale securities and cash, totaled $393.1 million, an increase of $18.1 million from December 31, 2015. As presented in the accompanying unaudited consolidated statements of cash flows, the sources of liquidity vary between periods. Our cash and cash equivalents at September 30, 2016 totaled $96.9 million, an increase of $70.6 million from December 31, 2015. The primary sources of funds during the first nine months of 2016 included an increase in net deposits of $73.2 million, $63.9 million in proceeds from sales, pay-downs and maturities of investment securities, net of purchases and $20.3 million net cash provided by operating activities. The primary uses of liquidity during the first nine months of 2016 were the repayment of $67.0 million in borrowings to lower our funding costs going forward and loan principal collections (net of loan originations) of $11.7 million.

Undrawn credit commitments, as discussed in Note 8 to the consolidated financial statements, totaled ~~$416.5~~$400.6 million at ~~September~~June 30, ~~2016.~~2017. These commitments, to the extent used, are expected to be funded primarily through the

repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, ~~$111.9~~$97.6 million of time deposits will mature. We expect these funds to be replaced with new deposits. Our emphasis on local deposits combined with our well capitalized equity position, provides a very stable funding base.

Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held ~~$5.4~~$3.9 million of cash at ~~September~~June 30, ~~2016. Bancorp obtained dividend distributions from the Bank in the amount of $6.4 million in the first nine months of 2016. These funds are~~2017, which is deemed sufficient to cover Bancorp's operational needs and cash dividends to shareholders through the end of ~~2016.~~2017. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant form of market risk is interest rate risk, which is inherent in our investment, borrowing, lending and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.

To mitigate interest rate risk, the structure of the Consolidated Statement of Condition is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings. The asset liability management policy sets limits on the acceptable amount of change to net interest income and economic value of equity in different interest rate environments.

From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. See Note 9 to the Consolidated Financial Statements in this Form 10-Q.

Exposure to interest rate risk is reviewed at least quarterly by ALCO and the Board of Directors. Simulation models are used to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, Management may adjust the asset and liability mix to bring the risk position within approved limits.

~~In December 2015,~~The following table estimates the ~~FOMC raised~~effect of interest rate changes in all points of the ~~target federal funds~~yield curve as measured against a flat rate ~~by 25 basis points to a range of 0.25% to 0.50%, from the historic low of 0.00% to 0.25%, which had been maintained since December 2008.~~scenario. The Bank currently has low interest rate ~~risk. Net~~risk and, in general, is slightly asset sensitive (net interest margin is expected to increase ~~after interest~~if rates go up ~~but there may be a lag between repricing of certain floating~~due to our adjustable rate loans ~~at their floors~~ and ~~increases in rates.~~

~~Based on~~ our ~~most recent simulation,~~significant non-interest bearing deposit base). Our net interest income is ~~projected~~most vulnerable to ~~increase by approximately 2% in year one given an immediate 200 basis point increase in~~a falling interest ~~rates and increase by approximately 8% in year two. The interest~~rate environment. Interest rate risk is within policy guidelines established by ALCO and the Board of Directors.



Immediate Changes in Interest Rates (in basis points)	Estimated Change in NII in Year 1 (as percent of NII)		Estimated Change in NII in Year 2 (as percent of NII)
up 200	0.8	%	6.6	%
down 100	(6.6	)%	(11.8	)%

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing these deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Further, the actual rates and timing of prepayments on loans and investment securities, and the behavior of depositors, could vary significantly from the assumptions applied in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this report. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the ~~Commission's~~SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is accumulated and communicated to our Management, including our principal executive and principal financial officers, or persons performing similar

functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls over Financial Reporting

During the last fiscal quarter there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

~~We may be party~~Refer to legal actions which arise from time to time as part of the normal course of our business. We believe, after consultation with legal counsel, that we have meritorious defenses in these actions, and that litigation contingency liability, if any, will not have a material adverse effect on our financial position, results of operations, or cash flows.

We are responsible for our proportionate share of certain litigation indemnifications provided to Visa U.S.A. by its member banks in connection with lawsuits related to anti-trust charges and interchange fees. For further details, see Note 1312 to the Consolidated Financial Statements in Item 8 of our ~~2015~~2016 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form ~~10-Q herein.~~10-Q.

ITEM 1A Risk Factors

~~There have been no material changes from~~In addition to other information contained in this report, including matters under the ~~risk factors~~section “Forward-Looking Statements,” and risks previously disclosed in ~~our 2015 Form 10-K. Refer to~~section Item 1A, “Risk Factors” ~~in Item 1A~~ of our ~~2015~~2016 Form 10-K, ~~pages 11 through 20.~~you should carefully consider the following risk factors in connection with the proposed acquisition of the Bank of Napa, N.A. (“Napa”).

The Market Price of Our Common Stock after the Merger may be Affected by Factors Different from those Affecting Our Shares Currently

The results of operations of the combined company and the market price of our common stock after the completion of the merger may be affected by factors different from those currently affecting our independent results of operations prior to the merger.

Regulatory Approvals May Not Be Received, May Take Longer Than Expected or May Impose Conditions That Are Not Presently Anticipated

Before the merger may be completed, Bancorp and Napa must satisfy a number of conditions. These conditions include obtaining various regulatory approvals or consents, including the Federal Deposit Insurance Corporation and the State of California. In deciding whether to grant these approvals, the relevant governmental authorities will make a determination of whether, among other things, the merger is in the public interest. These regulatory entities may impose conditions on the completion of the merger or require changes to the terms of the merger. Although we do not currently expect that any material conditions or changes would be imposed, there can be no assurance that they will not be. Such conditions or changes could have the effect of delaying completion of the merger or imposing additional

costs on or limiting the revenues of the combined company following the merger, any of which might have a material adverse effect on us following the merger. In addition, we or Napa may elect not to consummate the merger if:

(A) any required regulatory approval has been denied by the relevant regulatory authority and such denial has become final and nonappealable,

(B) any such approval includes any condition, restriction or requirement that would:

(i) have a material adverse effect on Napa's business or,

(ii) would restrict our business after the closing of the merger such that it would have a material adverse effect on us, or

(iii) require the sale by us or Napa of any material portion of assets, or

(C) if a regulatory authority has issued a final, nonappealable injunction permanently enjoining or otherwise prohibiting the completion of the merger.

We May Be Unable to Integrate Operations Successfully or to Achieve Expected Cost Savings

Our earnings, financial condition and prospects after the merger will depend in part on our ability to integrate the operations and management of Napa and to continue to implement our own business plan. There is no assurance that we will be able to do so. The issues that we could face include, but are not limited to:

unexpected problems with operations, personnel, technology or credit;

loss of customers and employees of Napa;

difficulty in working with Napa's employees and customers;

the assimilation of Napa's operations, sites and personnel; and

instituting and maintaining uniform standards, controls, procedures and policies.

Further, although the boards of directors of both parties anticipate cost savings as a result of the merger, we may not be fully able to realize those savings. Any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

We Expect to Incur Significant Costs Associated with the Merger

We estimate that we have incurred or will incur significant transaction costs associated with the merger, a portion of which will be incurred whether or not the merger closes. We believe the combined company may incur charges to operations, which are not currently reasonably estimable, in the quarter in which the merger is completed or subsequent quarters, to reflect costs associated with integrating the two banks. There is no assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger, including charges associated with the impairment of any goodwill booked in connection with the merger.

The Failure of the Loan Portfolios to Perform as Expected May Unfavorably Impact Us

Our performance and prospects after the merger will be dependent to a significant extent on the performance of the combined loan portfolios of Bank of Marin and Bank of Napa, and ultimately on the financial condition of their respective borrowers and other customers. The existing loan portfolios of the two banks differ to some extent in the types of borrowers, industries and credits represented. In addition, there are differences in the documentation, classifications, credit ratings and management of the portfolios. As a result, our overall loan portfolio after the merger may have a different risk profile than the loan portfolio of either Bank of Marin or Napa before the merger. The performance of the two loan portfolios will be adversely affected if any of such factors is worse than currently anticipated. In addition, to the extent that present customers are not retained by us, or additional expenses are incurred in retaining them, there could be adverse effects on our future consolidated results of operations following the merger. Realization of improvement in profitability is dependent, in part, on the extent to which the revenues of Napa are maintained and enhanced.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

We did not have any unregistered sales or repurchases of our equity securities during the ~~three~~six months ended ~~September~~June 30, ~~2016.~~2017.

ITEM 3 Defaults ~~Upon~~upon Senior Securities

None.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

ITEM 6 Exhibits

The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.

Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Herewith
2.01 Modified Whole Bank Purchase and Assumption Agreement dated February 18, 2011 among Federal Deposit Insurance Corporation, Receiver of Charter Oak Bank, Napa, California, Federal Deposit Insurance Corporation, and Bank of Marin 8-K 001-33572 99.2 February 28, 2011
2.02 Agreement and Plan of Merger with NorCal Community Bancorp, dated July 1, 2013 8-K 001-33572 2.1 July 5, 2013
3.01 Articles of Incorporation, as amended 10-Q 001-33572 3.01 November 7, 2007
3.02 Bylaws 10-Q 001-33572 3.02 May 9, 2011
3.02a Bylaw Amendment 8-K 001-33572 3.03 July 6, 2015
4.01 Rights Agreement dated as of July 2, 2007 8-A12B 001-33572 4.1 July 2, 2007
4.01a Rights Agreement, Amendment No. 1, dated June 17, 2016 8-K 001-33572 4.2 June 22, 2016
10.01 2007 Employee Stock Purchase Plan S-8 333-144810 4.1 July 24, 2007
10.02 1989 Stock Option Plan S-8 333-144807 4.1 July 24, 2007
10.03 1999 Stock Option Plan S-8 333-144808 4.1 July 24, 2007
10.04 2007 Equity Plan S-8 333-144809 4.1 July 24, 2007
10.05 2010 Director Stock Plan S-8 333-167639 4.1 June 21, 2010
10.06
Form of Indemnification Agreement for Directors and Executive Officers dated
August 9, 2007
10-Q 001-33572 10.06 November 7, 2007
10.07 Form of Employment Agreement dated January 23, 2009 8-K 001-33572 10.1 January 26, 2009
10.08 Intentionally left blank
10.09 2010 Annual Individual Incentive Compensation Plan 8-K 001-33572 99.1 October 21, 2010
10.10a Salary Continuation Agreements with executive officers, Russell Colombo, Chief Executive Officer and Peter Pelham, Director of Retail Banking, dated January 1, 2011 8-K 001-33572
10.1
10.4
January 6, 2011
10.10b Salary Continuation Agreements with executive officers, Tani Girton, Chief Financial Officer, dated October 18, 2013 and Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014 8-K 001-33572
10.2
10.3
November 4, 2014
10.10c Salary Continuation Agreements for executive officer Timothy Myers, Executive Vice President and Commercial Banking Manager, dated May 28, 2015 8-K 001-33572 10.4 June 2, 2015
10.11 2007 Form of Change in Control Agreement 8-K 001-33572 10.1 October 31, 2007
10.12 Information Technology Services Agreement with Fidelity Information Services, LLC, dated July 11, 2012 8-K 001-33572 10.1 July 17, 2012


								Incorporated by Reference
Exhibit Number							Exhibit Description	Form	File No.	Exhibit	Filing Date	Herewith
2.01							Agreement to Merger and Plan of Reorganization with Bank of Napa, dated July 31, 2017	8-K	001-33572	2.1	August 1, 2017
3.01							Articles of Incorporation, as amended	10-Q	001-33572	3.01	November 7, 2007
3.02							Bylaws	10-Q	001-33572	3.02	May 9, 2011
3.02a							Bylaw Amendment	8-K	001-33572	3.03	July 6, 2015
4.01							Rights Agreement, dated July 6, 2017	8-A12B	001-33572	4.1	July 7, 2017
10.01							Employee Stock Ownership Plan	S-8	333-144810	4.1	May 26, 2017
10.02							2007 Employee Stock Purchase Plan	S-8	333-144810	4.1	July 24, 2007
10.03							2017 Equity Plan	S-8	333-144809	4.1	June 30, 2017
10.04							2010 Director Stock Plan	S-8	333-167639	4.1	June 21, 2010
10.05							Form of Indemnification Agreement for Directors and Executive Officers, dated August 9, 2007	10-Q	001-33572	10.06	November 7, 2007
10.06							Form of Employment Agreement, dated January 23, 2009	8-K	001-33572	10.1	January 26, 2009
10.07							2010 Annual Individual Incentive Compensation Plan	8-K	001-33572	99.1	October 21, 2010
10.08							Salary Continuation Agreement for executive officer Russell Colombo, Chief Executive Officer, dated January 1, 2011	8-K	001-33572	10.1	January 6, 2011
10.09							Salary Continuation Agreement for executive officer Peter Pelham, Director of Retail Banking, dated January 1, 2011	8-K	001-33572	10.4	January 6, 2011
10.10							Salary Continuation Agreements for executive officer Tani Girton, Chief Financial Officer, dated October 18, 2013	8-K	001-33572	10.2	November 4, 2014
10.11							Salary Continuation Agreements for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014	8-K	001-33572	10.3	November 4, 2014
10.12							Salary Continuation Agreement for executive officer Timothy Myers, Executive Vice President and Commercial Banking Manager, dated May 28, 2015	8-K	001-33572	10.4	June 2, 2015
10.13							2007 Form of Change in Control Agreement	8-K	001-33572	10.1	October 31, 2007
10.14							Information Technology Services Agreement with Fidelity Information Services, LLC, dated July 11, 2012	8-K	001-33572	10.1	July 17, 2012
11.01	Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements					Filed	Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements					Filed
14.02	Code of Ethical Conduct, dated October 17, 2014	10-K	001-33572	14.02	March 12, 2015
31.01	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					Filed	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					Filed
31.02	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					Filed	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					Filed
32.01	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002					Filed	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002					Filed
101.01*	XBRL Interactive Data File					Furnished	XBRL Interactive Data File					Furnished


*	As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




			Bank of Marin Bancorp
			(registrant)


	~~November~~August 7, ~~2016~~2017		/s/ Russell A. Colombo
	Date		Russell A. Colombo
			President &
			Chief Executive Officer
			(Principal Executive Officer)


	~~November~~August 7, ~~2016~~2017		/s/ Tani Girton
	Date		Tani Girton
			Executive Vice President &
			Chief Financial Officer
			(Principal Financial Officer)


	~~November~~August 7, ~~2016~~2017		/s/ Cecilia Situ
	Date		Cecilia Situ
			First Vice President &
			Manager of Finance & Treasury
			(Principal Accounting Officer)

~~Page-48~~Page-49