SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

For the transition period from __________________ to __________________

(Exact name of Registrant as specified in its charter)

Securities registered pursuant to 12(b) of the Act:

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.

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).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filero

Non-accelerated filero

Smaller reporting companyo

Emerging growth companyo

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.

As of ~~October~~July 31, ~~2018,~~2019, there were ~~6,974,765~~13,643,265 shares of common stock outstanding.

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

BANK OF MARIN BANCORP

CONSOLIDATEDSTATEMENTS OFCONDITION

~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018



(in thousands, except share data; unaudited)	June 30, 2019		December 31, 2018
Assets
Cash, cash equivalents and restricted cash	$	58,757	$	34,221
Investment securities
Held-to-maturity, at amortized cost	148,879		157,206
Available-for-sale, at fair value	378,131		462,464
Total investment securities	527,010		619,670
Loans, net of allowance for loan losses of $15,835 and $15,821 at June 30, 2019 and December 31, 2018, respectively	1,749,044		1,748,043
Bank premises and equipment, net	6,872		7,376
Goodwill	30,140		30,140
Core deposit intangible	5,128		5,571
Operating lease right-of-use assets	12,515		—
Interest receivable and other assets	74,521		75,871
Total assets	$	2,463,987	$	2,520,892

Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing	$	1,056,655	$	1,066,051
Interest bearing
Transaction accounts	121,232		133,403
Savings accounts	172,255		178,429
Money market accounts	647,592		679,775
Time accounts	104,306		117,182
Total deposits	2,102,040		2,174,840
Borrowings and other obligations	297		7,000
Subordinated debentures	2,674		2,640
Operating lease liabilities	14,332		—
Interest payable and other liabilities	16,977		20,005
Total liabilities	2,136,320		2,204,485

Stockholders' Equity
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued	—		—
Common stock, no par value, Authorized - 30,000,000 shares; Issued and outstanding - 13,659,143 and 13,844,353 at June 30, 2019 and December 31, 2018, respectively	132,151		140,565
Retained earnings	190,416		179,944
Accumulated other comprehensive income (loss), net of taxes	5,100		(4,102		)
Total stockholders' equity	327,667		316,407
Total liabilities and stockholders' equity	$	2,463,987	$	2,520,892

(in thousands, except share data; unaudited) September 30, 2018
December 31, 2017
Assets

Cash and due from banks $ 142,718
$ 203,545
Investment securities

Held-to-maturity, at amortized cost 164,222
151,032
Available-for-sale, at fair value 405,571
332,467
Total investment securities 569,793
483,499
Loans, net of allowance for loan losses of $15,817 and $15,767 at
September 30, 2018 and December 31, 2017, respectively 1,713,054
1,663,246
Bank premises and equipment, net 7,602
8,612
Goodwill 30,140
30,140
Core deposit intangible 5,802
6,492
Interest receivable and other assets 76,606
72,620
Total assets $ 2,545,715
$ 2,468,154

Liabilities and Stockholders' Equity

Liabilities

Deposits

Non-interest bearing $ 1,109,909
$ 1,014,103
Interest bearing

Transaction accounts 138,838
169,195
Savings accounts 178,171
178,473
Money market accounts 659,788
626,783
Time accounts 126,140
160,116
Total deposits 2,212,846
2,148,670
Subordinated debentures 5,831
5,739
Interest payable and other liabilities 18,435
16,720
Total liabilities 2,237,112
2,171,129

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 - 6,982,179 and 6,921,542 at
September 30, 2018 and December 31, 2017, respectively 145,498
143,967
Retained earnings 172,723
155,544
Accumulated other comprehensive loss, net of taxes (9,618 ) (2,486 )
Total stockholders' equity 308,603
297,025
Total liabilities and stockholders' equity $ 2,545,715
$ 2,468,154

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, 2018			September 30, 2017			September 30, 2018			September 30, 2017			June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Interest income
Interest and fees on loans	$	20,284		$	16,738		$	58,795		$	49,010		$	20,988		$	19,624		$	41,683		$	38,511
Interest on investment securities													3,763			3,499			7,860			6,656
Securities of U.S. government agencies	2,953			1,525			8,288			4,577
Obligations of state and political subdivisions	546			511			1,788			1,632
Corporate debt securities and other	25			31			104			104
Interest on Federal funds sold and due from banks	400			406			1,088			623
Interest on federal funds sold and due from banks													190			285			329			688
Total interest income	24,208			19,211			70,063			55,946			24,941			23,408			49,872			45,855
Interest expense
Interest on interest-bearing transaction accounts	58			24			158			74			91			48			168			100
Interest on savings accounts	18			17			54			48			17			18			35			36
Interest on money market accounts	337			133			789			360			787			236			1,551			452
Interest on time accounts	130			138			426			423			175			140			294			296
Interest on Federal Home Loan Bank ("FHLB") and other borrowings	1			—			2			—
Interest on borrowings and other obligations													24			1			71			1
Interest on subordinated debentures	125			111			362			328			58			123			118			237
Total interest expense	669			423			1,791			1,233			1,152			566			2,237			1,122
Net interest income	23,539			18,788			68,272			54,713			23,789			22,842			47,635			44,733
Provision for loan losses	—			—			—			—			—			—			—			—
Net interest income after provision for loan losses	23,539			18,788			68,272			54,713			23,789			22,842			47,635			44,733
Non-interest income
Service charges on deposit accounts	475			438			1,407			1,337			485			455			964			932
Wealth Management and Trust Services	490			539			1,493			1,546			473			488			911			1,003
Debit card interchange fees, net	402			390			1,158			1,146			414			360			794			756
Merchant interchange fees, net	99			88			297			296			87			118			174			198
Earnings on bank-owned life insurance	227			209			685			628
Earnings on (cost of) bank-owned life insurance, net													235			230			175			458
Dividends on FHLB stock	194			177			582			585			193			192			389			388
(Losses) gains on investment securities, net	(90		)	—			(79		)	10
Gains on investment securities, net													61			11			55			11
Other income	439			225			1,173			729			326			384			583			734
Total non-interest income	2,236			2,066			6,716			6,277			2,274			2,238			4,045			4,480
Non-interest expense
Salaries and related benefits	8,069			7,344			25,402			22,106			8,868			8,316			18,014			17,333
Occupancy and equipment	1,444			1,364			4,462			4,063			1,578			1,511			3,109			3,018
Depreciation and amortization	532			489			1,625			1,433			572			546			1,128			1,093
Federal Deposit Insurance Corporation insurance	186			167			568			490			174			191			353			382
Data processing	950			946			3,354			2,848			1,004			1,023			2,019			2,404
Professional services	727			801			2,836			1,845			535			810			1,121			2,109
Directors' expense	173			175			530			557			187			183			366			357
Information technology	262			179			795			563			284			264			543			533
Amortization of core deposit intangible													221			230			443			460
Provision for losses on off-balance sheet commitments	—			100			—			57			—			—			129			—
Other expense	1,628			1,471			4,989			4,716			1,493			1,435			3,219			2,901
Total non-interest expense	13,971			13,036			44,561			38,678			14,916			14,509			30,444			30,590
Income before provision for income taxes	11,804			7,818			30,427			22,312			11,147			10,571			21,236			18,623
Provision for income taxes	3,124			2,686			7,467			7,446			2,912			2,680			5,522			4,343
Net income	$	8,680		$	5,132		$	22,960		$	14,866		$	8,235		$	7,891		$	15,714		$	14,280
Net income per common share:
Net income per common share:¹
Basic	$	1.25		$	0.84		$	3.31		$	2.43		$	0.60		$	0.57		$	1.15		$	1.03
Diluted	$	1.23		$	0.83		$	3.27		$	2.41		$	0.60		$	0.56		$	1.13		$	1.02
Weighted average shares:
Weighted average shares:¹
Basic	6,950			6,123			6,936			6,109			13,655			13,888			13,696			13,858
Diluted	7,055			6,191			7,031			6,179			13,818			14,066			13,871			14,039
Comprehensive income:
Net income	$	8,680		$	5,132		$	22,960		$	14,866		$	8,235		$	7,891		$	15,714		$	14,280
Other comprehensive (loss) income
Change in net unrealized gain or loss on available-for-sale securities	(2,120		)	(362		)	(9,421		)	6,309
Reclassification adjustment for losses (gains) on available-for-sale securities in net income	90			—			79			(10		)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity	—			—			(278		)	(3,036		)
Other comprehensive income (loss)
Change in net unrealized gains or losses on available-for-sale securities													8,982			(1,131		)	12,921			(7,301		)
Reclassification adjustment for gains on available-for-sale securities in net income													(61		)	(11		)	(55		)	(11		)
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity													—			(278		)	—			(278		)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	128			135			396			299			104			132			205			268
Subtotal	(1,902		)	(227		)	(9,224		)	3,562			9,025			(1,288		)	13,071			(7,322		)
Deferred tax (benefit) expense	(562		)	(96		)	(2,730		)	1,499
Other comprehensive (loss) income, net of tax	(1,340		)	(131		)	(6,494		)	2,063
Deferred tax expense (benefit)													2,671			(384		)	3,869			(2,168		)
Other comprehensive income (loss), net of tax													6,354			(904		)	9,202			(5,154		)
Comprehensive income	$	7,340		$	5,001		$	16,466		$	16,929		$	14,589		$	6,987		$	24,916		$	9,126

¹Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

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 three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018


(in thousands, except share data; unaudited)	Common Stock					Retained Earnings			Accumulated Other Comprehensive Loss ("AOCI"), Net of Taxes			Total			Common Stock					Retained Earnings			Accumulated Other Comprehensive Income (Loss) ("AOCI"), Net of Taxes			Total
	Shares		Amount												Shares¹		Amount
	Three months ended September 30, 2018														Three months ended June 30, 2019
Balance at July 1, 2018	6,991,821		$	146,195		$	166,281		$	(8,278	)	$	304,198
Balance at April 1, 2019															13,786,808		$	137,125		$	184,793		$	(1,254	)	$	320,664
Net income															—		—			8,235			—			8,235
Other comprehensive income															—		—			—			6,354			6,354
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings															9,333		211			—			—			211
Stock issued under employee stock purchase plan															374		15			—			—			15
Stock issued under employee stock ownership plan ("ESOP")															7,600		312			—			—			312
Restricted stock surrendered for tax withholdings upon vesting															(420	)	(18		)	—			—			(18		)
Restricted stock forfeited / cancelled															(9,932	)	—			—			—			—
Stock-based compensation - stock options															—		55			—			—			55
Stock-based compensation - restricted stock															—		95			—			—			95
Cash dividends paid on common stock ($0.19 per share)															—		—			(2,612		)	—			(2,612		)
Stock repurchased, net of commissions															(134,620	)	(5,644		)	—			—			(5,644		)
Balance at June 30, 2019															13,659,143		$	132,151		$	190,416		$	5,100		$	327,667
															Three months ended June 30, 2018
Balance at April 1, 2018															13,970,252		$	145,282		$	160,556		$	(7,374	)	$	298,464
Net income	—		—			8,680			—			8,680			—		—			7,891			—			7,891
Other comprehensive loss	—		—			—			(1,340		)	(1,340		)	—		—			—			(904		)	(904		)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	1,751		—			—			—			—			4,576		81			—			—			81
Stock issued under employee stock purchase plan	121		9			—			—			9			226		9			—			—			9
Stock issued under employee stock ownership plan ("ESOP")	3,400		297			—			—			297
Stock issued under ESOP															15,800		601			—			—			601
Restricted stock surrendered for tax withholdings upon vesting															(514	)	(17		)	—			—			(17		)
Restricted stock forfeited / cancelled															(3,902	)	—			—			—			—
Stock-based compensation - stock options	—		124			—			—			124			—		126			—			—			126
Stock-based compensation - restricted stock	—		176			—			—			176			—		217			—			—			217
Cash dividends paid on common stock ($0.32 per share)	—		—			(2,238		)	—			(2,238		)
Stock purchased by directors under director stock plan	239		19			—			—			19
Stock issued in payment of director fees	1,392		113			—			—			113
Cash dividends paid on common stock ($0.155 per share¹)															—		—			(2,166		)	—			(2,166		)
Stock repurchased, net of commissions	(16,545	)	(1,435		)	—			—			(1,435		)	(2,796	)	(104		)	—			—			(104		)
Balance at September 30, 2018	6,982,179		$	145,498		$	172,723		$	(9,618	)	$	308,603
	Three months ended September 30, 2017
Balance at July 1, 2017	6,160,952		$	88,949		$	152,883		$	(1,099	)	$	240,733
Net income	—		—			5,132			—			5,132
Other comprehensive loss	—		—			—			(131		)	(131		)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	2,893		—			—			—			—
Stock issued under ESOP	10,000		637			—			—			637
Stock-based compensation - stock options	—		141			—			—			141
Stock-based compensation - restricted stock	—		206			—			—			206
Cash dividends paid on common stock ($0.29 per share)	—		—			(1,788		)	—			(1,788		)
Stock purchased by directors under director stock plan	216		13			—			—			13
Stock issued in payment of director fees	1,690		106			—			—			106
Balance at September 30, 2017	6,175,751		$	90,052		$	156,227		$	(1,230	)	$	245,049
Balance at June 30, 2018															13,983,642		$	146,195		$	166,281		$	(8,278	)	$	304,198

¹Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

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 three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018


(in thousands, except share data; unaudited)	Common Stock					Retained Earnings			Accumulated Other Comprehensive Loss ("AOCI"), Net of Taxes			Total			Common Stock					Retained Earnings			Accumulated Other Comprehensive Income (Loss) ("AOCI"), Net of Taxes			Total
	Shares		Amount												Shares		Amount
															Six months ended June 30, 2019
Balance at January 1, 2019															13,844,353		$	140,565		$	179,944		$	(4,102	)	$	316,407
Net income															—		—			15,714			—			15,714
Other comprehensive income															—		—			—			9,202			9,202
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings															37,475		470			—			—			470
Stock issued under employee stock purchase plan															751		29			—			—			29
Stock issued under ESOP															15,600		625			—			—			625
Restricted stock granted															29,110		—			—			—			—
Restricted stock surrendered for tax withholdings upon vesting															(5,240	)	(220		)	—			—			(220		)
Restricted stock forfeited / cancelled															(17,325	)	—			—			—			—
Stock-based compensation - stock options															—		340			—			—			340
Stock-based compensation - restricted stock															—		664			—			—			664
Cash dividends paid on common stock ($0.38 per share)															—		—			(5,242		)	—			(5,242		)
Stock purchased by directors under director stock plan															199		8			—			—			8
Stock issued in payment of director fees															2,744		114			—			—			114
Stock repurchased, net of commissions															(248,524	)	(10,444		)	—			—			(10,444		)
Balance at June 30, 2019															13,659,143		$	132,151		$	190,416		$	5,100		$	327,667
	Nine months ended September 30, 2018														Six months ended June 30, 2018
Balance at January 1, 2018	6,921,542		$	143,967		$	155,544		$	(2,486	)	$	297,025		13,843,084		$	143,967		$	155,544		$	(2,486	)	$	297,025
Net income	—		—			22,960			—			22,960			—		—			14,280			—			14,280
Other comprehensive loss	—		—			—			(6,494		)	(6,494		)	—		—			—			(5,154		)	(5,154		)
Reclassification of stranded tax effects in AOCI	—		—			638			(638		)	—			—		—			638			(638		)	—
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	51,826		534			—			—			534			100,150		534			—			—			534
Stock issued under employee stock purchase plan	386		28			—			—			28			530		19			—			—			19
Stock issued under ESOP	11,300		898			—			—			898			15,800		601			—			—			601
Restricted stock granted	18,520		—			—			—			—			37,040		—			—			—			—
Restricted stock surrendered for tax withholdings upon vesting	(658	)	(45		)	—			—			(45		)	(1,316	)	(45		)	—			—			(45		)
Restricted stock forfeited / cancelled	(6,028	)	—			—			—			—			(12,056	)	—			—			—			—
Stock-based compensation - stock options	—		566			—			—			566			—		442			—			—			442
Stock-based compensation - restricted stock	—		848			—			—			848			—		672			—			—			672
Cash dividends paid on common stock ($0.92 per share)	—		—			(6,419		)	—			(6,419		)
Cash dividends paid on common stock ($0.30 per share¹)															—		—			(4,181		)	—			(4,181		)
Stock purchased by directors under director stock plan	499		37			—			—			37			520		18			—			—			18
Stock issued in payment of director fees	2,735		204			—			—			204			2,686		91			—			—			91
Stock repurchased, net of commissions	(17,943	)	(1,539		)	—			—			(1,539		)	(2,796	)	(104		)	—			—			(104		)
Balance at September 30, 2018	6,982,179		$	145,498		$	172,723		$	(9,618	)	$	308,603
	Nine months ended September 30, 2017
Balance at January 1, 2017	6,127,314		$	87,392		$	146,464		$	(3,293	)	$	230,563
Net income	—		—			14,866			—			14,866
Other comprehensive income	—		—			—			2,063			2,063
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	8,786		28			—			—			28
Stock issued under employee stock purchase plan	280		17			—			—			17
Stock issued under ESOP	21,732		1,335			—			—			1,335
Restricted stock granted	14,230		—			—			—			—
Stock-based compensation - stock options	—		423			—			—			423
Stock-based compensation - restricted stock	—		634			—			—			634
Cash dividends paid on common stock ($0.83 per share)	—		—			(5,103		)	—			(5,103		)
Stock purchased by directors under director stock plan	531		35			—			—			35
Stock issued in payment of director fees	2,878		188			—			—			188
Balance at September 30, 2017	6,175,751		90,052			156,227			(1,230		)	245,049
Balance at June 30, 2018															13,983,642		146,195			166,281			(8,278		)	304,198

¹Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

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, ~~2018~~2019 and ~~2017~~2018


(in thousands; unaudited)	September 30, 2018			September 30, 2017			June 30, 2019			June 30, 2018
Cash Flows from Operating Activities:
Net income	$	22,960		$	14,866		$	15,714		$	14,280
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on off-balance sheet commitments	—			57			129			—
Noncash contribution expense to employee stock ownership plan	898			637			625			601
Noncash director compensation expense	219			170			151			146
Stock-based compensation expense	1,414			1,057			1,004			1,114
Amortization of core deposit intangible	690			354			443			460
Amortization of investment security premiums, net of accretion of discounts	2,172			2,204			924			1,496
Accretion of discount on acquired loans	(531		)	(706		)	(154		)	(428		)
Accretion of discount on subordinated debentures	92			117			34			63
Net change in deferred loan origination costs/fees	114			85			(146		)	18
Loss (gain) on sale of investment securities	79			(10		)
Gain on sale of investment securities							(55		)	(11		)
Depreciation and amortization	1,625			1,433			1,128			1,093
Gain on sale of repossessed assets	—			(1		)
Earnings on bank-owned life insurance policies	(685		)	(628		)	(175		)	(458		)
Net change in operating assets and liabilities:
Deferred rent and other rent-related expenses	(278		)	38
Interest receivable and other assets	2,780			421			(583		)	(971		)
Interest payable and other liabilities	(265		)	350			(2,131		)	1,364
Total adjustments	8,324			5,578			1,194			4,487
Net cash provided by operating activities	31,284			20,444			16,908			18,767
Cash Flows from Investing Activities:
Purchase of held-to-maturity securities	(1,988		)	(4,496		)	—			(1,989		)
Purchase of available-for-sale securities	(174,617		)	(51,130		)	(11,282		)	(121,269		)
Proceeds from sale of available-for-sale securities	16,972			1,321			66,081			5,006
Proceeds from paydowns/maturities of held-to-maturity securities	15,947			22,352			8,157			9,615
Proceeds from paydowns/maturities of available-for-sale securities	45,917			37,126			41,905			24,540
Loans originated and principal collected, net	(50,315		)	(37,370		)	234			(38,835		)
Purchase of bank-owned life insurance policies							(1,892		)	—
Purchase of premises and equipment	(615		)	(1,143		)	(244		)	(446		)
Proceeds from sale of other real estate owned or repossessed assets	—			170
Cash paid for low-income housing tax credit investment	(389		)	(899		)	(38		)	(373		)
Net cash used in investing activities	(149,088		)	(34,069		)
Net cash provided by (used in) investing activities							102,921			(123,751		)
Cash Flows from Financing Activities:
Net increase in deposits	64,176			118,270
Net decrease in deposits							(72,800		)	(10,947		)
Proceeds from stock options exercised	585			88			470			585
Payment of tax withholdings for stock options exercised and vesting of restricted stock	(96		)	(60		)	(220		)	(96		)
Proceeds from stock issued under employee and director stock purchase plans	65			750			37			37
Stock repurchased, net of commissions	(1,334		)	—			(10,455		)	(104		)
Repayment of Federal Home Loan Bank borrowings							(7,000		)	—
Repayment of finance lease obligations							(83		)	—
Cash dividends paid on common stock	(6,419		)	(5,103		)	(5,242		)	(4,181		)
Net cash provided by financing activities	56,977			113,945
Net (decrease) increase in cash and cash equivalents	(60,827		)	100,320
Cash and cash equivalents at beginning of period	203,545			48,804
Cash and cash equivalents at end of period	$	142,718		$	149,124
Net cash used in financing activities							(95,293		)	(14,706		)
Net increase (decrease) in cash, cash equivalents and restricted cash							24,536			(119,690		)
Cash, cash equivalents and restricted cash at beginning of period							34,221			203,545
Cash, cash equivalents and restricted cash at end of period							$	58,757		$	83,855
Supplemental disclosure of cash flow information:
Cash paid in interest	$	1,737		$	1,131		$	2,191		$	1,083
Cash paid in income taxes	$	4,900		$	6,815		$	6,925		$	2,000
Supplemental disclosure of noncash investing and financing activities:
Change in net unrealized gain or loss on available-for-sale securities	$	(9,421	)	$	6,309		$	12,921		$	(7,301	)
Securities transferred from available-for-sale to held-to-maturity	$	27,422		$	128,965		$	—		$	27,422
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	396		$	299		$	205		$	268
Subscription in low-income housing tax credit investment							$	—		$	(3,000	)
Stock issued to ESOP	$	898		$	637		$	625		$	601
Stock issued in payment of director fees	$	204		$	188		$	114		$	91
Subscription in low-income housing tax credit investment	$	3,000		$	—
Repurchase of stock not yet settled	$	205		$	—		$	132		$	—
Restricted cash:
Federal Reserve Bank reserve balance requirements included in cash, cash equivalents and restricted cash							$	9,709		$	10,915

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

NOTES TO CONSOLIDATEDFINANCIAL 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 Bancorp 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 ~~2017~~2018 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.

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 accounts for its~~condition. Bancorp's investment in the securities of the Trusts is accounted for under the equity method ~~which~~and is included in interest receivable and other assets inon the consolidated statements of condition. Refer to Note 6, Borrowings, for detail on the early redemption on October 7, 2018 of one subordinated debenture due to NorCal Community Bancorp Trust I.

The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic 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 included in the quarterly diluted EPS is computed using the average market prices during the three months included 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. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.



	Three months ended				Six months ended
(in thousands, except per share data)¹	June 30, 2019		June 30, 2018		June 30, 2019		June 30, 2018
Weighted average basic shares outstanding	13,655		13,888		13,696		13,858
Potentially dilutive common shares related to:
Stock options	142		149		149		149
Unvested restricted stock awards	21		29		26		32
Weighted average diluted shares outstanding	13,818		14,066		13,871		14,039
Net income	$	8,235	$	7,891	$	15,714	$	14,280
Basic EPS	$	0.60	$	0.57	$	1.15	$	1.03
Diluted EPS	$	0.60	$	0.56	$	1.13	$	1.02
Weighted average anti-dilutive shares not included in the calculation of diluted EPS	44		60		30		69

Three months ended Nine months ended
(in thousands, except per share data) September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Weighted average basic shares outstanding 6,950
6,123
6,936
6,109
Potentially dilutive common shares related to:
Stock options 88
53
79
55
Unvested restricted stock awards 17
15
16
15
Weighted average diluted shares outstanding 7,055
6,191
7,031
6,179
Net income $ 8,680
$ 5,132
$ 22,960
$ 14,866
Basic EPS $ 1.25
$ 0.84
$ 3.31
$ 2.43
Diluted EPS $ 1.23
$ 0.83
$ 3.27
$ 2.41
Weighted average anti-dilutive shares not included in the calculation of diluted EPS —
23
1
19

~~On October 22, 2018, the Bancorp announced a 2:~~^{1 stock split, payable on November 27, 2018, to shareholders of record at the close of business on November 9, 2018. Pro forma}Share and per share ~~amounts are shown below~~data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

Three months ended Nine months ended
(in thousands, except per share data) September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Basic EPS $ 0.62
$ 0.42
$ 1.66
$ 1.22
Diluted EPS $ 0.62
$ 0.41
$ 1.63
$ 1.20

Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in ~~2018~~2019

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. ~~2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ The core principle of this ASU (and all subsequent updates) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU establishes a five-step model that must be used to recognize revenue that requires the entity to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation. The ASU does not apply to the majority of our revenue, including revenue associated with financial instruments, such as loans and investment securities, and certain non-interest income, such as earnings on bank-owned life insurance, dividends on Federal Home Loan Bank ("FHLB") stock, gains or losses on sales of investment securities, and deposit overdraft charges. The standard allowed the use of either the full retrospective or modified retrospective transition method. We elected to apply the modified retrospective transition method to incomplete contracts as of the initial date of application on January 1, 2018. The adoption of the new standards did not have a material impact on our financial condition or results of operations as revenue recognition under the new standards did not change significantly from our current practice of recognizing the in-scope non-interest income. In addition, we did not retroactively revise prior period amounts or record a cumulative adjustment to retained earnings upon adoption. We considered the nature, amount, timing, and uncertainty of revenue from contracts with customers and determined that significant revenue streams are sufficiently disaggregated in the consolidated statements of comprehensive income.

Descriptions of our significant revenue-generating transactions that are within the scope of the new revenue recognition standards, which are presented in the consolidated statements of comprehensive income as components of non-interest income, are as follows:

Wealth Management & Trust ("WM&T") fees - WM&T services include, but are not limited to: customized investment advisory and management; administrative services such as bill pay and tax reporting; trust administration, estate settlement, custody and fiduciary services. Performance obligations for investment advisory and management services are generally satisfied over time. Revenue is recognized monthly according to a tiered fee schedule based on the client's month-end market value of assets under our management. WM&T does not earn revenue based on performance or incentives. Costs associated with WM&T revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of professional service expenses when incurred.

Deposit account service charges - Service charges on deposit accounts consist of monthly maintenance fees, business account analysis fees, business online banking fees, check order charges, and other deposit account-related fees. Performance obligations for monthly maintenance fees and account analysis fees are satisfied, and the related revenue recognized, when we complete our performance obligation each month. Performance obligations related to transaction-based services (such as check orders) are satisfied, and the related revenue recognized, at a point in time when completed, except for business accounts subject to analysis where the transaction-based fees are part of the monthly account analysis fees.

Debit card interchange fees - We issue debit cards to our consumer and small business customers that allow them to purchase goods and services from merchants in person, online, or via mobile devices using funds held in their demand deposit accounts held with us. Debit cards issued to our customers are part of global

electronic payment networks (such as Visa) who pass a portion of the merchant interchange fees to debit card-issuing member banks like us when our customers make purchases through their networks. Performance obligations for debit card services are satisfied and revenue is recognized daily as the payment networks process transactions. Because we act in an agent capacity, we determined that network costs previously recorded as a component of non-interest expense should be netted with interchange fees recorded in non-interest income.

~~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 accounting standards related to financial instruments, including the following:~~

Requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, 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. When impairment exists, an entity is required to measure the investment at fair value.

Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value required under current standards for financial instruments measured at amortized cost on the consolidated balance sheet.

~~Requires public companies to use the exit price notion when measuring and disclosing the fair value of financial instruments.~~

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.

~~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.~~

We adopted the requirements of this ASU effective January 1, 2018, which did not have a material impact on our financial condition and results of operations. The fair value of our loans held for investment, which is recorded at amortized cost, now incorporates the exit price notion reflecting factors such as a liquidity premium. See Note 3, Fair Value of Assets and Liabilities.

~~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 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. We adopted the requirements of this ASU effective January 1, 2018, which did not impact our financial condition, results of operations, or related financial statement disclosures for the periods presented.

~~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 should be applied prospectively and are effective for annual periods after December 31, 2017, including interim periods within those periods. We adopted the amendments effective January 1, 2018, which did not impact our financial condition, results of operations, or related financial statement disclosures for the periods presented.

~~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 adopted the requirements of this ASU effective January 1, 2018, which did not impact our financial condition, results of operation, or related financial statement disclosures.

~~In August 2017, the FASB issued ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities~~. This amendment changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. It is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We early adopted the amendments of this ASU in the second quarter of 2018, and elected to perform hedge effectiveness assessments using a qualitative approach instead of quantitative regression analysis going forward. The adoption of this ASU had an immaterial impact to our financial results. The amendments also require additional disclosures, which are included in Note 9, Derivative Financial Instruments and Hedging Activities.

~~In February 2018, the FASB issued ASU No. 2018-02,~~ ~~Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~. This amendment helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the enactment of the Tax Cuts and Jobs Act of 2017. The ASU requires financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether or not they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act of 2017, and information about the other income tax effects that are reclassified. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied in either the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. We early adopted this ASU in the first quarter of 2018. See Note 7, Stockholders' Equity.

~~Accounting Standards Not Yet Effective~~

~~In February 2016, the FASB issued ASU No.~~ 2016-02, Leases (Topic 842)(the "new lease accounting standard"). The amendments in this ASU intend to increase transparency and comparability among organizations by recognizing an ~~asset, which represents the right to use the~~operating lease or finance lease right-of-use asset for the lease term, and a lease liability, which is a lessee's obligation to make lease payments, ~~measured~~recorded based on ~~a discounted basis.~~discounting future lease payments under the lease terms. 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 of adoption. In July 2018, the FASB issued two amendments to ASU 2016-02: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which ~~provides~~provided various corrections and clarifications to ASU 2016-02; and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which ~~provides a new~~permitted optional transition ~~method~~methods and ~~provides~~provided lessors with a ~~lessor with~~ practical ~~expedients~~expedient for separating lease and non-lease components of a lease. ~~Early application~~The ASU allowed entities to apply either a modified retrospective approach at the beginning of the ~~amendments is permitted. We intend~~earliest period presented or at the beginning of the period of adoption through a cumulative-effect adjustment to ~~adopt this~~retained earnings, which we adopted.

As a result of the adoption of the ASU ~~during the first quarter~~on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $13.4 million, net of ~~2019, as required. We completed an inventory of our~~deferred rent and unaccreted lease ~~agreements~~incentives, operating and ~~selected a~~finance lease accounting software solution. We are in the process of abstracting and inputting lease-related data, developing policies and procedures, and designing related internal controls. As of September 30, 2018, our undiscounted operating lease obligations that were off-balance sheet totaledliabilities totaling $15.4 million, ~~(See~~and no cumulative-effect adjustments to retained earnings. Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications and did not require us to reassess initial direct costs for any existing leases. In addition, we elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease). We made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications. 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 consolidated balance sheets. 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 retained earnings, capital ratios, results of operations or return on average assets when adopted.Contingencies for further information.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~. Under the new guidance, entities will be required to present financial assets at the net amount expected to be collected. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of a credit over its remaining life. In addition, the ASU amends the accounting for expected credit losses on available-for-sale debt securities and purchased financial assets with 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. We have formed an internal Current Expected Credit Loss ("CECL") committee and are working with our third party vendor to determine

the appropriate methodologies and resources to utilize in preparation for transition to the new accounting standards. The impact of this ASU on our financial condition and results of operations is not known at this time.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees, applying some of the same requirements as employee share-based payment transactions. The ASU will not affect the accounting for share-based payment awards to nonemployee directors, which will continue to be treated as employee share-based transactions under the current standards. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We doadopted the requirements of this ASU effective January 1, 2019, which did not ~~expect that the ASU will have a material~~ impact on our financial condition or results of operations, as it is not our practice to issue stock-based awards to pay for goods and services from nonemployees, other than nonemployee directors.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This update adds an alternative fifth permissible U.S. benchmark rate to be used for hedge accounting purposes. As we have already adopted the amendments in ASU 2017-12, which changed both the designation and measurement guidance for qualifying hedging relationships, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. Early adoption is permitted in any interim period upon issuance of this ASU if an entity already has adopted ASU 2017-12. We adopted this ASU effective January 1, 2019, which did not impact our financial condition or results of operations.

Accounting Standards Not Yet Effective

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace today's "incurred loss" model with a "current expected credit loss" ("CECL") model. The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt

security. Likewise, subsequent changes in this estimate are recorded through credit loss expense and related allowance. The CECL model requires the use of not only relevant historical experience and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for loan losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. 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. Entities will apply a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

While we believe the change from an incurred loss model to a CECL model has the potential to increase the allowance for credit losses at the adoption date, the full impact to our financial condition or results of operations cannot be quantified at this time as we continue to evaluate the applicability and validity of our methodologies and assumptions. In addition, any estimate could be significantly influenced by the composition and risk characteristics of the loan portfolio as well as prevailing economic conditions and forecasts as of the adoption date. Our cross-functional team and our third-party CECL model vendor continue to make progress and we will be ready for adoption on January 1, 2020. Early implementation activities focused on, among other things, capturing and validating data, segmenting the loan portfolio, evaluating various credit loss estimation methodologies, sourcing tools to forecast future economic conditions, and running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default. Continuing implementation activities include refining estimated credit loss model assumptions, evaluating the qualitative factor framework and assumptions, drafting policies and disclosures, and evaluating, documenting and testing internal controls. In addition, we will continue to run parallel tests throughout 2019 to identify opportunities for enhancing our assumptions as the processes, internal controls and policies are finalized.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities should disclose and describe the range and weighted-average of significant observable inputs used to develop Level 3 fair value measurements prospectively. Early adoption is permitted. Entities making this election are permitted to early adopt the eliminated or modified disclosure requirements and delay the adoption of all the new disclosure requirements until the ASU's effective date. ~~We do~~As the ASU’s requirements only relate to disclosures, the amendments will not ~~expect that the ASU will have a material~~ impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, regardless of whether they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity has the option to apply amendments in the ASU either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted, including adoption in an interim period. We do not expect that the ASU will have a material impact on our financial condition or results of operations.

In ~~October 2018,~~March 2019, the FASB issued ASU No. ~~2018-16,~~ ~~Derivatives and Hedging~~2019-01, Leases (Topic ~~815)~~842): ~~Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes~~Codification Improvements. This ~~update adds an alternative fifth permissible U.S. benchmark rate~~ASU addresses two lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with adopting ASU 2016-02. The amendments related to ~~be used~~the lessor implementation issues are effective for hedge accounting purposes. As we have already adopted the amendments in ASU 2017-12, which changed both the designation and measurement guidance for qualifying hedging relationships, the amendments in ASU 2018-16 are effectivepublic business entities for fiscal years beginning after December 15, ~~2018,~~2019, and interim periods

within those fiscal years. Early application is permitted. As the ASU's amendments applicable to us only relate to disclosures, the adoption ~~is permitted in any interim period upon issuance~~of ASU 2019-01 will not impact our financial condition or results of operations.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU ~~if an entity already has adopted ASU 2017-12.~~are effective January 1, 2020 and contain various methods of adoption. We ~~expect this amendment to affect the presentation of our hedging activities, but we~~ do not expect ~~it to~~that the ASU will have a material impact on our financial condition or results of operations.

In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and 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 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. No such transfers occurred during the first ~~nine~~three and six months of ~~2018~~2019 or ~~2017.~~2018.

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)

Measurement Categories: Changes in Fair Value Recorded In¹
September 30, 2018

Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies $ 246,220
$ —
$ 246,220
$ —
OCI
SBA-backed securities 40,181
—
40,181
—
OCI
Debentures of government sponsored agencies 42,914
—
42,914
—
OCI
Privately-issued collateralized mortgage obligations 370
—
370
—
OCI
Obligations of state and political subdivisions 73,373
—
73,373
—
OCI
Corporate bonds 2,513
—
2,513
—
OCI
Derivative financial assets (interest rate contracts) 436
—
436
—
NI
Derivative financial liabilities (interest rate contracts) 163
—
163
—
NI
December 31, 2017

Securities available-for-sale:

Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies $ 188,061
$ —
$ 188,061
$ —
OCI
SBA-backed securities 25,982
—
25,817
165
OCI
Debentures of government sponsored agencies 12,938
—
12,938
—
OCI
Privately-issued collateralized mortgage obligations 1,431
—
1,431
—
OCI
Obligations of state and political subdivisions 97,491
—
97,491
—
OCI
Corporate bonds 6,564
—
6,564
—
OCI
Derivative financial assets (interest rate contracts) 74
—
74
—
NI
Derivative financial liabilities (interest rate contracts) 740
—
740
—
NI



(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)		Measurement Categories: Changes in Fair Value Recorded In¹
June 30, 2019
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	258,115	$	—	$	258,115	$	—	OCI
SBA-backed securities	39,805		—		39,805		—		OCI
Debentures of government sponsored agencies	28,784		—		28,784		—		OCI
Privately-issued collateralized mortgage obligations	159		—		159		—		OCI
Obligations of state and political subdivisions	49,259		—		49,259		—		OCI
Corporate bonds	2,009		—		2,009		—		OCI
Derivative financial assets (interest rate contracts)	—		—		—		—		NI
Derivative financial liabilities (interest rate contracts)	1,118		—		1,118		—		NI
December 31, 2018
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	278,403	$	—	$	278,403	$	—	OCI
SBA-backed securities	50,781		—		50,781		—		OCI
Debentures of government sponsored agencies	53,018		—		53,018		—		OCI
Privately-issued collateralized mortgage obligations	297		—		297		—		OCI
Obligations of state and political subdivisions	77,960		—		77,960		—		OCI
Corporate bonds	2,005		—		2,005		—		OCI
Derivative financial assets (interest rate contracts)	161		—		161		—		NI
Derivative financial liabilities (interest rate contracts)	375		—		375		—		NI

¹Other comprehensive income ("OCI") or net income ("NI").

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 ~~providers,~~provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2). Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, and corporate bonds. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018, there were no Level 1 ~~securities. As of December 31, 2017, we had one~~or Level 3 ~~available-for-sale U.S. government agency obligation, which was paid off during the second quarter of 2018.~~securities.

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 other-than-temporary impairment, and we did not record any write-downs during the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 or ~~September~~June 30, ~~2017.~~2018.

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 us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 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 that are collateral dependent and other real estate owned ("OREO"). As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

The ~~following~~ table ~~summarizes~~below is a summary of fair value estimates for financial instruments as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we hold shares of FHLB stock and Visa Inc. Class B common stock, both recorded at ~~cost. These shares are restricted~~cost, as there was no impairment or changes resulting from ~~resale, except among member banks,~~observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, 2019 and ~~their~~December 31, 2018. The values are discussed in Note 4, Investment Securities.



	June 30, 2019					December 31, 2018
(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets (recorded at amortized cost)
Cash and cash equivalents	$	58,757	$	58,757	Level 1	$	34,221	$	34,221	Level 1
Investment securities held-to-maturity	148,879		151,118		Level 2	157,206		153,894		Level 2
Loans, net	1,749,044		1,760,974		Level 3	1,748,043		1,700,971		Level 3
Interest receivable	8,071		8,071		Level 2	8,292		8,292		Level 2
Financial liabilities (recorded at amortized cost)
Time deposits	104,306		103,359		Level 2	117,182		116,584		Level 2
Federal Home Loan Bank overnight borrowings	—		—		Level 2	7,000		7,000		Level 2
Subordinated debentures	2,674		3,289		Level 3	2,640		3,268		Level 3
Interest payable	115		115		Level 2	104		104		Level 2

September 30, 2018 December 31, 2017
(in thousands) Carrying Amounts
Fair Value
Fair Value Hierarchy Carrying Amounts
Fair Value
Fair Value Hierarchy
Financial assets (recorded at amortized cost)
Cash and cash equivalents $ 142,718
$ 142,718
Level 1 $ 203,545
$ 203,545
Level 1
Investment securities held-to-maturity 164,222
158,106
Level 2 151,032
151,032
Level 2
Loans, net 1,713,054
1,683,109
Level 3 1,663,246
1,650,198
Level 3
Interest receivable 7,366
7,366
Level 2 7,501
7,501
Level 2
Financial liabilities (recorded at amortized cost)

Time deposits 126,140
124,796
Level 2 160,116
159,540
Level 2
Subordinated debentures 5,831
7,505
Level 3 5,739
5,118
Level 3
Interest payable 155
155
Level 2 191
191
Level 2

Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material ~~at September~~as of June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

Note 4: Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, ~~corporate bonds,~~ U.S. corporations, U.S. federal government ~~agency securities, including residential and commercial mortgage-backed securities (“MBS”~~agencies such as Government National Mortgage Association ("GNMA") and ~~collateralized mortgage obligations (“CMOs”~~Small Business Administration ("SBA") ~~issued or guaranteed by~~, U.S. government-sponsored enterprise securities ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), ~~Small Business Administration ("SBA"), or Government National Mortgage Association ("GNMA"), debentures issued by government-sponsored agencies such~~

~~as FNMA,~~ Federal Farm Credit ~~Bureau, FHLB~~Banks Funding Corporation and ~~FHLMC,~~FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, and privately issued CMOs, as reflected in the following ~~table.~~table:

September 30, 2018 December 31, 2017
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
(in thousands) Cost Value Gains (Losses) Cost Value Gains (Losses)
Held-to-maturity:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA $ 91,237
$ 86,962
$ —
$ (4,275 )
$ 100,376
$ 100,096
$ 234
$ (514 )
SBA-backed securities 8,723
8,489
—
(234 ) —
—
—
—
CMOs issued by FNMA 11,646
11,254
—
(392 ) —
—
—
—
CMOs issued by FHLMC 34,169
32,868
—
(1,301 ) 31,010
30,938
2
(74 )
CMOs issued by GNMA 3,734
3,694
—
(40 ) —
—
—
—
Obligations of state and
political subdivisions
14,713
14,839
160
(34 ) 19,646
19,998
383
(31 )
Total held-to-maturity 164,222
158,106
160
(6,276 )
151,032
151,032
619
(619 )
Available-for-sale:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA 93,096
90,484
20
(2,632 )
65,559
65,262
126
(423 )
SBA-backed securities 41,074
40,181
—
(893 ) 25,979
25,982
58
(55 )
CMOs issued by FNMA 19,914
19,356
4
(562 )
35,340
35,125
33
(248 )
CMOs issued by FHLMC 128,848
124,930
1
(3,919 )
70,514
69,889
3
(628 )
CMOs issued by GNMA 11,938
11,450
—
(488 )
17,953
17,785
26
(194 )
Debentures of government- sponsored agencies 43,470
42,914
—
(556 )
12,940
12,938
3
(5 )
Privately issued CMOs 367
370
3
—

1,432
1,431
1
(2 )
Obligations of state and
political subdivisions
75,519
73,373
41
(2,187 )
98,027
97,491
298
(834 )
Corporate bonds 2,506
2,513
19
(12 )
6,541
6,564
26
(3 )
Total available-for-sale 416,732
405,571
88
(11,249 )
334,285
332,467
574
(2,392 )
Total investment securities $ 580,954
$ 563,677
$ 248
$ (17,525 )
$ 485,317
$ 483,499
$ 1,193
$ (3,011 )



	June 30, 2019									December 31, 2018
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)
Held-to-maturity:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	83,493	$	84,121	$	967	$	(339	)	$	88,606	$	85,804	$	7	$	(2,809	)
SBA-backed securities	8,401		8,779		378		—			8,720		8,757		37		—
CMOs issued by FNMA	10,972		11,250		278		—			11,447		11,327		—		(120		)
CMOs issued by FHLMC	33,095		33,880		805		(20		)	33,583		33,021		8		(570		)
CMOs issued by GNMA	3,750		3,810		60		—			3,739		3,769		30		—
Obligations of state and political subdivisions	9,168		9,278		110		—			11,111		11,216		128		(23		)
Total held-to-maturity	148,879		151,118		2,598		(359		)	157,206		153,894		210		(3,522		)
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	70,550		72,144		1,644		(50		)	95,339		94,467		358		(1,230		)
SBA-backed securities	38,363		39,805		1,498		(56		)	50,722		50,781		465		(406		)
CMOs issued by FNMA	25,832		26,175		352		(9		)	28,275		28,079		134		(330		)
CMOs issued by FHLMC	142,175		146,528		4,410		(57		)	145,979		144,836		454		(1,597		)
CMOs issued by GNMA	13,275		13,268		33		(40		)	11,294		11,021		1		(274		)
Debentures of government- sponsored agencies	28,035		28,784		749		—			52,956		53,018		185		(123		)
Privately issued CMOs	159		159		1		(1		)	295		297		2		—
Obligations of state and political subdivisions	48,323		49,259		1,012		(76		)	79,046		77,960		134		(1,220		)
Corporate bonds	2,000		2,009		10		(1		)	2,004		2,005		15		(14		)
Total available-for-sale	368,712		378,131		9,709		(290		)	465,910		462,464		1,748		(5,194		)
Total investment securities	$	517,591	$	529,249	$	12,307	$	(649	)	$	623,116	$	616,358	$	1,958	$	(8,716	)

The amortized cost and fair value of investment debt securities by contractual maturity at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 are shown in the following ~~table.~~table below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.



	June 30, 2019								December 31, 2018
	Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	6,088	$	6,095	$	9,763	$	9,753	$	6,194	$	6,182	$	9,863	$	9,795
After one but within five years	3,637		3,694		64,474		65,498		5,481		5,492		84,871		84,435
After five years through ten years	57,679		59,303		195,243		201,925		59,231		58,120		252,274		250,055
After ten years	81,475		82,026		99,232		100,955		86,300		84,100		118,902		118,179
Total	$	148,879	$	151,118	$	368,712	$	378,131	$	157,206	$	153,894	$	465,910	$	462,464

September 30, 2018 December 31, 2017
Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Within one year $ 2,677
$ 2,697
$ 10,111
$ 10,031
$ 2,151
$ 2,172
$ 10,268
$ 10,272
After one but within five years 12,476
12,438
69,230
67,972
15,577
15,791
71,576
71,237
After five years through ten years 60,422
58,041
239,939
232,532
54,641
54,554
129,723
128,954
After ten years 88,647
84,930
97,452
95,036
78,663
78,515
122,718
122,004
Total $ 164,222
$ 158,106
$ 416,732
$ 405,571
$ 151,032
$ 151,032
$ 334,285
$ 332,467

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



	Three months ended						Six months ended
(in thousands)	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Available-for-sale:
Sales proceeds	$	61,852		$	5,006		$	66,081		$	5,006
Gross realized gains	211			27			214			27
Gross realized losses	(150		)	(16		)	(159		)	(16		)

Three months ended Nine months ended
(in thousands) September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Available-for-sale:
Sales proceeds $ 11,966
$ —
$ 16,972
$ 1,321
Gross realized gains —
—
27
13
Gross realized losses (90 ) —
(106 ) (3 )

Pledged investment securities are shown in the following table.



(in thousands)	June 30, 2019		December 31, 2018
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	97,974	$	125,696
Collateral for trust deposits	723		734
Total investment securities pledged to the State of California	$	98,697	$	126,430
Collateral for Wealth Management and Trust Services checking account	$	1,990	$	2,000

(in thousands) September 30, 2018 December 31, 2017
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program $ 97,978
$ 107,829
Collateral for trust deposits 740
761
Total investment securities pledged to the State of California $ 98,718
$ 108,590
Collateral for Wealth Management and Trust Services checking account $ 2,005
$ 2,026

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. During 2018 and 2017, we transferred $27.4 million and $129.0 million, respectively, of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $278 thousand and $3.0 million, at the respective transfer dates, remained in accumulated other comprehensive income and are amortized over the remaining lives of the securities. Amortization of the net unrealized pre-tax losses totaled $396 thousand and $299 thousand for the nine months ended September 30, 2018 and 2017, respectively.

Other-Than-Temporarily Impaired ("OTTI") Debt Securities

There were ~~253~~56 and ~~198investment~~ 229securities in unrealized loss positions at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Those securities are summarized and classified according to the duration of the loss period in the ~~following tables:~~tables below:


September 30, 2018	< 12 continuous months					≥ 12 continuous months					Total securities in a loss position
June 30, 2019																< 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:
MBS pass-through securities issued by FHLMC and FNMA	$	6,602	$	(225	)	$	80,360	$	(4,050	)	$	86,962	$	(4,275	)	$	343	$	(3	)	$	34,714	$	(336	)	$	35,057	$	(339	)
SBA-backed securities	8,489		(234		)	—		—			$	8,489	$	(234	)
CMOs issued by FNMA	11,254		(392		)	—		—			11,254		(392		)
CMOs issued by FHLMC	11,430		(400		)	21,438		(901		)	32,868		(1,301		)	—		—			3,205		(20		)	3,205		(20		)
CMOs issued by GNMA	—		—			3,694		(40		)	3,694		(40		)
Obligations of state and political subdivisions	3,792		(34		)	—		—			3,792		(34		)
Total held-to-maturity	41,567		(1,285		)	105,492		(4,991		)	147,059		(6,276		)	343		(3		)	37,919		(356		)	38,262		(359		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	52,821		(1,804		)	20,406		(828		)	73,227		(2,632		)	—		—			13,537		(50		)	13,537		(50		)
SBA-backed securities	23,162		(893		)	—		—			23,162		(893		)	—		—			3,113		(56		)	3,113		(56		)
CMOs issued by FNMA	13,230		(383		)	5,905		(179		)	19,135		(562		)	—		—			3,877		(9		)	3,877		(9		)
CMOs issued by FHLMC	87,017		(2,930		)	29,702		(989		)	116,719		(3,919		)	8,153		(2		)	17,767		(55		)	25,920		(57		)
CMOs issued by GNMA	10,728		(485		)	485		(3		)	11,213		(488		)	56		(1		)	7,948		(39		)	8,004		(40		)
Debentures of government- sponsored agencies	37,831		(556		)	—		—			37,831		(556		)	—		—			—		—			—		—
Privately issued CMOs																81		(1		)	—		—			81		(1		)
Obligations of state and political subdivisions	44,714		(785		)	21,543		(1,402		)	66,257		(2,187		)	—		—			9,395		(76		)	9,395		(76		)
Corporate bonds	1,010		(12		)	—		—			1,010		(12		)	—		—			1,008		(1		)	1,008		(1		)
Total available-for-sale	270,513		(7,848		)	78,041		(3,401		)	348,554		(11,249		)	8,290		(4		)	56,645		(286		)	64,935		(290		)
Total temporarily impaired securities	$	312,080	$	(9,133	)	$	183,533	$	(8,392	)	$	495,613	$	(17,525	)	$	8,633	$	(7	)	$	94,564	$	(642	)	$	103,197	$	(649	)

December 31, 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
Held-to-maturity:
Obligations of state and political subdivisions $ 3,648
$ (31 ) $ —
$ —
$ 3,648
$ (31 )
MBS pass-through securities issued by FHLMC and FNMA 16,337
(143 ) 46,845
(371 ) 63,182
(514 )
CMOs issued by FHLMC 11,066
(31 ) 13,824
(43 ) 24,890
(74 )
Total held-to-maturity 31,051
(205 ) 60,669
(414 ) 91,720
(619 )
Available-for-sale:

MBS pass-through securities issued by FHLMC and FNMA 32,189
(121 ) 15,325
(302 ) 47,514
(423 )
SBA-backed securities 11,028
(53 ) 165
(2 ) 11,193
(55 )
CMOs issued by FNMA 26,401
(171 ) 5,440
(77 ) 31,841
(248 )
CMOs issued by FHLMC 69,276
(628 ) —
—
69,276
(628 )
CMOs issued by GNMA 14,230
(194 ) —
—
14,230
(194 )
Debentures of government- sponsored agencies 2,984
(5 ) —
—
2,984
(5 )
Privately issued CMO's 1,310
(2 ) —
—
1,310
(2 )
Obligations of state and political subdivisions 52,197
(288 ) 19,548
(546 ) 71,745
(834 )
Corporate bonds 3,060
(3 ) —
—
3,060
(3 )
Total available-for-sale 212,675
(1,465 ) 40,478
(927 ) 253,153
(2,392 )
Total temporarily impaired securities $ 243,726
$ (1,670 ) $ 101,147
$ (1,341 ) $ 344,873
$ (3,011 )



December 31, 2018	< 12 continuous months					≥ 12 continuous months					Total securities in a loss position
(in thousands)	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA	$	198	$	(9	)	$	83,990	$	(2,800	)	$	84,188	$	(2,809	)
CMOs issued by FNMA	—		—			11,327		(120		)	11,327		(120		)
CMOs issued by FHLMC	2,880		(3		)	28,171		(567		)	31,051		(570		)
Obligations of state and political subdivisions	—		—			3,565		(23		)	3,565		(23		)
Total held-to-maturity	3,078		(12		)	127,053		(3,510		)	130,131		(3,522		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	19,971		(128		)	50,077		(1,102		)	70,048		(1,230		)
SBA-backed securities	13,175		(122		)	20,123		(284		)	33,298		(406		)
CMOs issued by FNMA	2,345		(8		)	16,138		(322		)	18,483		(330		)
CMOs issued by FHLMC	24,094		(330		)	74,243		(1,267		)	98,337		(1,597		)
CMOs issued by GNMA	1,666		(7		)	9,112		(267		)	10,778		(274		)
Debentures of government- sponsored agencies	4,992		(8		)	11,349		(115		)	16,341		(123		)
Obligations of state and political subdivisions	15,290		(54		)	52,804		(1,166		)	68,094		(1,220		)
Corporate Bonds	—		—			1,004		(14		)	1,004		(14		)
Total available-for-sale	81,533		(657		)	234,850		(4,537		)	316,383		(5,194		)
Total temporarily impaired securities	$	84,611	$	(669	)	$	361,903	$	(8,047	)	$	446,514	$	(8,716	)

As of ~~September~~June 30, ~~2018,~~2019, the investment portfolio included 8348 investment securities that had been in a continuous ~~unrealized~~ loss position for twelve months or more and ~~170~~8 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.

Other temporarily impaired securities, including obligations of state and political subdivisions and corporate bonds, were deemed credit worthy after our internal analyses of the issuers’ latest financial information, credit ratings by major credit ~~rating~~ agencies, and/or credit enhancements.

Based on our comprehensive analyses, we determined that the decline in the fair values of these securities was primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At ~~September~~June 30, ~~2018,~~2019, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more likely than not that we ~~are~~will not be required to sell any of the securities with unrealized losses before recovery of their amortized cost. Therefore, we do not consider these investment securities to be other-than-temporarily impaired at ~~September~~June 30, ~~2018.~~2019.

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 $11.7 million and $11.1 million of FHLB stock ~~recorded at cost~~included in other assets inon the consolidated statements of condition at ~~both September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018, 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~~Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock ~~is other-than-temporarily-impaired, due to FHLB's current financial condition.~~was not impaired at June 30, 2019 and December 31, 2018. On ~~October~~July 25, ~~2018,~~2019, FHLB announced a cash dividend ~~to be distributed in mid-November 2018~~for the second quarter of 2019 at an annualized dividend rate of 7.00%. to be distributed in mid-August 2019. 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~~held 10,439 shares of Visa Inc. Class B common stock ~~with~~at June 30, 2019 and December 31, 2018. These shares have a carrying value of zero ~~which is equal to our cost basis. These shares~~and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the ~~conversation~~conversion rate to Class A shares, these shares lack a readily determinable ~~fair value and are not classified as available-for-sale securities nor are they carried at~~ fair value. When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6298 both as of ~~September~~June 30, ~~2018~~2019 and ~~1.6483 as of~~ December 31, ~~2017,~~2018, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been ~~$4.1~~$3.0 million and ~~$3.2~~$2.2 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.

On October 25, 2018, we entered into an agreement to sell 6,500 shares of our holdings of Visa Class B common stock to a member bank of Visa U.S.A. to be settled in the fourth quarter of 2018, and the estimated net pre-tax gain from the sale is $955 thousand.

We invest in low-income housing tax credit funds as a limited partner, which totaled ~~$4.8~~$4.4 million and ~~$2.1~~$4.6 million recorded in other assets as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. WeIn the first six months of 2019, we recognized ~~$173 thousand and $454~~$305 thousand of low-income housing tax credits and other tax benefits, ~~net of $144 thousand and $381~~offset by $232 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax ~~expense in the three and nine months ended September 30, 2018, respectively.~~expense. As of ~~September~~June 30, ~~2018,~~2019, our unfunded commitments for these low-income housing tax credit funds totaled ~~$3.2~~$3.1 million. We did not recognize any impairment losses on these low-income housing tax credit investments during the ~~three and nine~~first six months ~~ended September 30,~~of 2019 or 2018, ~~or 2017,~~ as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5: Loans and Allowance for Loan Losses

Credit Quality of Loans

The following table shows outstanding loans by class and payment aging as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018.



Loan Aging Analysis by Class
(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, 2019
30-59 days past due	$	—	$	—	$	—	$	—	$	272	$	—	$	144	$	416
60-89 days past due	—		—		—		—		—		—		20		20
90 days or more past due	—		—		—		—		84		—		—		84
Total past due	—		—		—		—		356		—		164		520
Current	234,832		306,327		878,969		63,563		125,612		124,120		30,936		1,764,359
Total loans ²	$	234,832	$	306,327	$	878,969	$	63,563	$	125,968	$	124,120	$	31,100	$	1,764,879
Non-accrual loans ¹	$	354	$	—	$	—	$	—	$	157	$	—	$	63	$	574
December 31, 2018
30-59 days past due	$	5	$	—	$	1,004	$	—	$	—	$	—	$	112	$	1,121
60-89 days past due	—		—		—		—		—		—		—		—
90 days or more past due	—		—		—		—		—		—		—		—
Total past due	5		—		1,004		—		—		—		112		1,121
Current	230,734		313,277		872,406		76,423		124,696		117,847		27,360		1,762,743
Total loans ²	$	230,739	$	313,277	$	873,410	$	76,423	$	124,696	$	117,847	$	27,472	$	1,763,864
Non-accrual loans ¹	$	319	$	—	$	—	$	—	$	313	$	—	$	65	$	697

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
September 30, 2018

30-59 days past due $ —
$ —
$ —
$ —
$ 121
$ —
$ 113
$ 234
60-89 days past due 20
—
—
—
—
—
47
67
90 days or more past due —
—
—
—
—
—
—
—
Total past due 20
—
—
—
121
—
160
301
Current 238,751
316,467
841,493
68,739
121,122
113,383
28,615
1,728,570
Total loans ³
$ 238,771
$ 316,467
$ 841,493
$ 68,739
$ 121,243
$ 113,383
$ 28,775
$ 1,728,871
Non-accrual loans ²
$ —
$ —
$ —
$ —
$ 318
$ —
$ 68
$ 386
December 31, 2017

30-59 days past due $ —
$ —
$ —
$ —
$ 99
$ 255
$ 330
$ 684
60-89 days past due 1,340
—
—
—
—
—
—
1,340
90 days or more past due —
—
—
—
307
—
—
307
Total past due 1,340
—
—
—
406
255
330
2,331
Current 234,495
300,963
822,984
63,828
132,061
95,271
27,080
1,676,682
Total loans ³
$ 235,835
$ 300,963
$ 822,984
$ 63,828
$ 132,467
$ 95,526
$ 27,410
$ 1,679,013
Non-accrual loans ²
$ —
$ —
$ —
$ —
$ 406
$ —
$ —
$ 406

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 Includes no purchased credit impaired ("PCI") loans at ~~September~~June 30, ~~2018. Three PCI loans with unpaid balances totaling $131 thousand~~2019 and ~~no carrying values were not accreting interest at~~ December 31, ~~2017.~~2018. Amounts exclude accreting PCI loans with carrying values totaling $2.1 million at ~~both September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018, 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. There were no accruing loans past due more than ninety days at ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

³² Amounts include net deferred loan origination costs of ~~$704~~$781 thousand and ~~$818~~$635 thousand at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of ~~$922~~$669 thousand and ~~$1.2 million~~$708 thousand at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

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

such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress.

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, a large majority of our loans are guaranteed by the owners of the ~~properties guarantee substantially all of our commercial real estate loans.~~properties. Conditions in the real estate markets or in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.

WeConstruction loans are generally ~~make construction loans~~made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loan borrowers provide for interest reserves that are used for the payment of interest during the development and marketing periods. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit, other residential loans and floating homes, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.

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

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

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

Substandard: Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or 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 we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers are usually required to submit rent rolls or property income statements annually. We monitor construction loans ~~monthly and review them on an ongoing basis.~~monthly. We review home equity and other consumer loans based on ~~delinquency status.~~delinquency. We also review loans graded “Watch” or worse, regardless of loan type, 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 PCI loans, at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.



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
June 30, 2019
Pass	$	208,201	$	285,221	$	875,504	$	63,563	$	123,440	$	124,120	$	30,947	$	2,081	$	1,713,077
Special Mention	25,926		10,861		2,643		—		2,121		—		—		—		41,551
Substandard	688		9,080		—		—		330		—		153		—		10,251
Total loans	$	234,815	$	305,162	$	878,147	$	63,563	$	125,891	$	124,120	$	31,100	$	2,081	$	1,764,879
December 31, 2018
Pass	$	219,625	$	299,998	$	870,443	$	73,735	$	122,844	$	117,847	$	27,312	$	2,112	$	1,733,916
Special Mention	9,957		4,106		2,156		—		1,121		—		—		—		17,340
Substandard	1,126		7,986		—		2,688		648		—		160		—		12,608
Total loans	$	230,708	$	312,090	$	872,599	$	76,423	$	124,613	$	117,847	$	27,472	$	2,112	$	1,763,864

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
September 30, 2018
Pass $ 223,259
$ 302,082
$ 838,493
$ 66,049
$ 119,383
$ 113,383
$ 28,611
$ 2,129
$ 1,693,389
Special Mention 14,574
5,192
2,194
—
1,121
—
—
—
23,081
Substandard 899
7,995
—
2,690
653
—
164
—
12,401
Total loans $ 238,732
$ 315,269
$ 840,687
$ 68,739
$ 121,157
$ 113,383
$ 28,775
$ 2,129
$ 1,728,871
December 31, 2017

Pass $ 214,636
$ 281,104
$ 818,570
$ 60,859
$ 130,558
$ 95,526
$ 27,287
$ 1,325
$ 1,629,865
Special Mention 9,318
9,284
1,850
—
—
—
—
790
21,242
Substandard 11,816
9,409
1,774
2,969
1,815
—
123
—
27,906
Total loans $ 235,770
$ 299,797
$ 822,194
$ 63,828
$ 132,373
$ 95,526
$ 27,410
$ 2,115
$ 1,679,013

Troubled Debt Restructuring

Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and 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.

We may remove a loan from TDR designation if it meets all of the following conditions:

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

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

Performance on the loan is reasonably assured; ~~and;~~and

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

The same Management level that approved the ~~upgrading of the~~ loan classification upgrade must approve the removal of TDR status. ~~During the nine months ended September 30, 2018,~~There was one commercial loan with a recorded investment of $3 thousand and one TIC loan ~~and one home equity loan~~ with a recorded ~~investments totaling $247~~investment of $150 thousand ~~were~~ removed from TDR designation during the six months ended June 30, 2019 and 2018, respectively, after meeting all of the conditions ~~noted~~ above. ~~There were no loans removed from TDR designation during 2017.~~

The following table summarizes the carrying amount of TDR loans by loan class as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.


(in thousands)
Recorded investment in Troubled Debt Restructurings ¹	September 30, 2018		December 31, 2017
Recorded Investment in Troubled Debt Restructurings ¹					June 30, 2019		December 31, 2018
Commercial and industrial	$	1,763	$	2,165	$	1,433	$	1,506
Commercial real estate, owner-occupied	6,997		6,999		7,000		6,993
Commercial real estate, investor	1,831		2,171		1,796		1,821
Construction	2,690		2,969		488		2,688
Home equity	251		347		251		251
Other residential	986		1,148		457		462
Installment and other consumer	695		721		665		685
Total	$	15,213	$	16,520	$	12,090	$	14,406

¹There were ~~two~~no acquired TDR loans ~~with recorded investments totaling $68 thousand on non-accrual status at September~~as of June 30, ~~2018 and no~~2019 or December 31, 2018. TDR loans on non-accrual status totaled $361 thousand and $65 thousand at ~~December 31, 2017. Includes no acquired loans on TDR status as of September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018, respectively.

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



~~(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~~
~~TDRs during the three months ended September 30, 2018:~~
~~None~~	—	$	—	$	—	$	—
~~TDRs during the three months ended September 30, 2017:~~
~~None~~	—	$	—	$	—	$	—



(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
TDRs during the three months ended June 30, 2019:
Commercial and industrial	1	$	298	$	298	$	298
TDRs during the three months ended June 30, 2018:
Commercial and industrial	2	$	254	$	245	$	235

TDRs during the nine months ended September 30, 2018:
Commercial and industrial 2
$ 254
$ 245
$ 235
TDRs during the nine months ended September 30, 2017:

Installment and consumer 1
$ 50
$ 50
$ 49



TDRs during the six months ended June 30, 2019:
Commercial and industrial	1	$	298	$	298	$	298
TDRs during the six months ended June 30, 2018:
Commercial and industrial	2	$	254	$	245	$	235

The loan modified during the first six months of 2019 reflected a maturity extension and interest rate concession. The two loans ~~that were~~ modified during the ~~nine~~first six months ~~ended September 30,~~of 2018 were to the same borrower and included ~~loan~~maturity extensions and other changes in loan terms. ~~The modification during the nine months endedSeptember 30, 2017 primarily involved an interest rate concession and other changes to loan terms.~~ During the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, 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 Loans

The following tables summarize information by class on impaired loans and their related 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, 2018

Recorded investment in impaired loans:
With no specific allowance recorded $ 304
$ —
$ —
$ 2,690
$ 318
$ 986
$ 113
$ 4,411
With a specific allowance recorded 1,459
6,997
1,831
—
251
—
582
11,120
Total recorded investment in impaired loans $ 1,763
$ 6,997
$ 1,831
$ 2,690
$ 569
$ 986
$ 695
$ 15,531
Unpaid principal balance of impaired loans $ 1,751
$ 6,993
$ 1,824
$ 2,688
$ 567
$ 985
$ 694
$ 15,502
Specific allowance 173
228
44
—
5
—
77
527
Average recorded investment in impaired loans during the quarter ended
September 30, 2018 1,840
7,000
1,837
2,690
651
987
700
15,705
Interest income recognized on impaired loans during the quarter ended
September 30, 2018¹
31
67
20
39
5
13
7
182
Average recorded investment in impaired loans during the nine months ended
September 30, 2018 2,019
7,002
1,925
2,831
698
1,029
708
16,212
Interest income recognized on impaired loans during the nine months ended
September 30, 2018 ¹
214
199
63
114
15
38
22
665
Average recorded investment in impaired loans during the quarter ended
September 30, 2017 2,063
7,000
3,236
3,104
607
1,164
802
17,976
Interest income recognized on impaired loans during the quarter ended
September 30, 2017¹
27
67
22
39
5
14
9
183
Average recorded investment in impaired loans during the nine months ended
September 30, 2017 2,100
6,998
3,010
3,174
660
1,367
871
18,180
Interest income recognized on impaired loans during the nine months ended
September 30, 2017 ¹
74
199
65
110
19
48
29
544



(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, 2019
Recorded investment in impaired loans:
With no specific allowance recorded	$	320	$	—	$	—	$	488	$	157	$	457	$	105	$	1,527
With a specific allowance recorded	1,169		7,000		1,796		—		251		—		560		10,776
Total recorded investment in impaired loans	$	1,489	$	7,000	$	1,796	$	488	$	408	$	457	$	665	$	12,303
Unpaid principal balance of impaired loans	$	1,472	$	6,993	$	1,789	$	486	$	407	$	456	$	664	$	12,267
Specific allowance	342		123		42		—		5		—		64		576
Average recorded investment in impaired loans during the quarter ended June 30, 2019	1,498		7,000		1,804		1,590		503		458		670		13,523
Interest income recognized on impaired loans during the quarter ended June 30, 2019¹	19		66		20		13		29		5		6		158
Average recorded investment in impaired loans during the six months ended June 30, 2019	1,607		6,998		1,809		1,956		523		460		675		14,028
Interest income recognized on impaired loans during the six months ended June 30, 2019¹	41		132		39		56		33		9		13		323
Average recorded investment in impaired loans during the quarter ended June 30, 2018	2,092		7,005		1,849		2,833		736		990		708		16,213
Interest income recognized on impaired loans during the quarter ended June 30, 2018¹	28		66		20		37		5		13		8		177
Average recorded investment in impaired loans during the six months ended June 30, 2018	2,104		7,003		1,956		2,878		742		1,043		712		16,438
Interest income recognized on impaired loans during the six months ended June 30, 2018¹	183		132		42		75		10		26		15		483

¹Interest income recognized on a cash basis ~~totaling $6 thousand and $134 thousand~~ during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018 was primarily~~2019 totaled $24 thousand related to the pay-off of ~~three~~a non-accrual ~~commercial PCI loans.~~home equity loan. No interest income on impaired loans was recognized on a cash basis during the three ~~and nine~~ months ended ~~September~~June 30, ~~2017.~~2018. Interest income recognized on a cash basis totaled $128 thousand during the six months ended June 30, 2018 related to the pay-off of two non-accrual commercial PCI loans.



(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor		Construction		Home equity		Other residential		Installment and other consumer		Total
December 31, 2018
Recorded investment in impaired loans:
With no specific allowance recorded	$	303	$	—	$	—	$	2,688	$	313	$	462	$	111	$	3,877
With a specific allowance recorded	1,522		6,993		1,821		—		251		—		574		11,161
Total recorded investment in impaired loans	$	1,825	$	6,993	$	1,821	$	2,688	$	564	$	462	$	685	$	15,038
Unpaid principal balance of impaired loans	$	1,813	$	6,993	$	1,812	$	2,688	$	562	$	461	$	684	$	15,013
Specific allowance	$	466	$	189	$	45	$	—	$	5	$	—	$	73	$	778

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.~~impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to ~~specifically identified~~specifically-identified impaired loans when they are deemed uncollectible. There were no charged-off amounts on impaired loans at ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled ~~$950~~$599 thousand and ~~$935 thousand,~~$1.1 million, respectively.

The following tables disclose activity in the 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, 2018

Beginning balance $ 2,597
$ 2,339
$ 7,390
$ 508
$ 952
$ 746
$ 325
$ 956
$ 15,813
Provision (reversal) (245 ) 83
46
157
(39 ) 35
5
(42 ) —
Charge-offs —
—
—
—
—
—
—
—
—
Recoveries 4
—
—
—
—
—
—
—
4
Ending balance $ 2,356
$ 2,422
$ 7,436
$ 665
$ 913
$ 781
$ 330
$ 914
$ 15,817
Three months ended September 30, 2017
Beginning balance $ 3,932
$ 2,082
$ 6,065
$ 411
$ 981
$ 509
$ 340
$ 912
$ 15,232
Provision (reversal) 612
(56 ) 33
217
21
33
(5 ) (855 ) —
Charge-offs (5 ) —
—
—
—
—
(1 ) —
(6 )
Recoveries 21
—
—
—
—
—
1
—
22
Ending balance $ 4,560
$ 2,026
$ 6,098
$ 628
$ 1,002
$ 542
$ 335
$ 57
$ 15,248

																																																				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, 2018
Allowance for loan losses:
Three months ended June 30, 2019																										Three months ended June 30, 2019
Beginning balance	$	3,654		$	2,294	$	6,475		$	681		$	1,031		$	536	$	378		$	718		$	15,767		$	2,612		$	2,358		$	7,766		$	704		$	923		$	800	$	340		$	314		$	15,817
Provision (reversal)	(1,308		)	128		961			(16		)	(118		)	245		(88		)	196			—			(250		)	(37		)	(57		)	(85		)	(16		)	49		(17		)	413			—
Charge-offs	(3		)	—		—			—			—			—		(2		)	—			(5		)	—			—			—			—			—			—		—			—			—
Recoveries	13			—		—			—			—			—		42			—			55			6			—			12			—			—			—		—			—			18
Ending balance	$	2,356		$	2,422	$	7,436		$	665		$	913		$	781	$	330		$	914		$	15,817		$	2,368		$	2,321		$	7,721		$	619		$	907		$	849	$	323		$	727		$	15,835
Nine months ended September 30, 2017
Allowance for loan losses:
Three months ended June 30, 2018																										Three months ended June 30, 2018
Beginning balance	$	3,248		$	1,753	$	6,320		$	781		$	973		$	454	$	372		$	1,541		$	15,442		$	3,693		$	2,080		$	6,455		$	697		$	979		$	543	$	351		$	973		$	15,771
Provision (reversal)	1,509			273		(222		)	(153		)	29			88		(40		)	(1,484		)	—			(1,098		)	259			935			(189		)	(27		)	203		(66		)	(17		)	—
Charge-offs	(289		)	—		—			—			—			—		(3		)	—			(292		)	(3		)	—			—			—			—			—		(2		)	—			(5		)
Recoveries	92			—		—			—			—			—		6			—			98			5			—			—			—			—			—		42			—			47
Ending balance	$	4,560		$	2,026	$	6,098		$	628		$	1,002		$	542	$	335		$	57		$	15,248		$	2,597		$	2,339		$	7,390		$	508		$	952		$	746	$	325		$	956		$	15,813

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
September 30, 2018
Ending ALLL related to loans collectively evaluated for impairment $ 2,183
$ 2,194
$ 7,392
$ 665
$ 908
$ 781
$ 253
$ 914
$ 15,290
Ending ALLL related to loans individually evaluated for impairment 173
228
44
—
5
—
77
—
527
Ending ALLL related to PCI loans —
—
—
—
—
—
—
—
—
Ending balance $ 2,356
$ 2,422
$ 7,436
$ 665
$ 913
$ 781
$ 330
$ 914
$ 15,817
Recorded Investment:

Collectively evaluated for impairment $ 236,969
$ 308,272
$ 838,856
$ 66,049
$ 120,588
$ 112,397
$ 28,080
$ —
$ 1,711,211
Individually evaluated for impairment 1,763
6,997
1,831
2,690
569
986
695
—
15,531
PCI loans 39
1,198
806
—
86
—
—
—
2,129
Total $ 238,771
$ 316,467
$ 841,493
$ 68,739
$ 121,243
$ 113,383
$ 28,775
$ —
$ 1,728,871
Ratio of allowance for loan losses to total loans 0.99 % 0.77 % 0.88 % 0.97 % 0.75 % 0.69 % 1.15 % NM
0.91 %
Allowance for loan losses to non-accrual loans NM
NM
NM
NM
287 % NM
485 % NM
4,098 %



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, 2019
Allowance for loan losses:
Beginning balance	$	2,436		$	2,407		$	7,703	$	756		$	915		$	800	$	310		$	494	$	15,821
Provision (reversal)	(70		)	(86		)	6		(137		)	(8		)	49		13			233		—
Charge-offs	(9		)	—			—		—			—			—		—			—		(9		)
Recoveries	11			—			12		—			—			—		—			—		23
Ending balance	$	2,368		$	2,321		$	7,721	$	619		$	907		$	849	$	323		$	727	$	15,835
Six months ended June 30, 2018
Allowance for loan losses:
Beginning balance	$	3,654		$	2,294		$	6,475	$	681		$	1,031		$	536	$	378		$	718	$	15,767
Provision (reversal)	(1,063		)	45			915		(173		)	(79		)	210		(93		)	238		—
Charge-offs	(3		)	—			—		—			—			—		(2		)	—		(5		)
Recoveries	9			—			—		—			—			—		42			—		51
Ending balance	$	2,597		$	2,339		$	7,390	$	508		$	952		$	746	$	325		$	956	$	15,813



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
June 30, 2019
Ending ALLL related to loans collectively evaluated for impairment	$	2,026		$	2,198		$	7,679		$	619		$	902		$	849		$	259		$	727	$	15,259
Ending ALLL related to loans individually evaluated for impairment	342			123			42			—			5			—			64			—		576
Ending ALLL related to PCI loans	—			—			—			—			—			—			—			—		—
Ending balance	$	2,368		$	2,321		$	7,721		$	619		$	907		$	849		$	323		$	727	$	15,835
Recorded Investment:
Collectively evaluated for impairment	$	233,326		$	298,162		$	876,351		$	63,075		$	125,483		$	123,663		$	30,435		$	—	$	1,750,495
Individually evaluated for impairment	1,489			7,000			1,796			488			408			457			665			—		12,303
PCI loans	17			1,165			822			—			77			—			—			—		2,081
Total	$	234,832		$	306,327		$	878,969		$	63,563		$	125,968		$	124,120		$	31,100		$	—	$	1,764,879
Ratio of allowance for loan losses to total loans	1.01		%	0.76		%	0.88		%	0.97		%	0.72		%	0.68		%	1.04		%	NM		0.90		%
Allowance for loan losses to non-accrual loans	669		%	NM			NM			NM			578		%	NM			513		%	NM		2,759		%

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, 2017
Ending ALLL related to loans collectively evaluated for impairment $ 3,604
$ 2,106
$ 6,316
$ 674
$ 1,025
$ 535
$ 276
$ 718
$ 15,254
Ending ALLL related to loans individually evaluated for impairment 50
188
159
7
6
1
102
—
513
Ending ALLL related to purchased credit-impaired loans —
—
—
—
—
—
—
—
—
Ending balance $ 3,654
$ 2,294
$ 6,475
$ 681
$ 1,031
$ 536
$ 378
$ 718
$ 15,767
Recorded Investment:

Collectively evaluated for impairment $ 233,605
$ 292,798
$ 820,023
$ 60,859
$ 131,620
$ 94,378
$ 26,689
$ —
$ 1,659,972
Individually evaluated for impairment 2,165
6,999
2,171
2,969
753
1,148
721
—
16,926
Purchased credit-impaired 65
1,166
790
—
94
—
—
—
2,115
Total $ 235,835
$ 300,963
$ 822,984
$ 63,828
$ 132,467
$ 95,526
$ 27,410
$ —
$ 1,679,013
Ratio of allowance for loan losses to total loans 1.55 % 0.76 % 0.79 % 1.07 % 0.78 % 0.56 % 1.38 % NM
0.94 %
Allowance for loan losses to non-accrual loans NM
NM
NM
NM
254 % NM
NM
NM
3,883 %



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, 2018
Ending ALLL related to loans collectively evaluated for impairment	$	1,970		$	2,218		$	7,658		$	756		$	910		$	800		$	237		$	494	$	15,043
Ending ALLL related to loans individually evaluated for impairment	466			189			45			—			5			—			73			—		778
Ending ALLL related to purchased credit-impaired loans	—			—			—			—			—			—			—			—		—
Ending balance	$	2,436		$	2,407		$	7,703		$	756		$	915		$	800		$	310		$	494	$	15,821
Recorded Investment:
Collectively evaluated for impairment	$	228,883		$	305,097		$	870,778		$	73,735		$	124,049		$	117,385		$	26,787		$	—	$	1,746,714
Individually evaluated for impairment	1,825			6,993			1,821			2,688			564			462			685			—		15,038
Purchased credit-impaired	31			1,187			811			—			83			—			—			—		2,112
Total	$	230,739		$	313,277		$	873,410		$	76,423		$	124,696		$	117,847		$	27,472		$	—	$	1,763,864
Ratio of allowance for loan losses to total loans	1.06		%	0.77		%	0.88		%	0.99		%	0.73		%	0.68		%	1.13		%	NM		0.90		%
Allowance for loan losses to non-accrual loans	764		%	NM			NM			NM			292		%	NM			NM			NM		2,270		%

NM - Not Meaningful

Purchased Credit-Impaired Loans

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 three bank acquisitions to be PCI loans based on credit indicators such as ~~nonaccrual~~non-accrual 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.

The following table reflects the unpaid principal balance and related carrying value of PCI loans.



PCI Loans	June 30, 2019				December 31, 2018
(in thousands)	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial and industrial	$	64	$	17	$	89	$	31
Commercial real estate, owner occupied	1,221		1,165		1,247		1,187
Commercial real estate, investor	1,017		822		1,033		811
Home equity	200		77		210		83
Total purchased credit-impaired loans	$	2,502	$	2,081	$	2,579	$	2,112

PCI Loans September 30, 2018 December 31, 2017

(in thousands)
Unpaid Principal Balance
Carrying Value
Unpaid Principal Balance
Carrying Value
Commercial and industrial $ 106
$ 39
$ 276
$ 65
Commercial real estate, owner occupied 1,259
1,198
1,297
1,166
Commercial real estate, investor 1,041
806
1,064
790
Home equity 215
86
231
94
Total purchased credit-impaired loans $ 2,621
$ 2,129
$ 2,868
$ 2,115

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



Accretable Yield	Three months ended						Six months ended
(in thousands)	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Balance at beginning of period	$	875		$	1,142		$	934		$	1,254
Accretion	(56		)	(83		)	(115		)	(195		)
Balance at end of period	$	819		$	1,059		$	819		$	1,059

Accretable Yield Three months ended Nine months ended
(in thousands) September 30, 2018 September 30, 2017 September 30, 2018 September 30, 2017
Balance at beginning of period $ 1,059
$ 1,306
$ 1,254
$ 1,476
Accretion (63 ) (76 ) (258 ) (246 )
Balance at end of period $ 996
$ 1,230
$ 996
$ 1,230

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of ~~$1,031.5~~$1,083.5 million and ~~$887.9~~$1,027.4 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. In addition, we pledge ~~a certain residential loan portfolio,~~eligible TIC loans, which totaled ~~$85.2~~$102.9 million and ~~$67.6~~$94.5 million at ~~September~~June 30, ~~2018~~ 2019

and December 31, ~~2017,~~2018, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("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. Related party loans totaled ~~$11.3~~$9.7 million at ~~September~~June 30, ~~2018~~2019, compared to ~~$11.9~~$10.6 million at December 31, ~~2017.~~2018. In addition, undisbursed commitments to related parties totaled $9.1 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Note 6: Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight ~~borrowing~~borrowings totaling $92.0 million at ~~September~~June 30, ~~2018~~2019 and ~~$100.4 million at~~ December 31, ~~2017.~~2018. 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, ~~2018~~2019 or December 31, ~~2017~~2018.

Federal Home Loan Bank Borrowings – As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Bank had lines of credit with the FHLB totaling ~~$616.2~~$633.5 million and ~~$538.9~~$629.4 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at ~~September~~June 30, ~~2018~~or2019. There were $7.0 million FHLB overnight borrowings at an overnight rate of 2.56% on December 31, ~~2017.~~2018.

Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Bank had borrowing capacity under this line totaling ~~$64.4~~$75.8 million and ~~$52.1~~$69.7 million, respectively, and had no outstanding borrowings with the FRBSF.

Subordinated Debentures – As part of an acquisition, Bancorp assumed ~~two~~ subordinated debentures due to NorCal Community Bancorp Trusts I and II, ~~(the "Trusts"),~~ established for the sole purpose of issuing trust preferred securities. The trust preferred securities ~~on September 22, 2003~~were sold and ~~December 29, 2005, respectively.~~issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. On October 7, 2018, Bancorp redeemed in full the subordinated debentures due to NorCal Community Bancorp Trust I, resulting in $916 thousand accelerated accretion. The Trust II subordinated debentures were recorded at fair ~~values~~value totaling ~~$4.95~~$2.14 million at acquisition date with a contractual ~~values totaling $8.2~~balance of $4.12 million. The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the ~~lives~~life of the debentures. Accretion on the subordinated debentures totaled ~~$92~~$34 thousand (Trust II) and ~~$117~~$63 thousand in(Trusts I and II) for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~

2019 and ~~2017,~~2018, 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.~~event of default. 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~~$4.0 million issued by ~~the Trusts,~~Trust II, which have identical maturity, repricing and payment terms as the subordinated debentures.

~~The following table summarizes the contractual terms of the subordinated debentures due to the Trusts as of September 30, 2018:~~

(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 (5.39% as of September 30, 2018), 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 (3.73% as of September 30, 2018), redeemable, in whole or in part, on any interest payment date 4,124
Total $ 8,248

~~On October 5, 2018, Bancorp redeemed in full the subordinated~~ Subordinated debentures due to NorCal Community Bancorp Trust ~~I resulting~~II on March 15, 2036 with interest payable quarterly, (repricing quarterly, based on 3-month LIBOR plus 1.40%, or 3.81% as of June 30, 2019), are redeemable in ~~$916 thousand~~whole or in ~~accelerated accretion,~~part on any interest payment date.

Other Obligations – The Bank leases certain equipment under finances leases, which ~~will have a one-time impact on net interest income~~are included in borrowings and other obligations in the ~~fourth quarter~~consolidated statement of ~~2018, but will not have a material impact on our capital ratios.~~conditions. See Note 8, Commitment and Contingencies, for additional information.

Note 7: Stockholders' Equity

~~Dividend~~Dividends and Stock Split

On ~~October 22, 2018,~~July 19, 2019, the Bancorp declared a ~~$0.35~~$0.21 per share cash dividend, payable on ~~November 8, 2018~~August 9, 2019 to shareholders of record at the close of business on ~~November 1, 2018. Additionally, Bancorp announced a 2:1~~August 2, 2019. All share and per share data have been adjusted to reflect the two-for-one stock split ~~payable on~~effective November 27, ~~2018, to shareholders of record at the close of business on November 9,~~ 2018. ~~See Note 1, Basis of Presentation, for the pro forma effect of the stock split on reported earnings per share for the periods presented.~~

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, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, ~~on the grant date,~~ which equals the intrinsic value, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. ~~Stock~~Beginning in 2018, stock option and restricted stock awards issued ~~in 2018~~ include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate stock-based compensation ifexpense when the award holder is eligible to retire. However, retirement eligibility does not affect the ~~legal~~ vesting ~~schedule~~ of restricted stock or the ~~awards.~~exercisability of stock options, which are based on the scheduled vesting period.

Performance-based stock awards (restricted ~~stock awards)~~stock) 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 ~~the stock awards~~ cliff ~~vest.~~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 record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits

(expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.

The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits onfor dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.

~~Under the 2017 Equity Plan,~~Stock options and restricted stock ~~options~~ may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment ~~and~~and/or applicable tax withholding requirements. During the ~~nine~~six months ended ~~September~~June 30, 2019, we withheld 6,937 shares totaling $290 thousand at a weighted-average price of $41.78 for cashless exercises. During the six months ended June 30, 2018, ~~option holders exchanged 20,981~~we withheld 39,726 shares totaling ~~$1.5~~$1.4 million at a weighted-average price of ~~$71.35~~$35.17 for cashless stock option exercises and tax withholdings upon vesting of performance-based stock awards. During the nine months ended September 30, 2017, option holders exchanged 11,938 shares totaling $782 thousand at a weighted-average price of $65.50 for cashless stock option exercises. Shares ~~exchanged~~withheld under net settlement arrangements are available for future ~~grants under the 2017 Equity Plan.~~grants.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We ~~early~~ adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $638 thousand from AOCI to retained earnings. This amount ~~represents~~represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017. ~~For more information regarding ASU No. 2018-02, refer to Note 2, Accounting Standards Adopted in 2018.~~

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.

Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock.

As part of the Share Repurchase Program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, Bancorp ~~purchased 17,943~~repurchased 248,524 shares totaling $10.4 million for a ~~total amount of $1.5 million.~~cumulative 419,741 shares totaling $17.5 million repurchased from May 1, 2018 through June 30, 2019.

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, the total commitment amount does not necessarily represent future cash requirements.

Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if

deemed necessary by us, is based on Management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of undrawn loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:



(in thousands)	June 30, 2019		December 31, 2018
Commercial lines of credit	$	234,953	$	238,361
Revolving home equity lines	187,244		189,971
Undisbursed construction loans	49,037		46,229
Personal and other lines of credit	9,779		14,109
Standby letters of credit	2,014		2,636
Total commitments and standby letters of credit	$	483,027	$	491,306

(in thousands) September 30, 2018
December 31, 2017
Commercial lines of credit $ 228,932
$ 224,370
Revolving home equity lines 189,353
177,678
Undisbursed construction loans 51,624
35,322
Personal and other lines of credit 10,783
11,758
Standby letters of credit 2,636
4,074
Total commitments and standby letters of credit $ 483,328
$ 453,202

We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of the utilization of these commitments according to our historical experience on different types of commitments and expected loss. The allowance for losses on off-balance sheet commitments totaled $1.1 million and $958 thousand as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition.

~~Operating~~ Leases

We ~~rent certain~~lease premises under long-term non-cancelable operating leases ~~expiring at various dates through~~with remaining terms of 1 year to 13 years, most of which include escalation clauses and one or more options to extend the ~~year 2032. Most~~lease term, and some of ~~the leases~~which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.

The following table shows the balances of operating and ~~escalation clauses. At September~~finance lease right-of-use assets and lease liabilities as of June 30, ~~2018,~~2019.



(in thousands)	June 30, 2019
Operating leases:
Operating lease right-of-use assets	$	12,515
Operating lease liabilities	$	14,332
Finance leases:
Finance lease right-of-use assets	$	380
Accumulated amortization	(85		)
Finance lease right-of-use assets, net¹	$	295
Finance lease liabilities²	$	297
¹Included in premises and equipment in the consolidated statements of condition.
²Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the ~~approximate minimum future commitments payable under non-cancelable contracts~~period presented. There were no lease-related noncash investing and financing activities for ~~leased premises are as follows:~~the six months ended June 30, 2018.


															Six months ended
(in thousands)	2018		2019		2020		2021		2022		Thereafter		Total		June 30, 2019
Operating leases	$	1,106	$	4,198	$	3,758	$	2,138	$	1,330	$	2,904	$	15,434
Right-of-use assets obtained in exchange for operating lease liabilities															$	1,286
Right-of-use assets obtained in exchange for finance lease liabilities															$	31
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets															$	1,967

~~Rent expense included in occupancy~~The following table shows components of operating and finance lease cost.

Amortization of right-of-use assets²

Interest on finance lease liabilities³

Operating lease rent expense totaled ~~$1.1~~$1.2 million and ~~$997~~$2.3 million, respectively, for the three and six months ended June 30, 2018.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2019. Total minimum lease payments do not include obligations of approximately $398 thousand for an operating lease that has not commenced. The discount rates used to calculate the ~~three months ended September 30, 2018~~present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and ~~2017, respectively. Rent expense totaled $3.5 million and $3.0 million for~~minimum payments on the ~~nine months ended September 30, 2018 and 2017, respectively.~~later of the date we adopted the new lease accounting standards or lease commencement date.

WeBancorp may be party to legal actions that arise from time to time ~~during~~in the normal course of business. ~~We believe, after consultation with~~Bancorp's Management is not aware of any pending legal ~~counsel,~~proceedings to which either it or the Bank may be a party or has recently been a party that ~~litigation contingent liability, if any, would not~~will have a material adverse effect on ~~our consolidated~~the financial ~~position,~~condition or results of operations of Bancorp or ~~cash flows.~~the Bank.

The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. On September 17, 2018, Visa signed an amended settlement agreement with the putative class action plaintiffs of the U.S. interchange multidistrict litigation that superseded the 2012 settlement agreement. ~~Pursuant to~~Visa's share of the settlement amount under the amended class settlement agreement ~~Visa deposited an additional $600 million into~~increased to $4.1 billion. On January 24, 2019, the ~~litigation escrow account, increasing~~district court granted preliminary approval of the ~~escrow account balance~~amended class settlement agreement, which was moved for final approval on June 7, 2019. Certain merchants chose to ~~$1.5 billion.~~opt out of the class settlement agreement and a final settlement approval hearing is scheduled for November 7, 2019. The escrow balance as of June 30, 2019 of $902 million, combined with funds previously deposited with the court, are expected to cover ~~all~~the settlement payment obligations. According to Visa's Form 10-Q filed on July 27, 2018, it had reached settlement agreements with individual merchants representing 51% of the Visa-branded payment card sales volume of merchants who opted out of the 2012 settlement agreement.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate might change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may ~~arise.~~arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification ~~liabilities~~ related to the Covered ~~Litigation.~~Litigation, as we consider the probability of losses to be remote.

Note 9: Derivative Financial Instruments and Hedging Activities

We ~~have~~ entered into interest rate swap agreements, primarily as an interest rate risk 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.

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, ~~2018~~2019, 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 designated hedging instruments and~~ are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $4$3 thousand at both June 30, 2019 and ~~$8 thousand~~ ~~as of~~ ~~September 30, 2018~~ ~~and~~ December 31, ~~2017, respectively.~~

~~The following table presents~~2018. Information on our interest rate swaps is shown in the ~~notional amount and fair value of our derivatives designated as hedging instruments:~~derivative tables below:

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of ~~September~~June 30, 2019 and December 31, 2018:

(in thousands) Carrying Amounts of Hedged Assets
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
Loans $ 17,651
$ (493 )

The following table presents the net gains (losses) recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges:



	Three months ended						Six months ended
(in thousands)	June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Interest and fees on loans ¹	$	20,988		$	19,624		$	41,683		$	38,511
(Decrease) increase in value of designated interest rate swaps due to LIBOR interest rate movements	$	(547	)	$	187		$	(904	)	$	716
Payment on interest rate swaps	(14		)	(40		)	(26		)	(95		)
Increase (decrease) in value of hedged loans	573			(116		)	935			(693		)
Decrease in value of yield maintenance agreement	(3		)	(3		)	(7		)	(7		)
Net gains (losses) on fair value hedging relationships recognized in interest income	$	9		$	28		$	(2	)	$	(79	)

Three months ended
(in thousands) September 30, 2018 September 30, 2017
Increase in value of designated interest rate swaps $ 222
$ 25
Payment on interest rate swaps $ (32 ) $ (76 )
Decrease in value of hedged loans $ (231 ) $ (43 )
Decrease in value of yield maintenance agreement $ (4 ) $ (4 )
Net loss on fair value hedging relationships recognized in interest income $ (45 ) $ (98 )
Nine months ended
(in thousands) September 30, 2018 September 30, 2017
Increase in value of designated interest rate swaps $ 939
$ 7
Payment on interest rate swaps $ (127 ) $ (261 )
(Decrease) increase in value of hedged loans $ (924 ) $ 35
Decrease in value of yield maintenance agreement $ (11 ) $ (11 )
Net loss on fair value hedging relationships recognized against interest income $ (123 ) $ (230 )
¹ Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.

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.

~~The following table shows information~~Information on financial instruments that are eligible for offset in the consolidated statements of ~~condition.~~condition follows:



Offsetting of Financial Liabilities and Derivative Liabilities
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial			Cash Collateral
(in thousands)	Liabilities²		Condition		of Condition²		Instruments			Pledged			Net Amount
June 30, 2019
Derivatives by Counterparty:
Counterparty A	$	1,118	$	—	$	1,118	$	—		$	(990	)	$	128
Total	$	1,118	$	—	$	1,118	$	—		$	(990	)	$	128
December 31, 2018
Derivatives by Counterparty:
Counterparty A	$	375	$	—	$	375	$	(161	)	$	—		$	214
Total	$	375	$	—	$	375	$	(161	)	$	—		$	214

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our ~~2017~~2018 Form 10-K filed with the SEC on March 14, ~~2018.~~2019.

~~Note 10: Acquisition~~

On November 21, 2017, we completed the merger of Bank of Napa, N.A. (OTCQB: BNNP), to enhance our market presence in Napa, California. Bank of Napa was a national bank with two branch offices serving Napa. The acquisition added $134.7 million in loans, $249.9 million in deposits and $75.5 million in investment securities to Bank of Marin as of the acquisition date. Bank of Napa shareholders received 0.307 shares of Bancorp common stock for each

share of Bank of Napa common stock outstanding. We have accounted for the acquisition of Bank of Napa as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805, ~~Business Combinations. The acquisition was treated as a "reorganization" within the definition of section 368(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.~~

The Bank of Napa acquisition resulted in $23.7 million in goodwill, which represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of Bank of Napa and Bank of Marin, which we evaluate for impairment annually. We determined that the fair value of our traditional community banking activities (provided through our branch network) exceeded the carrying amount of the bank-level reporting unit. The goodwill is not deductible for tax purposes.

The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. We recorded a core deposit intangible asset of $4.4 million from the Bank of Napa acquisition on November 21, 2017, of which $56 thousand was amortized in 2017 and $381 thousand was amortized in the first nine months of 2018. The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and is evaluated periodically for impairment. No impairment loss was recognized as of September 30, 2018.

Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and operational functions become fully integrated. Bank of Marin Bancorp incurred acquisition-related expenses in the consolidated statements of comprehensive income for the three and nine months ended September 30, 2018 as follows:

¹ Primarily relates to Bank of Napa's core processing system contract termination and deconversion fees.

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 ~~2017~~2018 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 ~~and the successful integration of acquisitions~~ that may affect our earnings in future periods. A number of factors, many of which are beyond Management’s control, could cause future results to vary materially from current Management expectations. Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States and abroad, including changes in interest rates, deposit flows, real estate values, and expected future cash flows on

loans and securities; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation (including the Tax Cuts and Jobs Act of 2017); natural disasters (such as the ~~2017~~ wildfires in our area); adverse weather conditions; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and ~~cyber-security~~cybersecurity threats) affecting our operations, pricing, products and services.

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. Risk Factors section of our ~~2017~~2018 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 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. There have been no material changes to our critical accounting policies, which include: Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements. For a detailed discussion, refer to Note 1 to the Consolidated Financial Statements included in our ~~2017~~2018 Form 10-K filed with the SEC on March 14, ~~2018~~2019 and Note 2, Recently Adopted and Issued Accounting Standards, to the Consolidated Financial Statements in this Form 10-Q.

Executive Summary

Earnings in the ~~third~~second quarter of ~~2018~~2019 totaled ~~$8.7~~$8.2 million, compared to ~~$5.1~~$7.9 million in the ~~third~~second quarter of ~~2017.~~2018. Diluted earnings per share were ~~$1.23~~$0.60 in the ~~third~~second quarter of ~~2018,~~2019, compared to ~~$0.83~~$0.56 (adjusted for stock split) in the same quarter a year ago. ~~Year-to-date earnings~~Earnings for the first six months of 2019 totaled ~~$23.0~~$15.7 million compared to ~~$14.9~~$14.3 million in the same period last year. Diluted earnings per share were ~~$3.27~~$1.13 and ~~$2.41~~$1.02 (adjusted for stock-split) in the ~~nine~~first six months ~~ended September 30,~~of 2019 and 2018, ~~and 2017,~~ respectively.

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

~~Pre-tax net income in the third quarter of 2018 was up $4.0~~Loans totaled $1,764.9 million from the third quarter of 2017. Higher average balances of both loans and non-interest bearing deposits and higher yields across earning asset categories favorably impacted earnings in the current quarter. Reported net interest margin was 3.91% in the third quarter of 2018,at June 30, 2019, compared to ~~3.63% in the same quarter last year.~~

Return on assets was 1.38% for the quarter ended September 30, 2018, compared to 0.95% for the quarter ended September 30, 2017. Return on equity was 11.20% for the quarter ended September 30, 2018, compared to 8.37% for the quarter ended September 30, 2017.

All capital ratios are well above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio for Bancorp was 15.3% at September 30, 2018, compared to 14.9% at December 31, 2017.

The Board of Directors declared a cash dividend of $0.35 per share, a $0.03 increase from the prior quarter. This represents the 54th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on November 8, 2018, to shareholders of record at the close of business on November 1, 2018.

In order to further enhance liquidity in Bank of Marin Bancorp (BMRC) stock and expand diversification in the investor base, the Board of Directors announced a 2:1 stock split payable on November 27, 2018, to shareholders of record at the close of business on November 9, 2018.

To reduce our funding costs, on October 5, 2018, Bancorp early-redeemed one of the two subordinated debentures assumed as part of the 2013 acquisition of NorCal Community Bancorp. The unaccreted purchase discount of $916 thousand has been accelerated and will have a one-time impact on net interest income in the fourth quarter of 2018, but will not have a material impact on our capital ratios.

~~Loans totaled $1,728.9 million at September 30, 2018, compared to $1,679.0~~$1,763.9 million at December 31, ~~2017.~~2018. New loan ~~volume~~originations of ~~$165.8~~$76.1 million in the first ~~nine months~~half of ~~2018~~2019 was partially offset by payoffs of ~~$120.8~~$69.3 million, and combined with changes in lines of credit utilization and amortization on existing loans, resulted in the net increase of ~~$49.9~~$1.0 million.

Strong credit quality remains a cornerstone of the Bank's consistent performance. Non-accrual loans totaled ~~$386~~$574 thousand, or ~~0.02%~~0.03% of the loan portfolio at ~~September~~June 30, ~~2018,~~2019, compared to ~~$406~~$697 thousand, or ~~0.02%~~0.04% at December 31, ~~2017.~~2018. Classified loans totaled ~~$12.4~~$10.3 million at ~~September~~June 30, ~~2018,~~2019, compared to ~~$27.9~~$12.6 million at December 31, ~~2017. The decrease in classified loans is primarily due to two borrowing relationships whose risk grades were upgraded from substandard to special mention in the second quarter of~~ 2018. Accruing loans past due 30 to 89 days totaled ~~$301~~$343 thousand at ~~September~~June 30, ~~2018,~~2019, compared to ~~$1.9~~$1.1 million at December 31, ~~2017.~~2018. There was no provision for ~~either~~ loan losses ~~or off-balance sheet commitments~~ recorded in the first ~~nine~~six months of 2019 and 2018.

Total deposits ~~increased $64.2~~decreased $72.8 million in the first ~~nine months~~half of ~~2018~~2019 to ~~$2,212.8~~$2,102.0 million at ~~September~~June 30, ~~2018.~~2019. The decrease was primarily due to normal cash fluctuations in some of our large business accounts and a $16.1 million increase in one-way deposit sales to third party deposit networks. Non-interest bearing deposits decreased $9.4 million from December 31, 2018 and represented ~~50.2%~~50% of total deposits ~~and the~~at June 30, 2019. The annualized cost of total deposits for the first ~~nine~~six months of ~~2018~~2019 was ~~0.09%~~0.19%.

All capital ratios were above regulatory requirements. The total risk-based capital ratio for Bancorp was 15.2% at June 30, 2019, compared to 14.9% at December 31, 2018.

Return on assets was 1.32% for the quarter ended June 30, 2019, compared to 1.28% for the quarter ended June 30, 2018. Return on assets was 1.26% for the six months ended June 30, 2019, compared to 1.17% for the six months ended June 30, 2018. Return on equity was 10.26% for the quarter ended June 30, 2019, compared to 10.54% for the quarter ended June 30, 2018. Return on equity was 9.90% for the six months ended June 30, 2019, compared to 9.63% for the six months ended June 30, 2018.

The Board of Directors declared a cash dividend of $0.21 per share on July 19, 2019. This represents the 57th consecutive quarterly dividend paid by Bank of Marin Bancorp, a 35% payout ratio and 10% increase over the prior quarter dividend. The dividend is payable on August 9, 2019, to shareholders of record at the close of business on August 2, 2019.

Based on the size of the market and reduced branch foot traffic driven by digital banking offerings, we have decided to close the Petaluma Downtown Branch on August 9, 2019. We will focus our resources on growing our two remaining branches in Petaluma, where most Downtown customers have already moved their business. Our commitment to the Petaluma community remains strong, and employees have accepted positions in other Bank of Marin branches.

On June 17, 2019, we upgraded to a new digital banking platform that offers our customers enhanced features and additional functionality for an improved online and mobile banking experience. The conversion is substantially complete, and the implementation and operations teams are working closely with our customers to make their transition to the new platform as smooth as possible.

Looking forward into ~~2018,~~2019, we believe that our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve - will continue to drive the success of the Bank. By building strong relationships in vibrant markets, we are able to grow our loan portfolio and deposit franchise organically. Disciplined fundamentals ensure that our credit quality remains high, our deposit base is reasonably priced, and our operations are highly efficient, all of which contribute to ~~profitability and net interest margin expansion. Our success helps us to attract the most qualified professionals in the marketplace.~~profitability.

Our strong liquidity and capital ~~supports~~support our organic growth as well as possible acquisitions. This gives us a great deal of flexibility as we seek opportunities that add value to the ~~Company.~~Bank.

RESULTS OF OPERATIONS

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


(dollars in thousands)	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Selected financial condition data:
Total assets	$	2,545,715		$	2,468,154		$	2,463,987		$	2,520,892
Loans, net	1,713,054			1,663,246			1,749,044			1,748,043
Deposits	2,212,846			2,148,670			2,102,040			2,174,840
Borrowings	5,831			5,739
Borrowings and other obligations							2,971			9,640
Stockholders' equity	308,603			297,025			327,667			316,407
Asset quality ratios:
Allowance for loan losses to total loans	0.91%			0.94		%	0.90		%	0.90		%
Allowance for loan losses to non-accrual loans	41.00		x	38.88x			27.59x			22.71x
Non-accrual loans to total loans	0.02%			0.02		%	0.03		%	0.04		%
Capital ratios:
Equity to total assets ratio	12.12		%	12.03		%	13.30		%	12.55		%
Tangible common equity to tangible assets¹	10.90		%	10.70		%	12.04		%	11.30		%
Total capital (to risk-weighted assets)	15.29		%	14.91		%	15.23		%	14.93		%
Tier 1 capital (to risk-weighted assets)	14.45		%	14.04		%	14.39		%	14.10		%
Tier 1 capital (to average assets)	11.74		%	12.13		%	11.78		%	11.54		%
Common equity Tier 1 capital (to risk weighted assets)	14.16		%	13.75		%	14.26		%	13.98		%


	Three months ended				Nine months ended				Three months ended						Six months ended
(dollars in thousands, except per share data)	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017		June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Selected operating data:
Net interest income	$	23,539	$	18,788	$	68,272	$	54,713	$	23,789		$	22,842		$	47,635		$	44,733
Non-interest income	2,236		2,066		6,716		6,277		2,274			2,238			4,045			4,480
Non-interest expense ²	13,971		13,036		44,561		38,678
Net income ²	8,680		5,132		22,960		14,866
Net income per common share:
Non-interest expense									14,916			14,509			30,444			30,590
Net income									8,235			7,891			15,714			14,280
Net income per common share: ⁴
Basic	$	1.25	$	0.84	$	3.31	$	2.43	$	0.60		$	0.57		$	1.15		$	1.03
Diluted	$	1.23	$	0.83	$	3.27	$	2.41	$	0.60		$	0.56		$	1.13		$	1.02
Performance and other financial ratios:
Return on average assets	1.38%		0.95%		1.24%		0.96%		1.32		%	1.28		%	1.26		%	1.17		%
Return on average equity	11.20%		8.37%		10.17%		8.35%		10.26		%	10.54		%	9.90		%	9.63		%
Tax-equivalent net interest margin ³	3.97%		3.77%		3.91%		3.80%
Tax-equivalent net interest margin ²									4.04		%	3.92		%	4.03		%	3.89		%
Efficiency ratio	54.20%		62.51%		59.42%		63.42%		57.23		%	57.85		%	58.91		%	62.16		%
Cash dividend payout ratio on common stock ⁴	25.60%		34.52%		27.79%		34.16%
Cash dividend payout ratio on common stock ³									31.67		%	27.19		%	33.04		%	29.13		%

³ Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, ~~in 2018 and 35 percent in 2017,~~ by total average interest-earning assets.

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 and 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. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.

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

Average Statements of Condition and Analysis of Net Interest Income

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


		Three months ended						Three months ended							Three months ended						Three months ended
		September 30, 2018						September 30, 2017							June 30, 2019						June 30, 2018
				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	$	79,674	$	400	1.96	%	$	125,846	$	406	1.26	%	Interest-bearing due from banks¹	$	30,928	$	190	2.43	%	$	62,665	$	285	1.80	%
	Investment securities^{2, 3}	558,741		3,624		2.59	%	400,659		2,294		2.29	%	Investment securities^{2, 3}	567,813		3,844		2.71	%	574,669		3,611		2.51	%
	Loans ^{1, 3, 4}	1,715,295		20,504		4.68	%	1,500,167		17,228		4.49	%	Loans ^{1, 3, 4}	1,758,874		21,180		4.76	%	1,700,057		19,852		4.62	%
	Total interest-earning assets¹	2,353,710		24,528		4.08	%	2,026,672		19,928		3.85	%	Total interest-earning assets¹	2,357,615		25,214		4.23	%	2,337,391		23,748		4.02	%
	Cash and non-interest-bearing due from banks	41,316						45,009						Cash and non-interest-bearing due from banks	34,437						40,383
	Bank premises and equipment, net	7,866						8,430						Bank premises and equipment, net	7,108						8,203
	Interest receivable and other assets, net	86,039						60,622						Interest receivable and other assets, net	107,089						87,183
Total assets	Total assets	$	2,488,931					$	2,140,733					Total assets	$	2,506,249					$	2,473,160
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity													Liabilities and Stockholders' Equity
	Interest-bearing transaction accounts	$	134,293	$	58	0.17	%	$	96,504	$	24	0.10	%	Interest-bearing transaction accounts	$	124,620	$	91	0.29	%	$	142,133	$	48	0.14	%
	Savings accounts	179,429		18		0.04	%	171,187		17		0.04	%	Savings accounts	174,102		17		0.04	%	178,956		18		0.04	%
	Money market accounts	609,821		337		0.22	%	560,486		133		0.09	%	Money market accounts	661,363		787		0.48	%	612,612		236		0.15	%
	Time accounts including CDARS	132,588		130		0.39	%	140,736		138		0.39	%	Time accounts including CDARS	115,272		175		0.61	%	140,799		140		0.40	%
	Overnight borrowings ¹	112		1		2.06	%	—		—		—	%	Borrowings and other obligations ¹	3,608		24		2.59	%	231		1		1.84	%
	Subordinated debentures ¹	5,815		125		8.43	%	5,682		111		7.63	%	Subordinated debentures ¹	2,664		58		8.69	%	5,786		123		8.40	%
	Total interest-bearing liabilities	1,062,058		669		0.25	%	974,595		423		0.17	%	Total interest-bearing liabilities	1,081,629		1,152		0.43	%	1,080,517		566		0.21	%
	Demand accounts	1,101,288						909,900						Demand accounts	1,073,909						1,072,976
	Interest payable and other liabilities	18,022						13,055						Interest payable and other liabilities	28,621						19,443
	Stockholders' equity	307,563						243,183						Stockholders' equity	322,090						300,224
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity	$	2,488,931					$	2,140,733					Total liabilities & stockholders' equity	$	2,506,249					$	2,473,160
Tax-equivalent net interest income/margin ¹	Tax-equivalent net interest income/margin ¹			$	23,859	3.97	%			$	19,505	3.77	%	Tax-equivalent net interest income/margin ¹			$	24,062	4.04	%			$	23,182	3.92	%
Reported net interest income/margin¹	Reported net interest income/margin¹			$	23,539	3.91	%			$	18,788	3.63	%	Reported net interest income/margin¹			$	23,789	3.99	%			$	22,842	3.87	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread					3.83	%					3.68	%	Tax-equivalent net interest rate spread					3.80	%					3.81	%

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.

³Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2018 and 35 percent in 2017.

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.

Analysis of Changes in Tax-Equivalent 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.

¹ Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21% in 2018 and 35% in 2017.

~~Third~~Second Quarter of ~~2018~~2019 Compared to ~~Third~~Second Quarter of ~~2017~~2018

Net interest income totaled ~~$23.5~~$23.8 million in the ~~third~~second quarter of ~~2018,~~2019, compared to ~~$18.8~~$22.8 million in the same quarter a year ago. The ~~$4.7 million~~$947 thousand increase was ~~primarily due to the $327.0 million increase in~~reflective of higher average ~~earning assets from both the Bank of Napa acquisition~~loan balances and ~~organic growth. Higher~~higher yields across asset categories, ~~also positively impacted interest income for the current quarter.~~partially offset by higher rates on deposits.

The reported net interest margin was ~~3.91%~~3.99% in the ~~third~~second quarter of ~~2018,~~2019 compared to ~~3.63%~~3.87% in the same quarter of the previous year. The 2812 basis points increase compared to the ~~third~~second quarter of ~~2017 is~~2018 was related to higher yields onand a more favorable mix of earning assets, partially offset by ~~a minimal~~an increase in rates on deposit ~~accounts and subordinated debentures.~~accounts.

First ~~Nine~~Six Months of ~~2018~~2019 Compared to First ~~Nine~~Six Months of ~~2017~~2018

Net interest income totaled ~~$68.3~~$47.6 million in the ~~nine~~first six months ~~ended September 30, 2018,~~of 2019 compared to ~~$54.7~~$44.7 million ~~for~~in the same period ~~in 2017.~~a year ago. The ~~$13.6~~$2.9 million increase was primarily ~~relates~~related to ~~a $367.3 million increase in~~higher yields across asset categories and higher average ~~earning assets compared to 2017. Additionally, the higher yield on loans,~~loan and investment securities ~~and interest-bearing cash positively impacted interest income.~~balances, partially offset by higher rates on deposits.

The reported net interest margin was ~~3.86%~~3.98% in the first ~~nine~~six months of ~~2018,~~2019, compared to ~~3.67%~~3.83% in the same period of ~~2017.~~2018. The 1915 basis points increase ~~compared to the first nine months of 2017 is~~was related to higher yields onand a more favorable mix of earning assets, partially offset by ~~a decrease~~an increase in ~~higher yielding loans as a percentage of total earning assets.~~rates on deposit accounts.

Market Interest Rates

Market interest rates are, in part, ~~based on~~influenced by the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) ~~implemented~~set by the Federal Reserve Open Market Committee ("FOMC"). ~~Actions by~~During 2018, the FOMC made four 25-basis-point increases to ~~increase~~a range of 2.25% to 2.50% as of December 2018, where it remained during the ~~target federal funds rate by 25 basis points in December~~first half of 2019. While nine increases since 2015 ~~December 2016, March 2017, June 2017, December 2017, March 2018, June 2018 and September 2018, have~~ positively impacted yields on our ~~rate sensitive interest-earning assets. The increase~~Prime-rate adjustable assets, the yield curve flattened with less movement in ~~September 2018,~~longer-term rates that influence pricing on longer-term, fixed-rate loans. In its July 2019 meeting, the FOMC decided to ~~the current target range for~~lower the federal funds rate by 0.25% to a range of ~~2.00%~~2.0% to 2.25%~~, was~~ and stated that it will continue to monitor the ~~eighth rate hike since 2008. If~~economic outlook and will act as appropriate to sustain the

expansion. In addition, the FOMC decided to end the reduction of its securities holdings as of August 1, 2019, two months earlier than previously indicated. Because the Bank is asset sensitive, falling interest rates ~~continue to rise, we anticipate that our~~could put pressure on net interest ~~income will increase. While short-term interest rates have risen~~margin, and ~~improved~~changes in the ~~Bank’s yields on prime-rate adjustable assets, longer-term rates that influence competitive pricing~~ shape of the yield curve could either mitigate or exacerbate those effects. See ITEM 3. Quantitative and Qualitative Disclosure about MarketRisk for ~~fixed-rate lending activities have moved to a lesser degree.~~further information.

Impact of Acquired Loans on Net Interest Margin

Early payoffs or prepayments of our acquired loans with significant unamortized purchase discount/premium could result in volatility in our net interest margin. As our acquired loans from prior acquisitions continue to pay off, we expect the accretion income from these loans to continue to decline. Accretion and gains on payoffs of purchased loans are recorded in interest income and the positive ~~affect~~impact on our net interest margin for the ~~third~~second quarter and the first ~~nine~~six months of ~~2018~~2019 and ~~2017~~2018 were as follows:

Provision for Loan Losses

Management assesses the adequacy of the allowance for loan losses quarterly 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. While loss recoveries and provisions for loan losses charged to expense increase the allowance, actual losses on loans reduce the allowance.

Impaired loan balances totaled ~~$15.5~~$12.3 million at ~~September~~June 30, ~~2018~~2019 and ~~$16.9~~$15.0 million at December 31, ~~2017,~~2018, with specific valuation allowances of ~~$527~~$576 thousand and ~~$513~~$778 thousand for the same respective dates. Classified assets (loans with substandard or doubtful risk grades) decreased to ~~$12.4~~$10.3 million at ~~September~~June 30, ~~2018,~~2019, from ~~$27.9~~$12.6 million at December 31, ~~2017.~~2018. The $2.3 million decrease ~~in classified loans is~~was primarily due to ~~two borrowing relationships whose~~a substantial pay down on a substandard classified land development loan, which was upgraded to a Pass risk ~~grades were upgraded from substandard~~rating due to ~~special mention in the second quarter of 2018.~~borrower’s improved financial condition and low loan-to-value ratio. There were no loans with doubtful risk grades at ~~September~~June 30, ~~2018~~2019 or December 31, ~~2017.~~2018.

There was no provision for loan losses recorded in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and 2017. The two classified borrowing relationships that were upgraded in the second quarter (mentioned above) reduced the calculated general allowance for loan losses. This reduction was primarily offset by general allowances resulting from loan growth and refinement of certain loan concentration qualitative factors, and an increase in specific reserves related to a loan that was modified as a troubled debt restructuring in the second quarter.2018. Net recoveries in the ~~third~~second quarter of ~~2018~~2019 totaled $4$18 thousand compared to ~~$16~~net recoveries of $42 thousand in the same quarter a year ago. Net recoveries totaled ~~$50~~$14 thousand in the ~~nine months ended September 30, 2018,~~first half of 2019, compared to net ~~charge-offs~~recoveries of ~~$194~~$46 thousand ~~for~~in the ~~same period in 2017.~~first half of 2018.

The ratio of loan loss reserves to total loans was ~~0.91%~~0.90% at ~~September~~June 30, ~~2018, compared to 0.94% at~~2019 and December 31, ~~2017.~~2018. Non-accrual loans totaled ~~$386~~$574 thousand, or ~~0.02%~~0.03% of total loans, at ~~September~~June 30, ~~2018,~~2019, compared to ~~$406~~$697 thousand, or ~~0.02%~~0.04%, at December 31, ~~2017.~~2018.

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

The following table details the components of non-interest income.

~~Third~~Second Quarter of ~~2018~~2019 Compared to ~~Third~~Second Quarter of ~~2017~~2018

Non-interest income increased by ~~$170~~$36 thousand in the ~~third~~second quarter of ~~2018~~2019 to ~~$2.2~~$2.3 million, compared to ~~$2.1~~$2.2 million in the same quarter a year ago. The increase was primarily attributed to debit card interchange fees due to increased activity and gains on the sale of investment securities. The largest offset was in other income ~~was primarily~~ due to ~~an increase~~a decrease in ~~fees on one-way deposits placed into~~ deposit ~~networks~~network income as a result of reduced deposits placed one-way into the ~~rising market interest rate environment. The decrease~~network in ~~Wealth Management and Trust Services income was primarily due to the loss of assets under management resulting from the distribution of large estates and trusts.~~2019.

First ~~Nine~~Six Months of ~~2018~~2019 Compared to First ~~Nine~~Six Months of ~~2017~~2018

Non-interest income ~~increased~~decreased by ~~$439~~$435 thousand in the first ~~nine~~six months of 2019 to ~~$6.7~~$4.0 million, compared to ~~$6.3~~$4.5 million in the same period a year ago. The ~~increase~~decrease in earnings on bank-owned life insurance was primarily due to $283 thousand non-refundable underwriting costs associated with two new bank-owned life insurance policies purchased in the first quarter of 2019. The decrease in other income was primarily due to the ~~reasons mentioned~~decrease in deposit network income discussed above. The decrease in wealth management and trust services income was largely attributed to the exit of a high-risk, high balance trust client and multiple large estate asset distributions in mid-2018, partially offset by new clients in early 2019. The largest increase in non-interest income was attributed to gains on the sale of investment securities.

Non-interest Expense

The following table details the components of non-interest expense.


	Three months ended				Amount			Percent		Three months ended				Amount			Percent
(dollars in thousands)	September 30, 2018		September 30, 2017		Increase (Decrease)			Increase (Decrease)		June 30, 2019		June 30, 2018		Increase (Decrease)			Increase (Decrease)
Salaries and related benefits	$	8,069	$	7,344	$	725		9.9	%	$	8,868	$	8,316	$	552		6.6	%
Occupancy and equipment	1,444		1,364		80			5.9	%	1,578		1,511		67			4.4	%
Depreciation and amortization	532		489		43			8.8	%	572		546		26			4.8	%
Federal Deposit Insurance Corporation insurance	186		167		19			11.4	%	174		191		(17		)	(8.9	)%
Data processing	950		946		4			0.4	%	1,004		1,023		(19		)	(1.9	)%
Professional services	727		801		(74		)	(9.2	)%	535		810		(275		)	(34.0	)%
Directors' expense	173		175		(2		)	(1.1	)%	187		183		4			2.2	%
Information technology	262		179		83			46.4	%	284		264		20			7.6	%
Core deposit intangible amortization										221		230		(9		)	(3.9	)%
Provision for losses on off-balance sheet commitments	—		100		(100		)	(100.0	)%	—		—		—			—	%
Other non-interest expense
Core deposit intangible amortization	230		118		112			94.9	%
Advertising	118		155		(37		)	(23.9	)%	194		130		64			49.2	%
Other expense	1,280		1,198		82			6.8	%	1,299		1,305		(6		)	(0.5	)%
Total other non-interest expense	1,628		1,471		157			10.7	%	1,493		1,435		58			4.0	%
Total non-interest expense	$	13,971	$	13,036	$	935		7.2	%	$	14,916	$	14,509	$	407		2.8	%

	Nine months ended				Amount			Percent		Six months ended				Amount			Percent
(dollars in thousands)	September 30, 2018		September 30, 2017		Increase (Decrease)			Increase (Decrease)		June 30, 2019		June 30, 2018		Increase (Decrease)			Increase (Decrease)
Salaries and related benefits	$	25,402	$	22,106	$	3,296		14.9	%	$	18,014	$	17,333	$	681		3.9	%
Occupancy and equipment	4,462		4,063		399			9.8	%	3,109		3,018		91			3.0	%
Depreciation and amortization	1,625		1,433		192			13.4	%	1,128		1,093		35			3.2	%
Federal Deposit Insurance Corporation insurance	568		490		78			15.9	%	353		382		(29		)	(7.6	)%
Data processing	3,354		2,848		506			17.8	%	2,019		2,404		(385		)	(16.0	)%
Professional services	2,836		1,845		991			53.7	%	1,121		2,109		(988		)	(46.8	)%
Directors' expense	530		557		(27		)	(4.8	)%	366		357		9			2.5	%
Information technology	795		563		232			41.2	%	543		533		10			1.9	%
Core deposit intangible amortization										443		460		(17		)	(3.7	)%
Provision for losses on off-balance sheet commitments	—		57		(57		)	(100.0	)%	129		—		129			100.0	%
Other non-interest expense
Core deposit intangible amortization	691		354		337			95.2	%
Advertising	426		359		67			18.7	%	405		308		97			31.5	%
Other expense	3,872		4,003		(131		)	(3.3	)%	2,814		2,593		221			8.5	%
Total other non-interest expense	4,989		4,716		273			5.8	%	3,219		2,901		318			11.0	%
Total non-interest expense	$	44,561	$	38,678	$	5,883		15.2	%	$	30,444	$	30,590	$	(146	)	(0.5	)%

NM - Not Meaningful

~~Third~~Second Quarter of ~~2018~~2019 Compared to ~~Third~~Second Quarter of ~~2017~~2018

Non-interest expense increased by ~~$935~~$407 thousand to ~~$14.0~~$14.9 million in the ~~third~~second quarter of ~~2018,~~2019, compared to ~~$13.0~~$14.5 million in the same quarter a year ago. The increase was primarily due to higher salaries and related benefits ~~related~~due to additional full-time equivalent staff and merit increases. We also accrued estimated personnel severance expenses for the ~~addition of Bank of Napa employees, merit increases and filling open positions. Additionally, we amortized $127 thousand~~departed Chief Operating Officer in the ~~third~~second quarter of ~~2018~~2019. The increase was partially offset by lower professional services expenses, mostly attributed to core processing contract negotiations in 2018.

First Six Months of the core-deposit intangible ("CDI") that arose from the Bank of Napa acquisition. There was no provision for losses on off-balance sheet commitments in the third quarter of 2018, compared to a $100 thousand reversal of the provision in the third quarter of 2017. Occupancy and equipment expenses increased primarily due to the addition of two branches from the Bank of Napa acquisition.

~~Nine Months Ended September 30, 2018~~2019 Compared to ~~Nine~~First Six Months ~~Ended September 30, 2017~~of 2018

Non-interest expense ~~increased~~decreased by ~~$5.9 million~~$146 thousand to ~~$44.6~~$30.4 million in the ~~nine months ended September 30, 2018,~~first half of 2019, compared to ~~$38.7~~$30.6 million in the same period a year ago. The ~~increase~~decrease was primarily ~~due~~attributed to ~~higher salaries and benefits related to the addition of Bank of Napa employees, merit increases and filling open positions, as well as higher stock-based compensation related to awards granted~~$1.0 million more in ~~2018 with certain participants meeting retirement eligibility requirements. Professional services increased due to $1.1 million in consulting expenses related to~~professional service fees

incurred for core processing contract negotiations ~~that will result~~ in ~~future technology cost savings. The increase also relates to $954~~2018 and $544 thousand more in ~~acquisition expenses in the nine months ended September 30, 2018 ($598 thousand in data processing, $172 thousand in professional services, $141 thousand in personnel severance~~termination and $43 thousand in other expenses) compared to $504 thousand in the same period last year ($458 thousand in professional services and $46 thousand in other expenses). Additionally, higher occupancy and equipment expensesconversion fees related to ~~rent for the two acquired branches from~~ Bank of Napa core processing system expenses in 2018. The decline was partially offset by higher salaries and related benefits due to additional full-time equivalent staff and merit increases and estimated accrued personnel severance. Additionally, the ~~amortization~~first half of ~~$381~~2019 included a $129 thousand provision for losses on off-balance sheet commitments.

As mentioned in the Executive Summary section above, we upgraded our digital banking platform in the second quarter. We are no longer running our existing and prior platforms in parallel and expect related expenses to decrease by approximately $295 thousand per quarter starting in the third quarter of ~~the core-deposit intangible ("CDI")~~2019. Data processing includes expenses for other projects and services that ~~arose from~~may also fluctuate as the Bank grows. The Petaluma Downtown Branch, closing on August 9, 2019, has had annual operating costs of ~~Napa acquisition also contributed~~approximately $550 thousand. The costs associated with existing employees will transfer to ~~the increase.~~other branches as employees fill open positions.

Provision for Income Taxes

The provision for income taxes for the ~~third~~second quarter of ~~2018~~2019 totaled $~~3.1~~2.9 million at an effective tax rate of ~~26.5%~~26.1%, compared to $2.7 million at an effective tax rate of ~~34.4%~~25.4% in the same quarter last year. The provision for income taxes for the ~~nine months ended September 30, 2018~~first half of 2019 totaled ~~$7.5~~$5.5 million at an effective tax rate of ~~24.5%~~26.0%, compared to ~~$7.4~~$4.3 million at an effective tax rate of ~~33.4%~~23.3% for the first half of 2018. The increase in the provision for income taxes reflected the higher level of pre-tax income and lower tax-exempt interest income and earnings on BOLI. The increase in the effective tax rate in the first half of 2019 compared to the first half of 2018 was also due to a higher level of discrete tax benefits in 2018 from the exercise of stock options and vesting of restricted stock. These discrete tax benefits reduced the effective tax rate by approximately 0.7% in the first half of 2019 versus 2.3% in the same period ~~in 2017. The declines for the 2018 periods compared to the prior~~a year ~~periods reflect the reduction~~ago. Discrete tax benefits were higher in the ~~federal corporate income tax rate~~first half of 2018 due to higher nonqualified stock option exercise activity from ~~35% to 21% related to~~ the ~~enactment~~former employees of ~~the Tax Cuts and Jobs Act~~Bank of ~~2017 that was signed into law on December 22, 2017, effective January 1, 2018.~~Napa post-acquisition. 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 housing tax credits) as well as transactions with discrete tax effects (such as the exercise of stock options, the disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The resulting reduction in the federal statutory rate was partially offset by the effect of the higher level of expected pre-tax income in 2018 and elimination or reductions to the deductibility of certain meals, entertainment, parking and transportation expenses due to the Tax Cuts and Jobs Act of 2017. We expect the effective tax rate for the nine months ended September 30, 2018 to be indicative of the effective tax rate for the year, not including the effect of discrete items described above.

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, ~~2018,~~2019, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At ~~September~~June 30, ~~2018,~~2019, assets totaled ~~$2,545.7~~$2,464.0 million, ~~an increase~~a decrease of ~~$77.6~~$56.9 million, ~~when compared to $2,468.2 million at~~from December 31, ~~2017. Excess cash was~~2018, mainly ~~deployed into investment securities and new loans during the first nine months of 2018 as discussed below.~~reflecting deposit outflows.

Investment Securities

The investment securities portfolio totaled ~~$569.8~~$527.0 million at ~~September~~June 30, ~~2018, an increase~~2019, a decrease of ~~$86.3~~$92.7 million from December 31, ~~2017.~~2018. The ~~increase~~decrease reflects ~~year-to-date purchases of investment securities that are either issued or guaranteed by the US government totaling $176.6 million, which were offset by~~calls, paydowns, maturities and sales totaling ~~$78.8~~$116.1 million, ~~amortization~~partially offset by purchases of ~~premiums net~~$11.3 million in 2019. We sold $66 million in lower yielding, shorter term securities during the first half of ~~accretion of discounts totaling $2.2 million, and a $9.4 million net increase in unrealized losses on available-for-sale securities. During the second quarter of 2018, as part of~~2019 to manage our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies and transferred $27.4 million of these securities from available-for-sale to held-to-maturity at fair value. We maintain liquidity to support our future loan growth by holding investment securities averaging less than 5 years durationinterest rate spread and cash ~~earning 2.20% at the Federal Reserve Bank as of September 30, 2018.~~position.

The following table summarizes our investment in obligations of state and political subdivisions at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

The portion of the portfolio outside the state of California is distributed among twenty states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are ~~Washington (12.2%~~Texas (22.1%), ~~Texas (11.4%~~Washington (8.1%), and ~~Minnesota (8.9%~~Wisconsin (7.9%). Revenue bonds, both within and outside California, primarily consist of bonds relating to essential services (such as public improvements, transportation 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:

Loans increased by ~~$49.9~~$1.0 million and totaled ~~$1,728.9~~$1,764.9 million at ~~September~~June 30, ~~2018, compared to $1,679.0 million at December 31, 2017.~~2019. New loan originations ~~in the first nine months~~ of 2018 of $165.8 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 pay-offs totaled $52.0 million in the third quarter and $120.8 year-to-date. Year-to-date payoffs were slightly higher than 2017 and were due to a variety of reasons, primarily asset sales and refinancing activities.

~~During the first nine months of 2018, total liabilities increased by $66.0 million to $2,237.1 million. Deposits increased $64.2~~$76.1 million in the first ~~nine~~six months of ~~2018,~~2019 were distributed across Commercial Banking and Consumer Banking. Loan payoffs totaled $69.3 million in the first six months. The largest portion of payoffs in 2019 reflected the sale of assets underlying loans and the successful completion of construction projects.

During the first six months of 2019, total liabilities decreased by $68.2 million to $2,136.3 million. Deposits decreased $72.8 million in the first six months of 2019, primarily due to fluctuations from large commercial clients' operational cash flows. The largest decrease in deposit type was money market accounts of $32.2 million. Non-interest bearing deposits ~~increased $95.8~~decreased $9.4 million in the first ~~nine~~six months of ~~2018~~2019 to ~~$1,109.9~~$1,056.7 million, ~~or 50.2%~~and represented 50.3% of total deposits at ~~September~~June 30, ~~2018,~~2019, compared to ~~47.2%~~49.0% at December 31, ~~2017.~~2018. We repaid a $7.0 million overnight borrowing from FHLB at year end of 2018. Liabilities as of June 30, 2019 included operating lease liabilities totaling $14.3 million that were recorded in 2019 after the adoption of the new lease accounting standard, as discussed in Notes 2 and 8 to the consolidated financial statements.

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 following tables can initiate certain mandatory and possibly

additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of ~~June 30, 2018.~~March 31, 2019. 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 Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ("Agencies") finalized regulatory capital rules known as “Basel III.” ~~The rules became effective beginning~~Fully phased in on January ~~2015, and will be fully phased-in by January 2019. The guidelines, among other things, changed~~1, 2019, Basel III required the Bank to maintain (i) a minimum ~~capital requirements~~ratio of ~~banks and bank holding companies, by increasing the~~ Tier 1 capital to risk-weighted assets ~~ratio to 6%~~of at least 8.5%, and ~~introduced a new requirement to maintain~~(ii) a minimum ratio of common equity Tier 1 capital to risk-weighted assets of ~~4.5%. By 2019, when fully phased in,~~at least 7.0%, both inclusive of a 2.50% “capital conservation buffer." The implementation of the ~~rules will require further increases to certain minimum capital requirements and a~~ capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by 0.625% each subsequent January 1, until it reached 2.50% on January 1, 2019). In August 2018, the Board of ~~an additional 2.5%~~Governors of ~~risk-weighted assets.~~

~~We have modeled our ratios under~~ the ~~fully phased-in Basel III rules, and based on present facts and~~Federal Reserve System changed the ~~recently announced $25 million share repurchase program, we do not expect that we will be required~~definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to ~~raise additional capital as~~$3.0 billion. As a result, ~~of the fully phased-in rules.~~Bancorp is no longer subject to separate minimum capital requirements. However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to minimum capital requirements.

The Bancorp’s and Bank’s capital adequacy ratios as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 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 2018 through the accumulation of net income. Our Share Repurchase Program announced on April 23, 2018 may affect future capital levels, as described in Item 1. Note 7, Stockholders Equity, of this Form 10-Q.


Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold¹				Ratio to be a Well Capitalized Bank Holding Company				Actual Ratio				Adequately Capitalized Threshold¹				Ratio to be a Well Capitalized Bank Holding Company
September 30, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2019													Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	306,006	15.29	%	≥ $	197,693	≥ 9.875	%	≥ $	200,195	≥ 10.00	%	$	307,869	15.23	%	≥ $	202,149	≥ 10.00	%	≥ $	202,149	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	289,231	14.45	%	≥ $	157,654	≥ 7.875	%	≥ $	160,156	≥ 8.00	%	$	290,948	14.39	%	≥ $	161,719	≥ 8.00	%	≥ $	161,719	≥ 8.00	%
Tier 1 Capital (to average assets)	$	289,231	11.74	%	≥ $	98,528	≥ 4.000	%	≥ $	123,160	≥ 5.00	%	$	290,948	11.78	%	≥ $	123,511	≥ 5.00	%	≥ $	123,511	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	283,400	14.16	%	≥ $	127,625	≥ 6.375	%	≥ $	130,127	≥ 6.50	%	$	288,274	14.26	%	≥ $	131,397	≥ 6.50	%	≥ $	131,397	≥ 6.50	%
December 31, 2017
December 31, 2018
Total Capital (to risk-weighted assets)	$	287,435	14.91	%	≥ $	178,323	≥ 9.250	%	≥ $	192,782	≥ 10.00	%	$	305,224	14.93	%	≥ $	201,943	≥ 9.875	%	≥ $	204,499	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	270,710	14.04	%	≥ $	139,767	≥ 7.250	%	≥ $	154,225	≥ 8.00	%	$	288,445	14.10	%	≥ $	161,043	≥ 7.875	%	≥ $	163,599	≥ 8.00	%
Tier 1 Capital (to average assets)	$	270,710	12.13	%	≥ $	89,285	≥ 4.000	%	≥ $	111,607	≥ 5.00	%	$	288,445	11.54	%	≥ $	100,011	≥ 4.000	%	≥ $	125,013	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	265,119	13.75	%	≥ $	110,849	≥ 5.750	%	≥ $	125,308	≥ 6.50	%	$	285,805	13.98	%	≥ $	130,368	≥ 6.375	%	≥ $	132,925	≥ 6.50	%

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the President and Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales, as part of our cash management strategy.

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

At ~~September~~June 30, ~~2018~~2019 our liquid assets, which included unencumbered available-for-sale securities and cash, totaled ~~$496.4~~$377.1 million, a decrease of ~~$5.6~~$56.1 million from December 31, ~~2017.~~2018. Our cash and cash equivalents ~~decreased $60.8~~increased $24.5 million from December 31, ~~2017.~~2018. Significant sources of liquidity during the first six months of 2019 included $116.1 million in paydowns, maturities and sales of investment securities, and $16.9 million net cash provided by operating activities. Significant uses of liquidity during the first ~~nine~~six months of ~~2018 were $176.6~~2019 included a $72.8 million decrease in deposits, $11.3 million in investment securities purchased, ~~$50.3~~$10.5 million in ~~loan originations and advances, net~~common stock repurchases, $7.0 million repayment of ~~repayments, $6.4~~borrowing from FHLB, $5.2 million in cash dividends paid on common stock to our shareholders, and ~~$1.3~~$1.9 million in ~~common stock repurchases. Significant sources~~purchases of liquidity during the first nine months of 2018 included $78.8 million in paydowns, maturities and sales of investment securities, an increase in deposits of $64.2 million, and $31.3 million net cash provided by operating activities.bank-owned life insurance policies. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base will provide adequate liquidity to fund our operations.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled ~~$483.3~~$483.0 million at ~~September~~June 30, ~~2018.~~2019. 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, ~~$83.2~~$66.1 million of time deposits will mature. We expect new deposits to replace these funds. Our emphasis on local deposits combined with our 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 ~~$31.3~~$13.0 million of cash at ~~September~~June 30, ~~2018, which~~2019. Combined with a dividend distribution from the bank in July 2019 of $7.2 million, the cash level at Bancorp is deemed sufficient to cover Bancorp's operational needs, share repurchases, ~~early redemption of subordinated debentures,~~ and cash dividends to shareholders through the ~~end of 2018.~~next twelve months. Management anticipates that ~~there~~the Bank will becontinue to have sufficient earnings ~~at the Bank~~ to provide dividends to Bancorp to meet its funding requirements ~~for the near future.~~going forward.

ITEM 3. Quantitative and Qualitative Disclosure about MarketRisk

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.

We expect our net interest margin to increase if rates go up, primarily due to our cash earning the Federal Funds rate, adjustable rate loans and our significant non-interest bearing deposit base. Our net interest income remains most vulnerable to a falling interest rate environment.

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 ~~under a variety of~~in different interest rate ~~scenarios.~~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.

ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, Management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At ~~September~~June 30, ~~2018,~~2019, interest rate risk was within policy guidelines established by ALCO and the Board.

One set of interest rates modeled and evaluated against flat interest rates is a series of immediate parallel shifts in the yield curve. These are provided in the following table as an example rather than an expectation of likely interest rate movements.

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing ~~these~~those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change. Further, the actual rates and timing of prepayments on loans and

investment securities ~~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. Controlsand 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 Securities Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this report. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Act (15 U.S.C. 78a etseq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Act is accumulated and communicated to our Management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our ~~2017~~2018 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q.

ITEM 1A Risk Factors

There have been no material changes from the risk factors previously disclosed in our ~~2017~~2018 Form 10-K. Refer to "Risk Factors" in Item 1A of our ~~2017~~2018 Form 10-K, pages 1011 through ~~20.~~18.

ITEM 2 Unregistered Sales of Equity Securities and Use ofProceeds

On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, ~~2019.~~2019, which the Board subsequently extended to February 28, 2020. For additional information, refer to Note 7 to the Consolidated Financial Statements in this Form 10-Q.

~~From April 23, 2018 to September~~During the three months ended June 30, ~~2018,~~2019, Bancorp ~~purchased 17,943~~repurchased 134,620 shares at an average price of ~~$85.76 and~~$41.87 per share for a total cost of ~~$1.5~~$5.6 million. The following table reflects ~~purchases~~repurchases under the Share Repurchase Program for the periods presented.

(in thousands, except per share data) Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Programs
Approximate Dollar Value That May yet Be Purchased Under the Program
Period
April 23-30, 2018 —
$ —
—
$ 25,000
May 1-31, 2018 1,398
74.06
1,398
24,896
June 1-30, 2018 —
—
—
24,896
July 1-31, 2018 —
—
—
24,896
August 1-31, 2018 4,444
88.85
4,444
24,501
September 1-30, 2018 12,101
85.98
12,101
23,460
Total 17,943
$ 85.76
17,943



(in thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value That May yet Be Purchased Under the Program
Period	Total Number of Shares Purchased	Average Price Paid per Share
April 1-30, 2019	37,858	$	42.23	37,858	$	11,588
May 1-31, 2019	50,308	41.72		50,308	9,486
June 1-30, 2019	46,454	41.75		46,454	7,544
Total	134,620	$	41.87	134,620

ITEM 3 Defaults 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
Agreement to Merger and Plan of Reorganization with Bank of Napa, dated July 31, 2017
8-K 001-33572 2.1 August 2, 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-8 333-218274 4.1 May 26, 2017
10.02
2017 Employee Stock Purchase Plan
S-8 333-221219 4.1 October 30, 2017
10.03
2017 Equity Plan
S-8 333-227840 4.1 October 15, 2018
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 Agreement 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 Agreement 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
11.01
Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements
Filed
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
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
32.01
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



		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 2, 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	333-218274	4.1	May 26, 2017
10.02	2017 Employee Stock Purchase Plan	S-8	333-221219	4.1	October 30, 2017
10.03	2017 Equity Plan, as amended	S-8	333-227840	4.1	October 15, 2018
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 Agreement 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 Agreement 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	Waiver and Release Agreement by and between James Kimball and Bank of Marin, dated as of July 25, 2019.	8-K	001-33572	10.1	July 26, 2019
11.01	Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements					Filed
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
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
32.01	Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002					Filed
101.INS	Inline XBRL Instance Document					Filed
101.SCH	Inline XBRL Taxonomy Extension Schema Document					Filed
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document					Filed
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document					Filed
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document					Filed
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document					Filed

* 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 6, 2018~~August 8, 2019		/s/ Russell A. Colombo
	Date		Russell A. Colombo
			President &
			Chief Executive Officer
			(Principal Executive Officer)


	~~November 6, 2018~~August 8, 2019		/s/ Tani Girton
	Date		Tani Girton
			Executive Vice President &
			Chief Financial Officer
			(Principal Financial Officer)


	~~November 6, 2018~~August 8, 2019		/s/ ~~Cecilia Situ~~David A. Merck
	Date		~~Cecilia Situ~~David A. Merck
			~~First~~ Vice President &
			Financial Reporting Manager ~~of Finance & Treasury~~
			(Principal Accounting Officer)

~~Page-48~~Page-47



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)



Securities registered pursuant to 12(b) of the Act:
Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value	BMRC	The NASDAQ Stock Market LLC




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-31~~Page-29

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	Page-43

ITEM 4.	Controls and Procedures	Page-44

PART II	OTHER INFORMATION	Page-44

ITEM 4.1.	~~Controls~~Legal Proceedings	Page-44

ITEM 1A.	Risk Factors	Page-44

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

~~PART II~~	~~OTHER INFORMATION~~	~~Page-46~~

~~ITEM 1.~~	~~Legal Proceedings~~	~~Page-46~~

~~ITEM 1A.~~	~~Risk Factors~~	~~Page-46~~

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

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

ITEM 4.	Mine Safety Disclosures	~~Page-46~~Page-45

ITEM 5.	Other Information	~~Page-46~~Page-45

ITEM 6.	Exhibits	Page-46

SIGNATURES		~~Page-48~~



Large accelerated filero	☐		Accelerated filerx	☒
Non-accelerated filero	☐	(Do not check if a smaller reporting company)	Smaller reporting companyo	☒
Emerging growth companyo	☐



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
September 30, 2018
30-59 days past due	$	—	$	—	$	—	$	—	$	121	$	—	$	113	$	234
60-89 days past due	20		—		—		—		—		—		47		67
90 days or more past due	—		—		—		—		—		—		—		—
Total past due	20		—		—		—		121		—		160		301
Current	238,751		316,467		841,493		68,739		121,122		113,383		28,615		1,728,570
Total loans ³	$	238,771	$	316,467	$	841,493	$	68,739	$	121,243	$	113,383	$	28,775	$	1,728,871
Non-accrual loans ²	$	—	$	—	$	—	$	—	$	318	$	—	$	68	$	386
December 31, 2017
30-59 days past due	$	—	$	—	$	—	$	—	$	99	$	255	$	330	$	684
60-89 days past due	1,340		—		—		—		—		—		—		1,340
90 days or more past due	—		—		—		—		307		—		—		307
Total past due	1,340		—		—		—		406		255		330		2,331
Current	234,495		300,963		822,984		63,828		132,061		95,271		27,080		1,676,682
Total loans ³	$	235,835	$	300,963	$	822,984	$	63,828	$	132,467	$	95,526	$	27,410	$	1,679,013
Non-accrual loans ²	$	—	$	—	$	—	$	—	$	406	$	—	$	—	$	406



(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 (5.39% as of September 30, 2018), 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 (3.73% as of September 30, 2018), redeemable, in whole or in part, on any interest payment date	4,124
Total	$	8,248



(in thousands)	June 30, 2019
Year	Operating Leases			Finance Leases
2019	$	2,277		$	89
2020	4,424			170
2021	2,746			37
2022	1,890			8
2023	1,400			1
Thereafter	2,716			—
Total minimum lease payments	15,453			305
Amounts representing interest (present value discount)	(1,121		)	(8		)
Present value of net minimum lease payments	$	14,332		$	297

Weighted average remaining term (in years)	5.1			1.8
Weighted average discount rate	2.81		%	2.88		%


	Derivative Assets				Derivative Liabilities				Asset Derivatives				Liability Derivatives
(in thousands)	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Fair value hedges:
Interest rate contracts notional amount	$	8,988	$	4,019	$	9,156	$	14,810	$	—	$	8,895	$	17,437	$	9,016
Interest rate contracts fair value¹	$	436	$	74	$	163	$	740	$	—	$	161	$	1,118	$	375



	Carrying Amounts of Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Loans	$	18,378	$	17,917	$	941	$	6

																											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, 2018
June 30, 2019
Derivatives by Counterparty:
Counterparty A	$	436	$	—	$	436	$	(163	)	$	—	$	273	$	—	$	—	$	—	$	—		$	—	$	—
December 31, 2017
Total														$	—	$	—	$	—	$	—		$	—	$	—
December 31, 2018
Derivatives by Counterparty:
Counterparty A	$	74	$	—	$	74	$	(74	)	$	—	$	—	$	161	$	—	$	161	$	(161	)	$	—	$	—
Total														$	161	$	—	$	161	$	(161	)	$	—	$	—


	Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017											Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017									Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018											Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018
(in thousands)	Volume			Yield/Rate		Mix			Total			Volume			Yield/Rate		Mix		Total		Volume			Yield/Rate		Mix			Total			Volume			Yield/Rate			Mix			Total
Interest-bearing due from banks	$	(149	)	$	226	$	(83	)	$	(6	)	$	100		$	315	$	50	$	465	$	(144	)	$	101	$	(52	)	$	(95	)	$	(467	)	$	338		$	(230	)	$	(359	)
Investment securities ¹	905			305		120			1,330			2,538			707		256		3,501		(43		)	279		(3		)	233			495			608			44			1,147
Loans¹	2,471			704		101			3,276			7,041			1,856		261		9,158		687			620		21			1,328			1,611			1,427			58			3,096
Total interest-earning assets	3,227			1,235		138			4,600			9,679			2,878		567		13,124		500			1,000		(34		)	1,466			1,639			2,373			(128		)	3,884
Interest-bearing transaction accounts	9			18		7			34			39			30		15		84		(6		)	56		(7		)	43			(19		)	106			(19		)	68
Savings accounts	1			—		—			1			4			2		—		6		(1		)	—		—			(1		)	—			(1		)	—			(1		)
Money market accounts	12			177		15			204			42			348		39		429		19			492		40			551			52			938			109			1,099
Time accounts, including CDARS	(8		)	—		—			(8		)	(6		)	9		—		3		(25		)	74		(14		)	35			(67		)	84			(19		)	(2		)
Overnight borrowings	—			—		1			1			—			—		2		2
Borrowings and other obligations																					14			—		9			23			47			—			23			70
Subordinated debentures	3			11		—			14			8			25		1		34		(66		)	4		(3		)	(65		)	(128		)	21			(12		)	(119		)
Total interest-bearing liabilities	17			206		23			246			87			414		57		558		(65		)	626		25			586			(115		)	1,148			82			1,115
Changes in tax-equivalent net interest income	$	3,210		$	1,029	$	115		$	4,354		$	9,592		$	2,464	$	510	$	12,566	$	565		$	374	$	(59	)	$	880		$	1,754		$	1,225		$	(210	)	$	2,769
¹ Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21% in 2018 and 35% in 2017.
¹ Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.																					¹ Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.


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, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2019													Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	274,656	13.72	%	≥ $	197,646	≥ 9.875	%	≥ $	200,147	≥ 10.00	%	$	294,728	14.58	%	≥ $	202,113	≥ 10.00	%	≥ $	202,113	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	257,881	12.88	%	≥ $	157,616	≥ 7.875	%	≥ $	160,118	≥ 8.00	%	$	277,806	13.75	%	≥ $	161,690	≥ 8.00	%	≥ $	161,690	≥ 8.00	%
Tier 1 Capital (to average assets)	$	257,881	10.47	%	≥ $	98,508	≥ 4.000	%	≥ $	123,135	≥ 5.00	%	$	277,806	11.25	%	≥ $	123,498	≥ 5.00	%	≥ $	123,498	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	257,881	12.88	%	≥ $	127,594	≥ 6.375	%	≥ $	130,096	≥ 6.50	%	$	277,806	13.75	%	≥ $	131,373	≥ 6.50	%	≥ $	131,373	≥ 6.50	%
December 31, 2017
December 31, 2018
Total Capital (to risk-weighted assets)	$	283,885	14.73	%	≥ $	178,281	≥ 9.250	%	≥ $	192,737	≥ 10.00	%	$	285,969	13.98	%	≥ $	201,297	≥ 9.875	%	≥ $	204,483	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	267,160	13.86	%	≥ $	139,734	≥ 7.250	%	≥ $	154,189	≥ 8.00	%	$	269,191	13.16	%	≥ $	161,031	≥ 7.875	%	≥ $	163,587	≥ 8.00	%
Tier 1 Capital (to average assets)	$	267,160	11.97	%	≥ $	89,275	≥ 4.000	%	≥ $	111,593	≥ 5.00	%	$	269,191	10.77	%	≥ $	99,994	≥ 4.000	%	≥ $	124,992	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	267,160	13.86	%	≥ $	110,824	≥ 5.750	%	≥ $	125,279	≥ 6.50	%	$	269,191	13.16	%	≥ $	130,358	≥ 6.375	%	≥ $	132,914	≥ 6.50	%


Immediate Changes in Interest Rates (in basis points)	Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income		Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
up 400	(0.3	)%	8.4	%	(4.8	)%	4.2	%
up 300	—	%	6.6	%	(3.4	)%	3.7	%
up 200	—	%	4.5	%	(2.1	)%	3.0	%
up 100	0.3	%	3.1	%	(0.8	)%	2.2	%
down 100	(6.0	)%	(10.1	)%	(3.9	)%	(7.7	)%
down 200					(7.7	)%	(16.4	)%