UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, ~~2020~~2021

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

For the transition period from __________________ to __________________

Commission File Number 001-33572

Bank of Marin Bancorp

(Exact name of Registrant as specified in its charter)

California

20-8859754

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

504 Redwood Blvd.

Suite 100

Novato

94947

(Address of principal executive office)

(Zip Code)

Registrant’s telephone number, including area code: (415) 763-4520

Not Applicable

(Former name, former address and formal fiscal year, if changed since last report)

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 and attached Share Purchase Rights

BMRC

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☐

Emerging growth company

☐

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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of July 31, ~~2020,~~2021, there were ~~13,595,694~~13,021,501 shares of common stock outstanding.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION	3

ITEM 1.	Financial Statements	3

	Consolidated Statements of Condition	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Stockholders' Equity	5
	Consolidated Statements of Cash Flows	76
	Notes to Consolidated Financial Statements	87

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3028

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risk	4342

ITEM 4.	Controls and Procedures	4443

PART II	OTHER INFORMATION	4543

ITEM 1.	Legal Proceedings	4543

ITEM 1A.	Risk Factors	4544

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4644

ITEM 3.	Defaults Upon Senior Securities	4744

ITEM 4.	Mine Safety Disclosures	4744

ITEM 5.	Other Information	4744

ITEM 6.	Exhibits	4845

SIGNATURES

Page-2

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION ~~June 30, 2020 and December 31, 2019~~

(in thousands, except share data; unaudited) June 30, 2020 December 31, 2019
Assets
Cash, cash equivalents and restricted cash $ 397,699 $ 183,388
Investment securities
Held-to-maturity, at amortized cost 125,781 137,413
Available-for-sale, at fair value 429,775 432,260
Total investment securities 555,556 569,673
Loans, net of allowance for loan losses of $20,868 and $16,677 at
June 30, 2020 and December 31, 2019, respectively
2,089,333 1,826,609
Bank premises and equipment, net 5,278 6,070
Goodwill 30,140 30,140
Core deposit intangible 4,258 4,684
Operating lease right-of-use assets 23,090 11,002
Interest receivable and other assets 76,186 75,714
Total assets $ 3,181,540 $ 2,707,280
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 1,442,849 $ 1,128,823
Interest bearing
Transaction accounts 146,811 142,329
Savings accounts 190,561 162,817
Money market accounts 904,163 804,710
Time accounts 95,482 97,810
Total deposits 2,779,866 2,336,489
Borrowings and other obligations 140 212
Subordinated debenture 2,743 2,708
Operating lease liabilities 24,574 12,615
Interest payable and other liabilities 21,977 18,468
Total liabilities 2,829,300 2,370,492
Stockholders' Equity
Preferred stock, no par value,
    Authorized - 5,000,000 shares, NaN issued
— —
Common stock, no par value,
    Authorized - 30,000,000 shares;
    Issued and outstanding - 13,591,835 and 13,577,008 at
    June 30, 2020 and December 31, 2019, respectively
128,633 129,058
Retained earnings 211,613 203,227
Accumulated other comprehensive income, net of taxes 11,994 4,503
Total stockholders' equity 352,240 336,788
Total liabilities and stockholders' equity $ 3,181,540 $ 2,707,280


(in thousands, except share data; unaudited)	June 30, 2021		December 31, 2020
Assets
Cash, cash equivalents and restricted cash	$	257,543	$	200,320


Investment securities:
Held-to-maturity, at amortized cost (net of 0 allowance for credit losses at June 30, 2021 and December 31, 2020 )	169,038		109,036
Available-for-sale, at fair value (net of 0 allowance for credit losses at June 30, 2021 and December 31, 2020 )	517,963		392,351
Total investment securities	687,001		501,387
Loans, at amortized cost	2,002,767		2,088,556
Allowance for credit losses on loans	(19,100)		(22,874)
Loans, net of allowance for credit losses on loans	1,983,667		2,065,682
Bank premises and equipment, net	5,248		4,919
Goodwill	30,140		30,140
Core deposit intangible	3,423		3,831
Operating lease right-of-use assets	23,506		25,612
Interest receivable and other assets	83,290		80,035
Total assets	$	3,073,818	$	2,911,926

Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing	$	1,460,076	$	1,354,650
Interest bearing
Transaction accounts	168,226		183,552
Savings accounts	230,730		201,507
Money market accounts	729,193		667,107
Time accounts	95,350		97,433
Total deposits	2,683,575		2,504,249
Borrowings and other obligations	438		58
Subordinated debenture	0		2,777
Operating lease liabilities	24,919		27,062
Interest payable and other liabilities	16,237		19,527
Total liabilities	2,725,169		2,553,673

Stockholders' Equity
Preferred stock, no par value, Authorized - 5,000,000 shares, NaN issued	0		0
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 13,055,105 and 13,500,453 at June 30, 2021 and December 31, 2020, respectively	108,430		125,905
Retained earnings	231,841		219,747
Accumulated other comprehensive income, net of taxes	8,378		12,601
Total stockholders' equity	348,649		358,253
Total liabilities and stockholders' equity	$	3,073,818	$	2,911,926

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

Page-3


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended Six months ended
(in thousands, except per share amounts; unaudited) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Interest income
Interest and fees on loans $ 21,217 $ 20,988 $ 42,104 $ 41,683
Interest on investment securities 3,741 3,763 7,906 7,860
Interest on federal funds sold and due from banks 39 190 371 329
Total interest income 24,997 24,941 50,381 49,872
Interest expense
Interest on interest-bearing transaction accounts 39 91 105 168
Interest on savings accounts 17 17 33 35
Interest on money market accounts 383 787 1,354 1,551
Interest on time accounts 142 175 303 294
Interest on borrowings and other obligations 1 24 3 71
Interest on subordinated debenture 40 58 89 118
Total interest expense 622 1,152 1,887 2,237
Net interest income 24,375 23,789 48,494 47,635
Provision for loan losses 2,000 — 4,200 —
Net interest income after provision for loan losses 22,375 23,789 44,294 47,635
Non-interest income
Service charges on deposit accounts 293 485 744 964
Wealth Management and Trust Services 421 473 925 911
Debit card interchange fees, net 308 414 668 794
Merchant interchange fees, net 47 87 120 174
Earnings on bank-owned life insurance 234 235 509 175
Dividends on Federal Home Loan Bank stock 146 193 354 389
Gains on sale of investment securities, net 115 61 915 55
Other income 249 326 698 583
Total non-interest income 1,813 2,274 4,933 4,045
Non-interest expense
Salaries and related benefits 7,864 8,868 17,341 18,014
Occupancy and equipment 1,661 1,578 3,324 3,109
Depreciation and amortization 526 572 1,052 1,128
Federal Deposit Insurance Corporation insurance 116 174 118 353
Data processing 829 1,004 1,615 2,019
Professional services 550 535 1,094 1,121
Directors' expense 175 187 349 366
Information technology 252 284 502 543
Amortization of core deposit intangible 213 221 426 443
Provision for losses on off-balance sheet commitments 260 — 362 129
Other expense 1,695 1,493 3,427 3,219
Total non-interest expense 14,141 14,916 29,610 30,444
Income before provision for income taxes 10,047 11,147 19,617 21,236
Provision for income taxes 2,641 2,912 4,983 5,522
Net income $ 7,406 $ 8,235 $ 14,634 $ 15,714
Net income per common share:
Basic $ 0.55 $ 0.60 $ 1.08 $ 1.15
Diluted $ 0.55 $ 0.60 $ 1.07 $ 1.13
Weighted average shares:
Basic 13,514 13,655 13,519 13,696
Diluted 13,585 13,818 13,621 13,871
Comprehensive income:
Net income $ 7,406 $ 8,235 $ 14,634 $ 15,714
Other comprehensive income
Change in net unrealized gains or losses on available-for-sale securities 1,494 8,982 11,306 12,921
Reclassification adjustment for gains on available-for-sale securities in net income (115) (61) (915) (55)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 135 104 245 205
Other comprehensive income, before tax 1,514 9,025 10,636 13,071
Deferred tax expense 448 2,671 3,145 3,869
Other comprehensive income, net of tax 1,066 6,354 7,491 9,202
Total comprehensive income $ 8,472 $ 14,589 $ 22,125 $ 24,916


	Three months ended				Six months ended
(in thousands, except per share amounts; unaudited)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Interest income
Interest and fees on loans	$	21,429	$	21,217	$	42,090	$	42,104
Interest on investment securities	3,504		3,741		6,633		7,906
Interest on federal funds sold and due from banks	54		39		96		371
Total interest income	24,987		24,997		48,819		50,381
Interest expense
Interest on interest-bearing transaction accounts	39		39		78		105
Interest on savings accounts	21		17		40		33
Interest on money market accounts	312		383		598		1,354
Interest on time accounts	81		142		177		303
Interest on borrowings and other obligations	0		1		0		3
Interest on subordinated debenture	0		40		1,361		89
Total interest expense	453		622		2,254		1,887
Net interest income	24,534		24,375		46,565		48,494
(Reversal of) provision for credit losses on loans	(920)		2,000		(3,849)		4,200
(Reversal of) provision for credit losses on unfunded loan commitments	(612)		260		(1,202)		362
Net interest income after (reversal of) provision for credit losses	26,066		22,115		51,616		43,932
Non-interest income
Wealth Management and Trust Services	530		421		1,018		925
Debit card interchange fees	419		308		785		668
Service charges on deposit accounts	317		293		598		744
Earnings on bank-owned life insurance, net	233		234		490		509
Dividends on Federal Home Loan Bank stock	177		146		326		354
Merchant interchange fees	61		47		118		120
Gains on sale of investment securities, net	0		115		0		915
Other income	285		249		513		698
Total non-interest income	2,022		1,813		3,848		4,933
Non-interest expense
Salaries and related benefits	8,888		7,864		18,096		17,341
Occupancy and equipment	1,751		1,661		3,502		3,324
Professional services	986		550		1,849		1,094
Data processing	820		829		1,639		1,615
Charitable contributions	462		273		493		440
Depreciation and amortization	389		526		848		1,052
Information technology	296		252		609		502
Directors' expense	230		175		405		349
Amortization of core deposit intangible	204		213		408		426
Federal Deposit Insurance Corporation insurance	182		116		361		118
Other expense	1,348		1,422		2,758		2,987
Total non-interest expense	15,556		13,881		30,968		29,248
Income before provision for income taxes	12,532		10,047		24,496		19,617
Provision for income taxes	3,247		2,641		6,264		4,983
Net income	$	9,285	$	7,406	$	18,232	$	14,634
Net income per common share:
Basic	$	0.71	$	0.55	$	1.38	$	1.08
Diluted	$	0.71	$	0.55	$	1.37	$	1.07
Weighted average shares:
Basic	13,092		13,514		13,227		13,519
Diluted	13,164		13,585		13,316		13,621
Comprehensive income (loss):
Net income	$	9,285	$	7,406	$	18,232	$	14,634
Other comprehensive income (loss):
Change in net unrealized gains on available-for-sale securities	2,798		1,494		(6,284)		11,306
Reclassification adjustment for gains on available-for-sale securities included in net income	0		(115)		0		(915)

Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity	138		135		281		245
Other comprehensive income (loss), before tax	2,936		1,514		(6,003)		10,636
Deferred tax expense (benefit)	864		448		(1,780)		3,145
Other comprehensive income (loss), net of tax	2,072		1,066		(4,223)		7,491
Total comprehensive income	$	11,357	$	8,472	$	14,009	$	22,125

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

Page-4


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended June 30, ~~2020~~2021 and ~~2019~~2020


(in thousands, except share data; unaudited)	(in thousands, except share data; unaudited)	Common Stock					Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Taxes		Total		(in thousands, except share data; unaudited)	Common Stock				Retained Earnings		Accumulated Other Comprehensive Income, Net of Taxes		Total
			Shares		Amount																		Retained Earnings	Accumulated Other Comprehensive Income, Net of Taxes	Total
												Three months ended June 30, 2021
Balance at April 1, 2021											Balance at April 1, 2021	13,326,509		$	118,386	$	225,600	$	6,306	$	350,292
Net income											Net income	—		—		9,285		—		9,285
Other comprehensive income											Other comprehensive income	—		—		—		2,072		2,072

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings											Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	14,000		314		—		—		314
Stock issued under employee stock purchase plan											Stock issued under employee stock purchase plan	831		25		—		—		25
Stock issued under employee stock ownership plan											Stock issued under employee stock ownership plan	9,300		336		—		—		336
Restricted stock granted											Restricted stock granted	2,400		—		—		—		—

Stock-based compensation - stock options											Stock-based compensation - stock options	—		28		—		—		28
Stock-based compensation - restricted stock											Stock-based compensation - restricted stock	—		95		—		—		95
Cash dividends paid on common stock ($0.23 per share)											Cash dividends paid on common stock ($0.23 per share)	—		—		(3,044)		—		(3,044)

Stock repurchased, net of commissions											Stock repurchased, net of commissions	(297,935)		(10,754)		—		—		(10,754)
Balance at June 30, 2021											Balance at June 30, 2021	13,055,105		$	108,430	$	231,841	$	8,378	$	348,649
		Three months ended June 30, 2020																		Three months ended June 30, 2020
Balance at April 1, 2020	Balance at April 1, 2020	13,565,969	$	127,684	$	207,328	$	10,928	$	345,940	Balance at April 1, 2020	13,565,969		$	127,684	$	207,328	$	10,928	$	345,940
Net income	Net income	—	—		7,406		—		7,406		Net income	—		—		7,406		—		7,406
Other comprehensive income	Other comprehensive income	—	—		—		1,066		1,066		Other comprehensive income	—		—		—		1,066		1,066

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	14,760	453		—		—		453		Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	14,760		453		—		—		453
Stock issued under employee stock purchase plan	Stock issued under employee stock purchase plan	537	17		—		—		17		Stock issued under employee stock purchase plan	537		17		—		—		17
Stock issued under employee stock ownership plan	Stock issued under employee stock ownership plan	11,500	324		—		—		324		Stock issued under employee stock ownership plan	11,500		324		—		—		324

Restricted stock forfeited / cancelled	Restricted stock forfeited / cancelled	(931)	—		—		—		—		Restricted stock forfeited / cancelled	(931)		—		—		—		—
Stock-based compensation - stock options	Stock-based compensation - stock options	—	42		—		—		42		Stock-based compensation - stock options	—		42		—		—		42
Stock-based compensation - restricted stock	Stock-based compensation - restricted stock	—	113		—		—		113		Stock-based compensation - restricted stock	—		113		—		—		113
Cash dividends paid on common stock ($0.23 per share)	Cash dividends paid on common stock ($0.23 per share)	—	—		(3,121)		—		(3,121)		Cash dividends paid on common stock ($0.23 per share)	—		—		(3,121)		—		(3,121)

Balance at June 30, 2020	Balance at June 30, 2020	13,591,835	$	128,633	$	211,613	$	11,994	$	352,240	Balance at June 30, 2020	13,591,835		$	128,633	$	211,613	$	11,994	$	352,240
		Three months ended June 30, 2019
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		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

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 six months ended June 30, ~~2020~~2021 and ~~2019~~2020

(in thousands, except share data; unaudited) Common Stock Retained
Earnings Accumulated Other
Comprehensive Income (Loss),
Net of Taxes Total
Shares Amount
Six months ended June 30, 2020
Balance at January 1, 2020 13,577,008 $ 129,058 $ 203,227 $ 4,503 $ 336,788
Net income — — 14,634 — 14,634
Other comprehensive income — — — 7,491 7,491
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 63,815 1,277 — — 1,277
Stock issued under employee stock purchase plan 1,084 33 — — 33
Stock issued under employee stock ownership plan 19,400 648 — — 648
Restricted stock granted 29,100 — — — —
Restricted stock surrendered for tax withholdings upon vesting (2,200) (73) — — (73)
Restricted stock forfeited / cancelled (6,718) — — — —
Stock-based compensation - stock options — 211 — — 211
Stock-based compensation - restricted stock — 574 — — 574
Cash dividends paid on common stock ($0.46 per share) — — (6,248) — (6,248)
Stock purchased by directors under director stock plan 400 18 — — 18
Stock issued in payment of director fees 2,610 117 — — 117
Stock repurchased, net of commissions (92,664) (3,230) — — (3,230)
Balance at June 30, 2020 13,591,835 $ 128,633 $ 211,613 $ 11,994 $ 352,240
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 employee stock ownership plan 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


(in thousands, except share data; unaudited)	Common Stock			Retained Earnings		Accumulated Other Comprehensive (Loss) Income, Net of Taxes		Total
	Shares	Amount
	Six months ended June 30, 2021
Balance at January 1, 2021	13,500,453	$	125,905	$	219,747	$	12,601	$	358,253
Net income	—	—		18,232		—		18,232
Other comprehensive (loss)	—	—		—		(4,223)		(4,223)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	31,180	351						351
Stock issued under employee stock purchase plan	1,609	53		—		—		53
Stock issued under employee stock ownership plan	18,300	668		—		—		668
Restricted stock granted	29,454	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(3,961)	(156)		—		—		(156)
Restricted stock forfeited / cancelled	(3,848)	—		—		—		—
Stock-based compensation - stock options	—	200		—		—		200
Stock-based compensation - restricted stock	—	538		—		—		538
Cash dividends paid on common stock ($0.46 per share)	—	—		(6,138)		—		(6,138)
Stock purchased by directors under director stock plan	519	18		—		—		18
Stock issued in payment of director fees	3,347	117		—		—		117

Stock repurchased, net of commissions	(521,948)	(19,264)		—		—		(19,264)
Balance at June 30, 2021	13,055,105	$	108,430	$	231,841	$	8,378	$	348,649
	Six months ended June 30, 2020
Balance at January 1, 2020	13,577,008	$	129,058	$	203,227	$	4,503	$	336,788
Net income	—	—		14,634		—		14,634
Other comprehensive income	—	—		—		7,491		7,491

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings	63,815	1,277		—		—		1,277
Stock issued under employee stock purchase plan	1,084	33		—		—		33
Stock issued under employee stock ownership plan	19,400	648		—		—		648
Restricted stock granted	29,100	—		—		—		—
Restricted stock surrendered for tax withholdings upon vesting	(2,200)	(73)		—		—		(73)
Restricted stock forfeited / cancelled	(6,718)	—		—		—		—
Stock-based compensation - stock options	—	211		—		—		211
Stock-based compensation - restricted stock	—	574		—		—		574
Cash dividends paid on common stock ($0.46 per share)	—	—		(6,248)		—		(6,248)
Stock purchased by directors under director stock plan	400	18		—		—		18

Stock issued in payment of director fees	2,610	117		—		—		117
Stock repurchased, net of commissions	(92,664)	(3,230)		—		—		(3,230)
Balance at June 30, 2020	13,591,835	$	128,633	$	211,613	$	11,994	$	352,240

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

Page-5


BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, ~~2020~~2021 and ~~2019~~2020


(in thousands; unaudited)	(in thousands; unaudited)	June 30, 2020		June 30, 2019		(in thousands; unaudited)	June 30, 2021		June 30, 2020
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:					Cash Flows from Operating Activities:
Net income	Net income	$	14,634	$	15,714	Net income	$	18,232	$	14,634
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,200		—
Provision for losses on off-balance sheet commitments		362		129
(Reversal of) provision for credit losses on loans						(Reversal of) provision for credit losses on loans	(3,849)		4,200
(Reversal of) provision for credit losses on unfunded loan commitments						(Reversal of) provision for credit losses on unfunded loan commitments	(1,202)		362

Noncash contribution expense to employee stock ownership plan	Noncash contribution expense to employee stock ownership plan	648		625		Noncash contribution expense to employee stock ownership plan	668		648
Noncash director compensation expense	Noncash director compensation expense	150		151		Noncash director compensation expense	162		150
Stock-based compensation expense	Stock-based compensation expense	785		1,004		Stock-based compensation expense	738		785

Amortization of core deposit intangible	Amortization of core deposit intangible	426		443		Amortization of core deposit intangible	408		426
Amortization of investment security premiums (discounts), net		344		924
Amortization of acquired loan (discounts) premiums, net		(55)		(154)
Amortization of investment security premiums, net of accretion of discounts						Amortization of investment security premiums, net of accretion of discounts	1,753		344
Accretion of discounts on acquired loans						Accretion of discounts on acquired loans	(78)		(55)
Accretion of discount on subordinated debenture	Accretion of discount on subordinated debenture	35		34		Accretion of discount on subordinated debenture	1,347		35
Net change in deferred loan origination costs/fees	Net change in deferred loan origination costs/fees	7,829		(146)		Net change in deferred loan origination costs/fees	1,146		7,829

Gain on sale of investment securities	Gain on sale of investment securities	(915)		(55)		Gain on sale of investment securities	0		(915)
Depreciation and amortization	Depreciation and amortization	1,052		1,128		Depreciation and amortization	848		1,052

Earnings on bank-owned life insurance policies	Earnings on bank-owned life insurance policies	(509)		(175)		Earnings on bank-owned life insurance policies	(490)		(509)
Net change in operating assets and liabilities:
Net changes in:						Net changes in:

Interest receivable and other assets	Interest receivable and other assets	(2,174)		(583)		Interest receivable and other assets	952		(2,174)
Interest payable and other liabilities	Interest payable and other liabilities	2,816		(2,131)		Interest payable and other liabilities	(866)		2,816
Total adjustments	Total adjustments	14,994		1,194		Total adjustments	1,537		14,994
Net cash provided by operating activities	Net cash provided by operating activities	29,628		16,908		Net cash provided by operating activities	19,769		29,628
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:

Purchase of held-to-maturity securities						Purchase of held-to-maturity securities	(74,521)		0
Purchase of available-for-sale securities	Purchase of available-for-sale securities	(56,912)		(11,282)		Purchase of available-for-sale securities	(170,161)		(56,912)
Proceeds from sale of available-for-sale securities	Proceeds from sale of available-for-sale securities	33,756		66,081		Proceeds from sale of available-for-sale securities	0		33,756
Proceeds from paydowns/maturities of held-to-maturity securities	Proceeds from paydowns/maturities of held-to-maturity securities	11,530		8,157		Proceeds from paydowns/maturities of held-to-maturity securities	14,376		11,530
Proceeds from paydowns/maturities of available-for-sale securities	Proceeds from paydowns/maturities of available-for-sale securities	36,951		41,905		Proceeds from paydowns/maturities of available-for-sale securities	36,936		36,951

Loans originated and principal collected, net	Loans originated and principal collected, net	(273,169)		234		Loans originated and principal collected, net	84,259		(273,169)
Purchase of bank-owned life insurance policies	Purchase of bank-owned life insurance policies	(941)		(1,892)		Purchase of bank-owned life insurance policies	(1,943)		(941)
Purchase of premises and equipment	Purchase of premises and equipment	(242)		(244)		Purchase of premises and equipment	(765)		(242)

Cash paid for low income housing tax credit investment	Cash paid for low income housing tax credit investment	(1,251)		(38)		Cash paid for low income housing tax credit investment	(346)		(1,251)
Net cash (used in) provided by investing activities		(250,278)		102,921
Net cash used in investing activities						Net cash used in investing activities	(112,165)		(250,278)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net increase (decrease) in deposits		443,377		(72,800)
Net increase in deposits						Net increase in deposits	179,326		443,377
Proceeds from stock options exercised	Proceeds from stock options exercised	1,277		470		Proceeds from stock options exercised	351		1,277

Payment of tax withholdings for stock options exercised and vesting of restricted stock		(73)		(220)
Payment of tax withholdings for vesting of restricted stock						Payment of tax withholdings for vesting of restricted stock	(156)		(73)
Proceeds from stock issued under employee and director stock purchase plans	Proceeds from stock issued under employee and director stock purchase plans	51		37		Proceeds from stock issued under employee and director stock purchase plans	71		51
Stock repurchased, net of commissions	Stock repurchased, net of commissions	(3,333)		(10,455)		Stock repurchased, net of commissions	(19,677)		(3,333)

Repayment of Federal Home Loan Bank borrowings		—		(7,000)
Repayment of subordinated debenture including execution costs						Repayment of subordinated debenture including execution costs	(4,126)		0

Repayment of finance lease obligations	Repayment of finance lease obligations	(90)		(83)		Repayment of finance lease obligations	(32)		(90)
Cash dividends paid on common stock	Cash dividends paid on common stock	(6,248)		(5,242)		Cash dividends paid on common stock	(6,138)		(6,248)

Net cash provided by (used in) financing activities		434,961		(95,293)
Net cash provided by financing activities						Net cash provided by financing activities	149,619		434,961
Net increase in cash, cash equivalents and restricted cash	Net increase in cash, cash equivalents and restricted cash	214,311		24,536		Net increase in cash, cash equivalents and restricted cash	57,223		214,311
Cash, cash equivalents and restricted cash at beginning of period	Cash, cash equivalents and restricted cash at beginning of period	183,388		34,221		Cash, cash equivalents and restricted cash at beginning of period	200,320		183,388
Cash, cash equivalents and restricted cash at end of period	Cash, cash equivalents and restricted cash at end of period	$	397,699	$	58,757	Cash, cash equivalents and restricted cash at end of period	$	257,543	$	397,699
Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid in interest	Cash paid in interest	$	1,871	$	2,191	Cash paid in interest	$	951	$	1,871
Cash paid in income taxes	Cash paid in income taxes	$	—	$	6,925	Cash paid in income taxes	$	6,000	$	0
Supplemental disclosure of noncash investing and financing activities:	Supplemental disclosure of noncash investing and financing activities:					Supplemental disclosure of noncash investing and financing activities:

Change in net unrealized gain or loss on available-for-sale securities		$	11,306	$	12,921
Change in net unrealized gains on available-for-sale securities						Change in net unrealized gains on available-for-sale securities	$	(6,284)	$	11,306

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	245	$	205	Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity	$	281	$	245

Stock issued to employee stock ownership plan	Stock issued to employee stock ownership plan	$	648	$	625	Stock issued to employee stock ownership plan	$	668	$	648
Stock issued in payment of director fees		$	117	$	114
Repurchase of stock not yet settled		$	—	$	132
Stock issued for director compensation expense						Stock issued for director compensation expense	$	162	$	150

Restricted cash¹	Restricted cash¹	$	—	$	9,709	Restricted cash1	$	0	$	0

¹ Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.

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

Page-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1: Basis of Presentation

The consolidated financial statements include the accounts of Bank of Marin Bancorp (“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California state-chartered commercial bank. References to “we,” “our,” “us” mean 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. Certain items in prior financial statements were reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

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 ~~2019~~2020 Annual Report on Form 10-K. In the opinion of ~~Management,~~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 Trust II (the "Trust") was formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trust (a variable interest entity), therefore the Trust is not consolidated in our consolidated financial statements, but rather the subordinated debenture is shown as a liability on our consolidated statements of condition. Bancorp's investment in the securities of the Trust is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for additional information on the subordinated debenture due to NorCal Community Bancorp Trust ~~II.~~II and the early redemption that occurred on March 15, 2021.

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) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Weighted average basic shares outstanding 13,514 13,655 13,519 13,696
Potentially dilutive common shares related to:
Stock options 54 142 80 149
Unvested restricted stock awards 17 21 22 26
Weighted average diluted shares outstanding 13,585 13,818 13,621 13,871
Net income $ 7,406 $ 8,235 $ 14,634 $ 15,714
Basic EPS $ 0.55 $ 0.60 $ 1.08 $ 1.15
Diluted EPS $ 0.55 $ 0.60 $ 1.07 $ 1.13
Weighted average anti-dilutive shares not included in the calculation of diluted EPS 207 44 109 30

Page-7


	Three months ended				Six months ended
(in thousands, except per share data)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Weighted average basic common shares outstanding	13,092		13,514		13,227		13,519
Potentially dilutive common shares related to:
Stock options	54		54		67		80
Unvested restricted stock awards	18		17		22		22
Weighted average diluted shares outstanding	13,164		13,585		13,316		13,621
Net income	$	9,285	$	7,406	$	18,232	$	14,634
Basic EPS	$	0.71	$	0.55	$	1.38	$	1.08
Diluted EPS	$	0.71	$	0.55	$	1.37	$	1.07
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS	111		207		88		109

Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in ~~2020~~2021

~~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 unobservable inputs used to develop Level 3 fair value measurements. We adopted this ASU prospectively effective January 1, 2020. As the ASU’s requirements only relate to disclosures, the amendments did not impact our financial condition or results of operations. Refer to Note 3, Fair Value of Assets and Liabilities, for additional disclosures.

~~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. We adopted this ASU prospectively on January 1, 2020, which did not impact our financial condition and results of operations.

~~Accounting Standards Not Yet Adopted~~

~~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 applies 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. In addition, the CECL standard modifies the accounting for purchased loans and requires that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through credit loss expense.

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 credit 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. However, in accordance with the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard. Implementation may be delayed until the end of the national emergency or December 31, 2020, whichever occurs first. Had we adopted the CECL standard as of January 1, 2020, the increase to our allowance for loan losses would have ranged from 5% to 15% of the amount recorded at December 31, 2019, which were based on economic forecasts at that time and did not include the subsequent COVID-19 pandemic related impact.

Early CECL 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, running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors, and evaluating the qualitative factor framework and assumptions. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that

~~Page-8~~

considers the probability of default and loss given default. Ongoing implementation activities include developing forecasts, running parallel calculations, evaluating results, and continuing model validation.

~~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. The provisions of this ASU under Topic 326 will be evaluated in conjunction with the adoption of ASU 2016-13, however, we do not expect it to have a material impact on our financial condition and results of operations. All other provisions under this ASU were adopted as of January 1, 2020 and did not impact our financial condition and 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 the adoption of ASU 2016-13 to determine its impact on our financial condition and results of operations. However, at this time we do not expect to elect the fair value option for our financial assets.

~~In November 2019, the FASB issued ASU No. 2019-11,~~ ~~Codification Improvements to Topic 326, Financial Instruments - Credit Losses~~. This ASU, among other narrow-scope improvements, clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. This ASU permits organizations to record expected recoveries on PCD assets. Additionally, this ASU reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments should be applied on a modified retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date of adoption. 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 the adoption of ASU 2016-13 to determine its impact on our financial condition and results of operations.

~~Accounting Standards Not Yet Effective~~

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes ~~(Topic~~(ASC Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in ~~Topic~~ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. ~~This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. As~~We adopted this ASU ~~is narrow in scope and applicability to us will likely be minimal, we do~~prospectively on January 1, 2021, which did not ~~expect that the ASU will~~ have a material impact on our financial condition or results of operations.

In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities ~~(Topic~~(ASC Topic 321), Investments - Equity Method and Joint Ventures ~~(Topic~~(ASC Topic 323), and Derivatives and Hedging ~~(Topic~~(ASC Topic 815) - Clarifying the Interactions between ~~Topic~~ASC 321, ~~Topic~~ASC 323, and ~~Topic~~ASC 815. Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ~~Topic~~ASC 323, for the purposes of applying the measurement alternative in accordance with ~~Topic~~ASC 321. ~~This~~We adopted this ASU ~~is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. ASU No. 2020-01 should be applied~~ prospectively ~~at the beginning of the interim period that includes adoption. We do~~on January 1, 2021, which did not ~~expect that the ASU will~~ have a material impact on our financial condition or results of operations.

In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application. This ASU adds clarification to ASU 2017-08, which the Bank early-adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should amortize the amount above that which is repayable, to the next call date. We adopted this ASU prospectively on January 1, 2021. Because this ASU was narrow in scope and for clarification purposes, it did not have a material impact on our financial condition and results of operations.

Accounting Standards Not Yet Effective

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden inof accounting for, ~~(or~~or recognizing the effects ~~of)~~of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying ~~generally accepted accounting principles (GAAP)~~GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued

~~Page-9~~

because of reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have not elected to apply ~~these amendments. However, we~~amendments at this time, however, will assess the applicability of ~~the~~this ASU to us ~~and~~as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.

Page-8

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~~management judgment and estimation.

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	(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	(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, 2020
June 30, 2021											June 30, 2021
Securities available-for-sale:											Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies											Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	284,783	$	0	$	284,783	$	0	OCI
SBA-backed securities											SBA-backed securities	29,460		0		29,460		0		OCI
Debentures of government sponsored agencies											Debentures of government sponsored agencies	74,711		0		74,711		0		OCI

Obligations of state and political subdivisions											Obligations of state and political subdivisions	123,224		0		123,224		0		OCI
Corporate bonds											Corporate bonds	5,785		0		5,785		0		OCI

Derivative financial liabilities (interest rate contracts)											Derivative financial liabilities (interest rate contracts)	1,363		0		1,363		0		NI
December 31, 2020											December 31, 2020
Securities available-for-sale:	Securities available-for-sale:										Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	255,709	$	—	$	255,709	$	—	OCI	Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies	$	228,651	$	0	$	228,651	$	0	OCI
SBA-backed securities	SBA-backed securities	33,993		—		33,993		—		OCI	SBA-backed securities	32,862		0		36,286		0		OCI
Debentures of government sponsored agencies	Debentures of government sponsored agencies	42,018		—		42,018		—		OCI	Debentures of government sponsored agencies	20,186		0		20,186		0		OCI

Obligations of state and political subdivisions	Obligations of state and political subdivisions	98,055		—		98,055		—		OCI	Obligations of state and political subdivisions	110,652		0		110,652		0		OCI

Derivative financial liabilities (interest rate contracts)	Derivative financial liabilities (interest rate contracts)	2,682		—		2,682		—		NI	Derivative financial liabilities (interest rate contracts)	1,912		0		1,912		0		NI
December 31, 2019
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies		$	278,144	$	—	$	278,144	$	—	OCI
SBA-backed securities		36,286		—		36,286		—		OCI
Debentures of government sponsored agencies		49,046		—		49,046		—		OCI

Obligations of state and political subdivisions		67,282		—		67,282		—		OCI
Corporate bonds		1,502		—		1,502		—		OCI

Derivative financial liabilities (interest rate contracts)		1,178		—		1,178		—		NI

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

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation

~~Page-10~~

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 June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were 0 Level 1 or Level 3 securities.

Page-9

Held-to-maturity securities may be written down to fair value as a result of ~~other-than-temporary~~ impairment ~~and we~~through a provision for credit losses in investments securities. We did 0t record any write-downs during the six months ended June 30, ~~2020~~2021 or June 30, ~~2019.~~2020. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.

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 OIS curves 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 June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we did 0t carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, ~~2020~~2021 or December 31, ~~2019.~~2020. The values are discussed in Note 4, Investment Securities.

~~Page-11~~


		June 30, 2020									December 31, 2019							June 30, 2021					December 31, 2020
(in thousands)	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets (recorded at amortized cost)	Financial assets (recorded at amortized cost)													Financial assets (recorded at amortized cost)
Cash and cash equivalents	Cash and cash equivalents	$	397,699	$	397,699	Level 1	$	183,388	$	183,388	Level 1	Cash and cash equivalents	$	257,543	$	257,543	Level 1	$	200,320	$	200,320	Level 1
Investment securities held-to-maturity	Investment securities held-to-maturity	125,781		132,836		Level 2	137,413		139,642		Level 2	Investment securities held-to-maturity	169,038		174,138		Level 2	109,036		115,185		Level 2
Loans, net	Loans, net	2,089,333		2,108,121		Level 3	1,826,609		1,839,666		Level 3	Loans, net	2,002,767		1,993,373		Level 3	2,065,682		2,089,192		Level 3
Interest receivable	Interest receivable	10,078		10,078		Level 2	7,732		7,732		Level 2	Interest receivable	10,160		10,160		Level 2	10,922		10,922		Level 2
Financial liabilities (recorded at amortized cost)	Financial liabilities (recorded at amortized cost)													Financial liabilities (recorded at amortized cost)
Time deposits	Time deposits	95,482		95,838		Level 2	97,810		97,859		Level 2	Time deposits	95,350		95,572		Level 2	97,433		97,769		Level 2

Subordinated debenture	Subordinated debenture	2,743		2,487		Level 3	2,708		3,182		Level 3	Subordinated debenture	0		0		Level 3	2,777		3,115		Level 3
Interest payable	Interest payable	115		115		Level 2	134		134		Level 2	Interest payable	53		53		Level 2	97		97		Level 2

Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The

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discounted cash flow valuation approach reflects key inputs and assumptions such as loan probability of default, loss given default, prepayment speed, and market discount rates.

Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current market rates offered for time deposits of similar remaining maturities.

Fair value of the subordinated debenture is estimated using a discounted cash flow approach based on current interest rates for similar financial instruments adjusted for credit and liquidity spreads.

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 as of June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Note 4: Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, U.S. Corporations, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following ~~table:~~table.

A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of June 30, 2021 and December 31, 2020 is presented below.


Held-to-maturity:	Amortized Cost 1		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized				Fair Value
(in thousands)							Gains		(Losses)
June 30, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	74,115	$	0	$	74,115	$	3,247	$	0	$	77,362
CMOs issued by FHLMC	38,641		0		38,641		1,142		(38)		39,745
CMOs issued by FNMA	6,274		0		6,274		265		0		6,539

SBA-backed securities	5,697		0		5,697		361		0		6,058
Debentures of government-sponsored agencies	43,731		0		43,731		115		0		43,846
Obligations of state and political subdivisions	580		0		580		8		0		588
Total held-to-maturity	$	169,038	$	0	$	169,038	$	5,138	$	(38)	$	174,138
December 31, 2020
Corporate bonds	$	0	$	0	$	0	$	0	$	0	$	0
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	65,579	$	0	$	65,579	$	3,924	$	0	$	69,503
CMOs issued by FHLMC	27,201		0		27,201		1,441		0		28,642
CMOs issued by FNMA	8,042		0		8,042		363		0		8,405

SBA-backed securities	6,547		0		6,547		400		0		6,947

Obligations of state and political subdivisions	1,667		0		1,667		21		0		1,688
Total held-to-maturity	$	109,036	$	0	$	109,036	$	6,149	$	0	$	115,185
1 Amortized cost and fair values exclude accrued interest receivable of $550 thousand and $366 thousand at June 30, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, 0 allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit

~~Page-12~~Page-11

June 30, 2020 December 31, 2019
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 $ 74,688 $ 79,006 $ 4,318 $ — $ 80,451 $ 81,325 $ 1,018 $ (144)
SBA-backed securities 7,029 7,473 444 — 7,999 8,264 265 —
CMOs issued by FNMA 9,011 9,524 513 — 10,210 10,492 282 —
CMOs issued by FHLMC 30,444 32,140 1,696 — 31,477 32,157 685 (5)
CMOs issued by GNMA 2,687 2,714 27 — 3,763 3,816 53 —
Obligations of state and
political subdivisions 1,922 1,979 57 — 3,513 3,588 75 —
Total held-to-maturity 125,781 132,836 7,055 — 137,413 139,642 2,378 (149)
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA 62,337 65,587 3,250 — 98,502 100,071 1,617 (48)
SBA-backed securities 32,517 33,993 1,536 (60) 35,674 36,286 688 (76)
CMOs issued by FNMA 20,018 20,849 831 — 22,702 23,092 390 —
CMOs issued by FHLMC 150,360 158,698 8,339 (1) 139,398 143,226 3,892 (64)
CMOs issued by GNMA 10,089 10,575 486 — 11,719 11,755 42 (6)
Debentures of government- sponsored agencies 41,355 42,018 663 — 48,389 49,046 727 (70)
Obligations of state and
political subdivisions 94,371 98,055 3,684 — 66,042 67,282 1,386 (146)
Corporate bonds — — — — 1,497 1,502 6 (1)
Total available-for-sale 411,047 429,775 18,789 (61) 423,923 432,260 8,748 (411)
Total investment securities $ 536,828 $ 562,611 $ 25,844 $ (61) $ 561,336 $ 571,902 $ 11,126 $ (560)
ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected.

The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions by Moody's and/or Standard & Poor's bond ratings as of June 30, 2021.


	Obligations of state and political subdivisions
(in thousands)	June 30, 2021		December 31, 2020
AA	$	376	$	1,461
A	204		206
Total	$	580	$	1,667

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of June 30, 2021 and December 31, 2020 is presented below.


Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value
(in thousands)			Gains		(Losses)
June 30, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	57,653	$	1,867	$	0	$	0	$	59,520
CMOs issued by FHLMC	160,949		5,573		(436)		0		166,086
CMOs issued by FNMA	36,636		428		0		0		37,064
CMOs issued by GNMA	21,855		258		0		0		22,113
SBA-backed securities	27,938		1,568		(46)		0		29,460
Debentures of government- sponsored agencies	76,321		128		(1,738)		0		74,711

Obligations of state and political subdivisions	117,595		5,694		(65)		0		123,224
Corporate bonds	5,987		0		(202)		0		5,785
Total available-for-sale	$	504,934	$	15,516	$	(2,487)	$	0	$	517,963
December 31, 2020
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	50,686	$	2,530	$	0	$	0	$	53,216
CMOs issued by FHLMC	143,267		7,925		(1)		0		151,191
CMOs issued by FNMA	16,450		580		0		0		17,030
CMOs issued by GNMA	6,863		351		0		0		7,214
SBA-backed securities	30,941		1,976		(55)		0		32,862
Debentures of government- sponsored agencies	19,944		266		(24)		0		20,186

Obligations of state and political subdivisions	104,887		5,765		0		0		110,652

Total available-for-sale	$	373,038	$	19,393	$	(80)	$	0	$	392,351
1 Amortized cost and fair value exclude accrued interest receivable of $2.4 million and $1.9 million June 30, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.

The amortized cost and fair value of investment debt securities by contractual maturity at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are shown 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, 2020 December 31, 2019
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 $ 1,333 $ 1,368 $ 18,446 $ 18,575 $ 1,807 $ 1,811 $ 6,699 $ 6,706
After one but within five years 2,230 2,319 55,125 57,705 2,256 2,296 48,706 49,619
After five years through ten years 53,616 57,101 173,876 183,624 56,221 57,544 208,806 214,277
After ten years 68,602 72,048 163,600 169,871 77,129 77,991 159,712 161,658
Total $ 125,781 $ 132,836 $ 411,047 $ 429,775 $ 137,413 $ 139,642 $ 423,923 $ 432,260

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	June 30, 2021								December 31, 2020
	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	$	245	$	246	$	14,263	$	14,403	$	246	$	250	$	11,530	$	11,687
After one but within five years	20,203		21,184		53,194		55,835		7,550		7,961		59,028		62,397
After five years through ten years	58,465		60,963		183,706		189,492		52,113		55,872		144,908		154,089
After ten years	90,125		91,745		253,771		258,233		49,127		51,102		157,572		164,178
Total	$	169,038	$	174,138	$	504,934	$	517,963	$	109,036	$	115,185	$	373,038	$	392,351

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


		Three months ended						Six months ended							Three months ended					Six months ended
(in thousands)	(in thousands)	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019		(in thousands)	June 30, 2021		June 30, 2020			June 30, 2021		June 30, 2020
Available-for-sale:	Available-for-sale:									Available-for-sale:
Sales proceeds	Sales proceeds	$	6,314	$	61,852	$	33,756	$	66,081	Sales proceeds	$	0	$	6,314		$	0	$	33,756
Gross realized gains	Gross realized gains	116		211		916		214		Gross realized gains	0		116			0		916
Gross realized losses	Gross realized losses	(1)		(150)		(1)		(159)		Gross realized losses	0		(1)			0		(1)

~~Page-13~~

Pledged investment securities are shown in the following table:

(in thousands) June 30, 2020 December 31, 2019
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program $ 122,042 $ 126,598
Collateral for trust deposits 750 742
Total investment securities pledged to the State of California 122,792 127,340
Collateral for Wealth Management and Trust Services checking account 629 622
Total pledged investment securities $ 123,421 $ 127,962

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


(in thousands)	June 30, 2021		December 31, 2020
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	145,128	$	131,051
Collateral for trust deposits	742		751
Total investment securities pledged to the State of California	145,870		131,802
Collateral for Wealth Management and Trust Services checking account	624		629
Total pledged investment securities	$	146,494	$	132,431

There were 723 and 4010 securities in unrealized loss positions at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


June 30, 2020		< 12 continuous months						≥ 12 continuous months						Total securities in a loss position
June 30, 2021														June 30, 2021	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss		(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:														Held-to-maturity:

Available-for-sale:

SBA-backed securities		$	—	$	—	$	2,016	$	(60)	$	2,016	$	(60)

CMOs issued by FHLMC	CMOs issued by FHLMC	2,740		(1)		—		—		2,740		(1)		CMOs issued by FHLMC	$	4,372	$	(38)	$	0	$	0	$	4,372	$	(38)

Total held-to-maturity														Total held-to-maturity	4,372		(38)		0		0		4,372		(38)
Available-for-sale:														Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA														MBS pass-through securities issued by FHLMC and FNMA	0		0		0		0		0		0
SBA-backed securities														SBA-backed securities	0		0		1,417		(46)		1,417		(46)
CMOs issued by FNMA														CMOs issued by FNMA	0		0		0		0		0		0
CMOs issued by FHLMC														CMOs issued by FHLMC	33,740		(436)		0		0		33,740		(436)

Debentures of government- sponsored agencies														Debentures of government- sponsored agencies	63,594		(1,738)		0		0		63,594		(1,738)

Obligations of state and political subdivisions														Obligations of state and political subdivisions	2,550		(65)		0		0		2,550		(65)
Corporate bonds														Corporate bonds	5,785		(202)		0		0		5,785		(202)
Total available-for-sale	Total available-for-sale	2,740		(1)		2,016		(60)		4,756		(61)		Total available-for-sale	105,669		(2,441)		1,417		(46)		107,086		(2,487)
Total temporarily impaired securities	Total temporarily impaired securities	$	2,740	$	(1)	$	2,016	$	(60)	$	4,756	$	(61)	Total temporarily impaired securities	$	110,041	$	(2,479)	$	1,417	$	(46)	$	111,458	$	(2,525)

December 31, 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
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA $ 14,203 $ (60) $ 6,073 $ (84) $ 20,276 $ (144)
CMOs issued by FHLMC — — 1,725 (5) 1,725 (5)
Total held-to-maturity 14,203 (60) 7,798 (89) 22,001 (149)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA 4,367 (34) 4,464 (14) 8,831 (48)
SBA-backed securities 9,227 (14) 2,448 (62) 11,675 (76)
CMOs issued by FHLMC 14,918 (58) 2,981 (6) 17,899 (64)
CMOs issued by GNMA 7,139 (6) — — 7,139 (6)
Debentures of government- sponsored agencies 25,228 (70) — — 25,228 (70)
Obligations of state and political subdivisions 20,579 (145) 659 (1) 21,238 (146)
Corporate Bonds 500 (1) — — 500 (1)
Total available-for-sale 81,958 (328) 10,552 (83) 92,510 (411)
Total temporarily impaired securities $ 96,161 $ (388) $ 18,350 $ (172) $ 114,511 $ (560)

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December 31, 2020	< 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






Available-for-sale:

SBA-backed securities	$	0	$	0	$	1,790	$	(55)	$	1,790	$	(55)

CMOs issued by FHLMC	5,975		(1)		0		0		5,975		(1)

Debentures of government- sponsored agencies	3,943		(24)		0		0		3,943		(24)



Total available-for-sale	9,918		(25)		1,790		(55)		11,708		(80)
Total temporarily impaired securities	$	9,918	$	(25)	$	1,790	$	(55)	$	11,708	$	(80)

As of June 30, ~~2020,~~2021, the investment portfolio included 54 investment securities that had been in a continuous loss position for twelve months or more and 219 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.

~~Page-14~~

~~We routinely perform internal analyses of latest financial information of the issuers of~~Our investment in obligations of state and political subdivisions ~~their~~bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements. Based on our comprehensive analyses, we determined that the decline in the fair values of obligations of state and political subdivisions and corporate bonds as of December 31, 2019 were primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase.

At June 30, ~~2020, Management~~2021, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. Therefore, ~~we do~~0 allowances for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not ~~consider these investment~~believe any of the securities are impaired due to ~~be other-than-temporarily impaired~~reasons of credit quality at June 30, ~~2020.~~2021.

Non-Marketable Securities Included in Other Assets

FHLB Capital Stock

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 $11.9 million ~~and $11.7 million~~ of FHLB stock included in other assets on the consolidated statements of condition at both June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. 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. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. On July ~~23, 2020,~~29, 2021, FHLB announced a cash dividend for the second quarter of ~~2020~~2021 at an annualized dividend rate of ~~5.00%~~6.00% to be distributed in mid-August ~~2020.~~2021. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

VISA Inc. Class B Common Stock

As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. These shares have a carrying value of 0 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 conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6228 both at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~$3.3~~$4.0 million and ~~$3.2~~$3.7 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation

Page-14

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.

Low Income Housing Tax Credits

We invest in low-income housing tax credit funds as a limited partner, which totaled ~~$3.8~~$3.3 million and ~~$4.1~~$3.5 million recorded in other assets as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. In the first six months of ~~2020,~~2021, we recognized ~~$327~~$323 thousand of low-income housing tax credits and other tax benefits, offset by ~~$275~~$271 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, ~~2020,~~2021, our unfunded commitments for these low-income housing tax credit funds totaled ~~$886~~$474 thousand. We did 0t recognize any impairment losses on these low-income housing tax credit investments during the first six months of ~~2020~~2021 or ~~2019,~~2020, as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5: Loans and Allowance for ~~Loan~~Credit Losses on Loans

~~Credit Quality~~Under the accounting relief provisions of ~~Loans~~the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard from January 1, 2020 to December 31, 2020. Upon adoption we used a modified retrospective method effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings. The cumulative adjustment to retained earnings was recorded, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019. Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the CECL accounting standards and have not been included below. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the adoption of CECL. In addition, refer to Note 5 under Part I, Item 1, of our June 30, 2020 Form 10-Q for prior period information.

The following table ~~shows outstanding~~presents the amortized cost of loans by class ~~and payment aging~~ as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

~~Page-15~~


(in thousands)	June 30, 2021		December 31, 2020
Commercial and industrial	$	423,646	$	498,408
Real estate:
Commercial owner-occupied	296,407		304,963
Commercial investor-owned	967,335		961,208
Construction	80,841		73,046
Home equity	92,510		104,813
Other residential	120,903		123,395
Installment and other consumer loans	21,125		22,723
Total loans, at amortized cost 1	2,002,767		2,088,556
Allowance for credit losses on loans	(19,100)		(22,874)
Total loans, net	$	1,983,667	$	2,065,682

Loan Aging Analysis by Class
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
June 30, 2020
30-59 days past due $ — $ — $ — $ — $ 169 $ — $ — $ 169
60-89 days past due 10 — — — — — 2 12
90 days or more past due — — — — 69 — — 69
Total past due 10 — — — 238 — 2 250
Current 525,107 296,163 946,389 66,368 112,673 136,859 26,392 2,109,951
Total loans ¹
$ 525,117 $ 296,163 $ 946,389 $ 66,368 $ 112,911 $ 136,859 $ 26,394 $ 2,110,201
Non-accrual loans ²
$ — $ — $ 907 $ — $ 625 $ — $ 55 $ 1,587
December 31, 2019
30-59 days past due $ 1 $ — $ 1,001 $ — $ 279 $ — $ 7 $ 1,288
60-89 days past due — — — — 98 — 95 193
90 days or more past due — — — — 167 — — 167
Total past due 1 — 1,001 — 544 — 102 1,648
Current 246,686 308,824 945,316 61,095 115,480 136,657 27,580 1,841,638
Total loans ¹
$ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286
Non-accrual loans ²
$ — $ — $ — $ — $ 168 $ — $ 58 $ 226

¹ ~~Amounts include~~Amortized cost includes net deferred loan origination ~~(fees) costs~~fees of ~~$(6.8)~~$(5.2) million ~~(including $8.1~~and $(4.9) million ~~in deferred SBA PPP loan fees, net of costs) and $983 thousand~~ at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Amounts are also net of ~~unaccreted~~unrecognized purchase discounts ~~on non-PCI loans~~ of ~~$925~~$737 thousand and $815 thousand at June 30, ~~2020~~2021 and ~~$983 thousand at~~ December 31, ~~2019.~~

²~~There were 0 accruing loans past due more than ninety days~~2020, respectively. Amortized cost excludes accrued interest, which totaled $7.3 million and $8.8 million at June 30, ~~2020 or~~2021 and December 31, ~~2019.~~2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

WeLending Risks

Commercial and Industrial Loans - Commercial loans are generally ~~make commercial loans~~made 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. A weakened

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~~Pursuant to~~economy, and resultant decreased consumer and/or business spending, may have an effect on the ~~CARES Act, on~~credit quality of commercial loans.

In April 6, 2020, the Bank began ~~accepting applications from eligible small businesses and non-profit organizations to participate~~participating in the Small Business Administration's ("SBA") Paycheck Protection Program ~~(“PPP”~~("PPP") ~~administered by~~. As of June 30, 2021, there were 1,532 PPP loans outstanding. PPP loans totaling $248.3 million (net of $6.5 million in unrecognized fees and costs) and $291.6 million (net of $5.4 million in unrecognized fees and costs) as of June 30, 2021 and December 31, 2020, respectively, were included in commercial and industrial loan balances. Of the ~~U.S. Small Business Administration (“SBA”).~~1,532 PPP loans outstanding as of June 30, 2021, 1,060 loans totaling $136.0 million were funded during the first half of 2021 under the second round of the PPP stimulus plan. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank ~~receives~~ a fee of 1%-5% ~~from the SBA~~ depending on the loan amount, which iswas netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of ~~the~~each loan. The recognition of ~~fees/~~fees and costs is accelerated when the SBA forgives the loan and/or the loan is ~~forgiven by the SBA and/or~~ paid off prior to maturity. PPP loans are fully guaranteed by the SBA and ~~are expected~~have virtually no risk of loss. We expect the vast majority of the PPP loans to be fully forgiven by the SBA if they meet the requirements of the program. PPP loans totaling $298.9 million at June 30, 2020 are included in commercial and industrial loan balances. The Bank ended its origination of new PPP loans on June 30, 2020.SBA.

Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, 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. Conditions in the real estate markets or downturn 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.

Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the

~~Page-16~~

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 - 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.

Credit Quality Indicators

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

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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 with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following ~~table represents an analysis~~tables present the loan portfolio by loan class, origination year and internal risk rating as of ~~the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, at~~ June 30, ~~2020~~2021 and December 31, ~~2019.~~2020. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
June 30, 2021	2021		2020		2019		2018		2017		Prior				Total
Commercial and industrial:
Pass	$	137,058	$	129,992	$	20,274	$	10,797	$	3,621	$	35,228	$	82,806	$	419,776
Special Mention	0		0		638		442		101		5		445		1,631
Substandard	0		1,099		369		0		0		0		771		2,239
Total commercial and industrial	$	137,058	$	131,091	$	21,281	$	11,239	$	3,722	$	35,233	$	84,022	$	423,646
Commercial real estate, owner-occupied:
Pass	$	19,776	$	29,440	$	26,861	$	40,403	$	40,695	$	94,071	$	0	$	251,246
Special Mention	0		0		0		2,360		16,419		8,173		0		26,952
Substandard	0		7,148		293		0		0		10,768		0		18,209
Total commercial real estate, owner-occupied	$	19,776	$	36,588	$	27,154	$	42,763	$	57,114	$	113,012	$	0	$	296,407
Commercial real estate, investor-owned:
Pass	$	115,580	$	159,350	$	142,354	$	136,108	$	72,393	$	311,508	$	98	$	937,391
Special Mention	0		0		5,203		5,461		1,803		7,920		0		20,387
Substandard	0		0		2,715		4,422		0		2,420		0		9,557
Total commercial real estate, investor-owned	$	115,580	$	159,350	$	150,272	$	145,991	$	74,196	$	321,848	$	98	$	967,335
Construction:
Pass	$	3,699	$	43,733	$	24,379	$	9,030	$	0	$	0	$	0	$	80,841
Special Mention	0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		0		0		0
Total construction	$	3,699	$	43,733	$	24,379	$	9,030	$	0	$	0	$	0	$	80,841
Home equity:
Pass	$	0	$	0	$	0	$	0	$	0	$	511	$	91,191	$	91,702
Special Mention	0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		386		422		808
Total home equity	$	0	$	0	$	0	$	0	$	0	$	897	$	91,613	$	92,510

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Credit Risk Profile by Internally Assigned Risk Grade
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total		(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
June 30, 2020
June 30, 2021																		June 30, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost		Revolving Loans Amortized Cost		Total
Other residential:																		Other residential:															Revolving Loans Amortized Cost
Pass	Pass	$	491,861	$	252,321	$	939,323	$	66,368	$	111,266	$	136,859	$	26,249	$	2,024,247	Pass	$	12,426	$	33,282	$	27,503	$	18,566	$	8,948	$	20,178	$	0	$	120,903
Special Mention	Special Mention	33,042		34,470		4,047		—		850		—		—		72,409		Special Mention	0		0		0		0		0		0		0		0
Substandard	Substandard	214		9,372		3,019		—		795		—		145		13,545		Substandard	0		0		0		0		0		0		0		0
Total loans		$	525,117	$	296,163	$	946,389	$	66,368	$	112,911	$	136,859	$	26,394	$	2,110,201
December 31, 2019
Total other residential																		Total other residential	$	12,426	$	33,282	$	27,503	$	18,566	$	8,948	$	20,178	$	0	$	120,903
Installment and other consumer:																		Installment and other consumer:
Pass	Pass	$	209,213	$	264,766	$	945,757	$	61,095	$	114,935	$	136,657	$	27,538	$	1,759,961	Pass	$	3,318	$	2,038	$	3,320	$	2,305	$	1,248	$	7,183	$	1,713	$	21,125
Special Mention	Special Mention	37,065		35,016		560		—		750		—		—		73,391		Special Mention	0		0		0		0		0		0		0		0
Substandard	Substandard	409		9,042		—		—		339		—		144		9,934		Substandard	0		0		0		0		0		0		0		0
Total loans		$	246,687	$	308,824	$	946,317	$	61,095	$	116,024	$	136,657	$	27,682	$	1,843,286
Total installment and other consumer																		Total installment and other consumer	$	3,318	$	2,038	$	3,320	$	2,305	$	1,248	$	7,183	$	1,713	$	21,125
Total loans:																		Total loans:
Pass																		Pass	$	291,857	$	397,835	$	244,691	$	217,209	$	126,905	$	468,679	$	175,808	$	1,922,984
Total Special Mention																		Total Special Mention	$	0	$	0	$	5,841	$	8,263	$	18,323	$	16,098	$	445	$	48,970
Total Substandard																		Total Substandard	$	0	$	8,247	$	3,377	$	4,422	$	0	$	13,574	$	1,193	$	30,813
Totals																		Totals	$	291,857	$	406,082	$	253,909	$	229,894	$	145,228	$	498,351	$	177,446	$	2,002,767


(in thousands)	Term Loans - Amortized Cost by Origination Year												Revolving Loans Amortized Cost
December 31, 2020	2020		2019		2018		2017		2016		Prior		Revolving Loans Amortized Cost		Total
Commercial and industrial:
Pass	$	308,237	$	22,589	$	12,596	$	4,508	$	5,915	$	34,282	$	85,889	$	474,016
Special Mention	0		2,034		1,318		141		11		49		19,092		22,645
Substandard	1,747		0		0		0		0		0		0		1,747
Total commercial and industrial	$	309,984	$	24,623	$	13,914	$	4,649	$	5,926	$	34,331	$	104,981	$	498,408
Commercial real estate, owner-occupied:
Pass	$	31,029	$	27,581	$	32,603	$	43,843	$	12,768	$	101,014	$	0	$	248,838
Special Mention	0		0		11,764		17,062		7,343		6,601		0		42,770
Substandard	7,147		0		0		0		6,208		0		0		13,355
Total commercial real estate, owner-occupied	$	38,176	$	27,581	$	44,367	$	60,905	$	26,319	$	107,615	$	0	$	304,963
Commercial real estate, investor-owned:
Pass	$	162,300	$	144,751	$	173,955	$	100,842	$	94,862	$	253,611	$	117	$	930,438
Special Mention	0		10,695		0		1,819		0		8,124		0		20,638
Substandard	0		2,716		4,435		0		1,553		1,428		0		10,132
Total commercial real estate, investor-owned	$	162,300	$	158,162	$	178,390	$	102,661	$	96,415	$	263,163	$	117	$	961,208
Construction:
Pass	$	31,654	$	30,150	$	11,242	$	0	$	0	$	0	$	0	$	73,046
Special Mention	0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		0		0		0
Total construction	$	31,654	$	30,150	$	11,242	$	0	$	0	$	0	$	0	$	73,046
Home equity:
Pass	$	0	$	0	$	0	$	0	$	128	$	694	$	102,614	$	103,436
Special Mention	0		0		0		0		0		0		799		799
Substandard	0		0		0		0		0		391		187		578
Total home equity	$	0	$	0	$	0	$	0	$	128	$	1,085	$	103,600	$	104,813
Other residential:
Pass	$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	0	$	123,395
Special Mention	0		0		0		0		0		0		0		0
Substandard	0		0		0		0		0		0		0		0
Total other residential	$	34,447	$	31,079	$	23,673	$	10,574	$	6,035	$	17,587	$	0	$	123,395
Installment and other consumer:
Pass	$	2,361	$	4,382	$	3,483	$	1,543	$	3,423	$	4,921	$	2,593	$	22,706
Special Mention	0		0		0		0		0		0		0		0
Substandard	0		0		0		17		0		0		0		17
Total installment and other consumer	$	2,361	$	4,382	$	3,483	$	1,560	$	3,423	$	4,921	$	2,593	$	22,723
Total loans:
Pass	$	570,028	$	260,532	$	257,552	$	161,310	$	123,131	$	412,109	$	191,213	$	1,975,875
Total Special Mention	$	0	$	12,729	$	13,082	$	19,022	$	7,354	$	14,774	$	19,891	$	86,852
Total Substandard	$	8,894	$	2,716	$	4,435	$	17	$	7,761	$	1,819	$	187	$	25,829
Totals	$	578,922	$	275,977	$	275,069	$	180,349	$	138,246	$	428,702	$	211,291	$	2,088,556

The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of June 30, 2021 and December 31, 2020.

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Loan Aging Analysis by Class
(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Total
June 30, 2021
30-59 days past due	$	367	$	0	$	0	$	0	$	0	$	0	$	0	$	367
60-89 days past due	0		0		0		0		121		0		0		121
90 days or more past due	0		0		878		0		0		0		0		878
Total past due	367		0		878		0		121		0		0		1,366
Current	423,279		296,407		966,457		80,841		92,389		120,903		21,125		2,001,401
Total loans 1	$	423,646	$	296,407	$	967,335	$	80,841	$	92,510	$	120,903	$	21,125	$	2,002,767
Non-accrual loans 2	$	0	$	7,148	$	1,597	$	0	$	445	$	0	$	0	$	9,190
Non-accrual loans with no allowance	$	0	$	7,148	$	1,597	$	0	$	445	$	0	$	0	$	9,190
December 31, 2020
30-59 days past due	$	0	$	0	$	1,673	$	0	$	274	$	0	$	136	$	2,083
60-89 days past due	0		0		0		0		0		0		622		622
90 days or more past due	0		0		0		0		0		0		0		0
Total past due	0		0		1,673		0		274		0		758		2,705
Current	498,408		304,963		959,535		73,046		104,539		123,395		21,965		2,085,851
Total loans 1	$	498,408	$	304,963	$	961,208	$	73,046	$	104,813	$	123,395	$	22,723	$	2,088,556
Non-accrual loans 2	$	0	$	7,147	$	1,610	$	0	$	459	$	0	$	17	$	9,233
Non-accrual loans with no allowance	$	0	$	7,147	$	1,610	$	0	$	459	$	0	$	17	$	9,233

1 There were 0 loans past due more than ninety days accruing interest at June 30, 2021 or December 31, 2020.

2 NaN of the non-accrual loans as of June 30, 2021 or December 31, 2020 were earning interest on a cash basis. We recognized 0 interest income on non-accrual loans for the three and six months ended June 30, 2021 and 2020. There were 0 new loans placed on non-accrual status during the six months ended June 30, 2021. Accrued interest of $20 thousand was reversed from interest income for loans that were placed on non-accrual status during the six months ended June 30, 2020.

Collateral Dependent Loans

The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at June 30, 2021 and December 31, 2020.


	Amortized Cost by Collateral Type
(in thousands)	Commercial Real Estate		Residential Real Estate		Other		Total		Allowance for Credit Losses

June 30, 2021
Commercial real estate, owner-occupied	$	7,148	$	0	$	0	$	7,148	$	0
Commercial real estate, investor-owned	1,597		0		0		1,597		0

Home equity	0		445		0		445		0


Total	$	8,745	$	445	$	0	$	9,190	$	0
December 31, 2020
Commercial real estate, owner-occupied	$	7,147	$	0	$	0	$	7,147	$	0
Commercial real estate, investor-owned	1,610		0		0		1,610		0

Home equity	0		459		0		459		0

Installment and other consumer	0		0		17		17		0
Total	$	8,757	$	459	$	17	$	9,233	$	0

NaN collateral-dependent loans were in process of foreclosure at June 30, 2021 or December 31, 2020. In addition, the weighted average loan-to-value of collateral dependent loans was approximately 58.7% at June 30, 2021 and 59.2% at December 31, 2020.

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~~management considers the borrower’s sustained repayment performance for a reasonable period, generally nine 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:

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

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

•Performance on the loan is reasonably assured; and

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

~~The same Management level that approved the loan classification upgrade must approve the removal of TDR status.~~ There were 0 loans removed from TDR designation during the six months ended June 30, 2021 and 2020. ~~There was 1 commercial loan with a recorded investment of $3 thousand removed from TDR designation during the six months ended June 30, 2019 after meeting all of the conditions above.~~

~~Section~~In accordance with section 4013 of the CARES Act, ~~provided optional, temporary relief from evaluating loans that may have been considered TDRs under GAAP. This relief applies to loan modifications executed between March 1, 2020 and either~~subsequently amended by section 541 of the ~~earlier of 60 days after the national emergency is terminated or December 31, 2020. The Bank~~Economic Aid Act, we elected to apply ~~these~~the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing GAAP. As of June 30, 2021, 7 borrowing relationships with 12 loans totaling $49.8 million were continuing to benefit from payment relief. Subsequent to quarter end and prior to the filing of this report, 1 relationship with 3 loans totaling $6.4 million transitioned out of the payment relief program and resumed normal contractual payments. The weighted average loan-to-value ratio of the remaining payment relief loans beginning in March 2020. As of July 10, 2020, the Bank approved over 260 loan modifications for full payment deferral or interest-only payments for up to 120 days on loan balances exceeding $386 million.was approximately 41%. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will ~~first~~generally be applied to ~~the~~ accrued interest due ~~and nothing will be applied to principal~~ until ~~the~~ accrued interest is fully paid. ~~We have been reaching out to each borrower before the expiration of the initial 120 day relief period to determine if additional short-term relief is necessary.~~

~~Page-18~~

The following table summarizes the carrying amount of TDR loans by loan class as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(in thousands)	(in thousands)							(in thousands)
Recorded Investment in Troubled Debt Restructurings ¹	Recorded Investment in Troubled Debt Restructurings ¹	June 30, 2020		December 31, 2019		Recorded Investment in Troubled Debt Restructurings 1	June 30, 2021		December 31, 2020
Commercial and industrial	Commercial and industrial	$	578	$	1,223	Commercial and industrial	$	821	$	1,021
Commercial real estate, owner-occupied	Commercial real estate, owner-occupied	7,002		6,998		Commercial real estate, owner-occupied	7,148		7,147
Commercial real estate, investor-owned	Commercial real estate, investor-owned	1,757		1,770		Commercial real estate, investor-owned	1,729		3,305

Home equity	Home equity	527		251		Home equity	276		281
Other residential		—		452

Installment and other consumer	Installment and other consumer	780		639		Installment and other consumer	745		752
Total	Total	$	10,644	$	11,333	Total	$	10,719	$	12,506

¹~~There was 1 acquired home equity TDR loan with a recorded investment of $276 thousand as of June 30, 2020. There were 0 acquired TDR loans as of December 31, 2019.~~ TDR loans on non-accrual status totaled ~~$331 thousand and $58 thousand~~$7.4 million at both June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. Unfunded commitments for TDR loans totaled $845 thousand as of June 30, 2021

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, if applicable.


(dollars in thousands)	(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		(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, 2021:									TDRs during the three months ended June 30, 2021:
None									None	0	$	0	$	0	$	0
TDRs during the three months ended June 30, 2020:	TDRs during the three months ended June 30, 2020:								TDRs during the three months ended June 30, 2020:
Home equity	Home equity	1	$	276	$	276	$	276	Home equity	1	$	276	$	276	$	276
Installment and other consumer	Installment and other consumer	1	108		108		108		Installment and other consumer	1	108		108		108
		2	$	384	$	384	$	384
TDRs during the three months ended June 30, 2019:
Commercial and industrial		1	$	298	$	298	$	298
Total									Total	2	$	384	$	384	$	384

TDRs during the six months ended June 30, 2020:
Commercial and industrial		1	$	170	$	162	$	144
Home equity		1	276		276		276
Installment and other consumer		3	211		211		210
		5	$	657	$	649	$	630
TDRs during the six months ended June 30, 2019:
Commercial and industrial		1	$	298	$	298	$	298



TDRs during the six months ended June 30, 2021:
None	0	$	0	$	0	$	0
TDRs during the six months ended June 30, 2020:
Commercial and industrial	1	$	170	$	162	$	144
Home equity	1	276		276		276
Installment and other consumer	3	211		211		210
Total	5	$	657	$	649	$	630

The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications. ~~The loan modified during the first six months of 2019 reflected a maturity extension and interest rate concession.~~ During the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, there were 0 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.

~~Page-19~~

~~Impaired Loans~~

~~The following tables summarize information by class on impaired loans and their related allowances. Total impaired loans include non-accrual loans and accruing TDR loans.~~


~~(in thousands)~~	~~Commercial and industrial~~		~~Commercial real estate, owner-occupied~~		~~Commercial real estate, investor-owned~~		~~Construction~~		~~Home equity~~		~~Other residential~~		~~Installment and other consumer~~		~~Total~~
~~June 30, 2020~~
~~Recorded investment in impaired loans:~~
~~With no specific allowance recorded~~	$	~~309~~	$	—	$	~~906~~	$	—	$	~~625~~	$	—	$	92	$	~~1,932~~
~~With a specific allowance recorded~~	~~269~~		~~7,002~~		~~1,758~~		—		~~251~~		—		~~688~~		~~9,968~~
~~Total recorded investment in impaired loans~~	$	~~578~~	$	~~7,002~~	$	~~2,664~~	$	—	$	~~876~~	$	—	$	~~780~~	$	~~11,900~~
~~Unpaid principal balance of impaired loans~~	$	~~569~~	$	~~6,993~~	$	~~2,655~~	$	—	$	~~893~~	$	—	$	~~778~~	$	~~11,888~~
~~Specific allowance~~	10		~~192~~		64		—		4		—		~~164~~		~~434~~
Average recorded investment in impaired loans during the quarter ended June 30, 2020	~~777~~		~~6,999~~		~~2,681~~		—		~~880~~		~~225~~		~~755~~		~~12,317~~
~~Interest income recognized on impaired loans during the quarter ended~~ ~~June 30, 2020~~¹	7		67		19		—		3		—		7		~~103~~
Average recorded investment in impaired loans during the six months ended June 30, 2020	~~926~~		~~6,999~~		~~2,377~~		—		~~726~~		~~300~~		~~717~~		~~12,045~~
~~Interest income recognized on impaired loans during the six months ended~~ ~~June 30, 2020~~¹	21		~~133~~		39		—		7		4		14		~~218~~
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, 2019~~¹	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, 2019~~¹	41		~~132~~		39		56		33		9		13		~~323~~

¹NaN interest income was recognized on a cash basis during the three and six months ended June 30, 2020. Interest income recognized on a cash basis during the three and six months ended June 30, 2019 totaled $24 thousand related to the pay-off of a non-accrual home equity loan.

(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
December 31, 2019
Recorded investment in impaired loans:
With no specific allowance recorded $ 349 $ — $ — $ — $ 167 $ 452 $ 98 $ 1,066
With a specific allowance recorded 874 6,998 1,770 — 251 — 541 10,434
Total recorded investment in impaired loans $ 1,223 $ 6,998 $ 1,770 $ — $ 418 $ 452 $ 639 $ 11,500
Unpaid principal balance of impaired loans $ 1,209 $ 6,992 $ 1,764 $ — $ 417 $ 451 $ 638 $ 11,471
Specific allowance $ 103 $ 195 $ 41 $ — $ 5 $ — $ 53 $ 397

Management monitors delinquent loans continuously and identifies problem loans (loans on non-accrual status and loans modified in a TDR) to evaluate individually for impairment. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were 0 charged-off amounts on impaired loans at June 30, 2020 or December 31, 2019. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At June 30, 2020 and December 31, 2019, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $979 thousand and $534 thousand, respectively.

Page-20

The following ~~tables disclose~~table discloses activity in the allowance for ~~loan~~credit losses ~~("ALLL") and~~on loans for the ~~recorded investment in loans by class, as well as the related ALLL disaggregated by impairment evaluation method.~~periods presented.


Allowance for Loan Losses Rollforward for the Period
Allowance for Credit Losses on Loans Rollforward																				Allowance for Credit Losses on Loans Rollforward
(in thousands)	(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total		(in thousands)	Commercial and industrial		Commercial real estate, owner-occupied		Commercial real estate, investor-owned		Construction		Home equity		Other residential		Installment and other consumer		Unallocated		Total
Three months ended June 30, 2020
Three months ended June 30, 2021																				Three months ended June 30, 2021
Beginning balance	Beginning balance	$	2,784	$	2,797	$	9,225	$	727	$	982	$	1,098	$	363	$	908	$	18,884	Beginning balance	$	1,654	$	2,304	$	10,856	$	1,312	$	520	$	757	$	255	$	2,300	$	19,958
Provision (reversal)		(159)		113		1,178		109		62		168		63		466		2,000
Provision (reversal) - CECL																				Provision (reversal) - CECL	(68)		(267)		(95)		(178)		(158)		(144)		(17)		7		(920)
Charge-offs	Charge-offs	(20)		—		—		—		—		—		—		—		(20)		Charge-offs	0		0		0		0		0		0		0		0		0
Recoveries	Recoveries	4		—		—		—		—		—		—		—		4		Recoveries	4		0		0		8		50		0		0		0		62
Ending balance	Ending balance	$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868	Ending balance	$	1,590	$	2,037	$	10,761	$	1,142	$	412	$	613	$	238	$	2,307	$	19,100
Three months ended June 30, 2019
Three months ended June 30, 2020																				Three months ended June 30, 2020
Beginning balance	Beginning balance	$	2,612	$	2,358	$	7,766	$	704	$	923	$	800	$	340	$	314	$	15,817	Beginning balance	$	2,784	$	2,797	$	9,225	$	727	$	982	$	1,098	$	363	$	908	$	18,884
Provision (reversal)		(250)		(37)		(57)		(85)		(16)		49		(17)		413		—
Provision - incurred loss																				Provision - incurred loss	(159)		113		1,178		109		62		168		63		466		2,000
Charge-offs	Charge-offs	—		—		—		—		—		—		—		—		—		Charge-offs	(20)		0		0		0		0		0		0		0		(20)
Recoveries	Recoveries	6		—		12		—		—		—		—		—		18		Recoveries	4		0		0		0		0		0		0		0		4
Ending balance	Ending balance	$	2,368	$	2,321	$	7,721	$	619	$	907	$	849	$	323	$	727	$	15,835	Ending balance	$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868


Allowance for Loan Losses Rollforward for the Period
Allowance for Credit Losses on Loans Rollforward																				Allowance for Credit Losses on Loans Rollforward
(in thousands)	(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		(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, 2020
Six months ended June 30, 2021																				Six months ended June 30, 2021
Beginning balance	Beginning balance	$	2,334	$	2,462	$	8,483	$	638	$	850	$	973	$	284	$	653	$	16,677	Beginning balance	$	2,530	$	2,778	$	12,682	$	1,557	$	738	$	998	$	291	$	1,300	$	22,874
Provision (reversal)		287		448		1,920		195		194		293		142		721		4,200
Provision (reversal) - CECL																				Provision (reversal) - CECL	(947)		(741)		(1,921)		(433)		(376)		(385)		(53)		1,007		(3,849)
Charge-offs	Charge-offs	(20)		—		—		—		—		—		—		—		(20)		Charge-offs	0		0		0		0		0		0		0		0		0
Recoveries	Recoveries	8		—		—		3		—		—		—		—		11		Recoveries	7		0		0		18		50		0		0		0		75
Ending balance	Ending balance	$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868	Ending balance	$	1,590	$	2,037	$	10,761	$	1,142	$	412	$	613	$	238	$	2,307	$	19,100
Six months ended June 30, 2019
Six months ended June 30, 2020																				Six months ended June 30, 2020
Beginning balance	Beginning balance	$	2,436	$	2,407	$	7,703	$	756	$	915	$	800	$	310	$	494	$	15,821	Beginning balance	$	2,334	$	2,462	$	8,483	$	638	$	850	$	973	$	284	$	653	$	16,677
Provision (reversal)		(70)		(86)		6		(137)		(8)		49		13		233		—
Provision - incurred loss																				Provision - incurred loss	287		448		1,920		195		194		293		142		721		4,200
Charge-offs	Charge-offs	(9)		—		—		—		—		—		—		—		(9)		Charge-offs	(20)		0		0		0		0		0		0		0		(20)
Recoveries	Recoveries	11		—		12		—		—		—		—		—		23		Recoveries	8		0		0		3		0		0		0		0		11
Ending balance	Ending balance	$	2,368	$	2,321	$	7,721	$	619	$	907	$	849	$	323	$	727	$	15,835	Ending balance	$	2,609	$	2,910	$	10,403	$	836	$	1,044	$	1,266	$	426	$	1,374	$	20,868

Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
June 30, 2020
Ending ALLL related to loans collectively evaluated for impairment $ 2,599 $ 2,718 $ 10,339 $ 836 $ 1,040 $ 1,266 $ 262 $ 1,374 $ 20,434��
Ending ALLL related to loans individually evaluated for impairment 10 192 64 — 4 — 164 — 434
Ending balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868
Recorded Investment:
Collectively evaluated for impairment $ 524,539 $ 289,161 $ 943,725 $ 66,368 $ 112,035 $ 136,859 $ 25,614 $ — $ 2,098,301
Individually evaluated for impairment 578 7,002 2,664 — 876 — 780 — 11,900
Total $ 525,117 $ 296,163 $ 946,389 $ 66,368 $ 112,911 $ 136,859 $ 26,394 $ — $ 2,110,201
Ratio of allowance for loan losses to total loans 0.50 % 0.98 % 1.10 % 1.26 % 0.92 % 0.93 % 1.61 % NM 0.99 %
Allowance for loan losses to non-accrual loans NM NM 1,147 % NM 167 % NM 775 % NM 1,315 %

~~NM - Not Meaningful~~

~~Page-21~~

Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
December 31, 2019
Ending ALLL related to loans collectively evaluated for impairment $ 2,231 $ 2,267 $ 8,442 $ 638 $ 845 $ 973 $ 231 $ 653 $ 16,280
Ending ALLL related to loans individually evaluated for impairment 103 195 41 — 5 — 53 — 397
Ending balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677
Recorded Investment:
Collectively evaluated for impairment $ 245,464 $ 301,826 $ 944,547 $ 61,095 $ 115,606 $ 136,205 $ 27,043 $ — $ 1,831,786
Individually evaluated for impairment 1,223 6,998 1,770 — 418 452 639 — 11,500
Total $ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ — $ 1,843,286
Ratio of allowance for loan losses to total loans 0.95 % 0.80 % 0.90 % 1.04 % 0.73 % 0.71 % 1.03 % NM 0.90 %
Allowance for loan losses to non-accrual loans NM NM NM NM 506 % NM 490 % NM 7,379 %

~~NM - Not Meaningful~~We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020. During the first six months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.

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 ~~$1,154.4 million~~$1.092 billion and ~~$1,133.4 million~~$1.165 billion at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. In addition, we pledge eligible TIC loans, which totaled ~~$120.8~~$113.0 million and ~~$115.7~~$113.6 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 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 ~~$7.7~~$5.3 million at

Page-21

June 30, ~~2020~~2021 and ~~$8.3~~$6.4 million at December 31, ~~2019.~~2020. In addition, undisbursed commitments to related parties totaled ~~$8.8~~$9.1 million at June 30, ~~2020~~2021 and ~~$9.2 million at~~ December 31, ~~2019.~~2020.

Note 6: Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling ~~$135.0~~$115.0 million at June 30, ~~2020~~2021 and ~~$92.0~~$135.0 million at December 31, ~~2019.~~2020. In general, interest rates on these lines approximate the federal funds target rate. We had 0 overnight borrowings under these credit facilities at June 30, ~~2020~~2021 or December 31, ~~2019~~2020.

Federal Home Loan Bank Borrowings – As of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Bank had available lines of credit with the FHLB totaling ~~$674.4~~$629.9 million and ~~$648.0~~$642.5 million, respectively, based on eligible collateral of certain loans. There were 0 FHLB overnight borrowings at June 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Federal Reserve Line of Credit – The Bank has aan available line of credit with the FRBSF secured by certain residential loans. At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Bank had borrowing capacity under this line totaling ~~$82.0~~$77.6 million and ~~$80.3~~$78.7 million, respectively, and had 0 outstanding borrowings with the FRBSF.

Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. ~~The trust preferred securities were sold and issued~~On March 15, 2021, Bancorp redeemed in ~~private transactions pursuant to an exemption from registration under~~full the ~~Securities Act of 1933, as amended. The~~$2.8 million (book value) subordinated debenture ~~was recorded at fair value totaling $2.14 million at~~due to the ~~acquisition date with a contractual balance~~Trust, which had an effective interest rate of ~~$4.12 million.~~6.5% for the first six months of 2020. The ~~difference~~

~~Page-22~~

~~between~~higher effective rate for the ~~contractual balance and the fair value at the acquisition date is accreted into interest expense over the life~~first six months of 2021 included accelerated accretion of the ~~debenture.~~$1.3 million remaining purchase discount due to the early redemption. Accretion ~~on the subordinated debenture totaled~~was $17 thousand and $35 thousand ~~and $34 thousand~~ for the three and six months ended June 30, 2020, ~~and 2019,~~ respectively. Bancorp has the option to defer payment of the interest on the subordinated debenture for a period of up to five years, as long as there is no event of default. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited. Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $4.0 million issued by the Trust, which have identical maturity, repricing and payment terms as the subordinated debenture. The subordinated debenture due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly (repricing quarterly, based on 3-month LIBOR plus 1.40%, or 1.71% as of June 30, 2020) is redeemable in whole or in part on any interest payment date.

Other Obligations – ~~The Bank leases certain equipment under finance leases, which~~Finance lease liabilities totaling $438 thousand and $58 thousand at June 30, 2021 and December 31, 2020, respectively, are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.

Note 7: Stockholders' Equity

Dividends

On July ~~17, 2020,~~16, 2021, Bancorp declared a ~~$0.23~~$0.24 per share cash dividend, payable on August ~~7, 2020~~6, 2021 to shareholders of record at the close of business on July ~~31, 2020.~~30, 2021.

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, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.

Performance-based stock awards (restricted 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~~three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

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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 for 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.

Stock options and restricted stock 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/or applicable tax withholding requirements. During the six months ended June 30, 2021, we withheld 27,547 shares totaling $1.1 million at a weighted-average price of $38.87 for cashless exercises. During the six months ended June 30, 2020, we withheld 8,409 shares totaling $346 thousand at a weighted-average price of $41.17 ~~for cashless exercises. During the six months ended June 30,~~

~~Page-23~~

~~2019, we withheld 6,937 shares totaling $290 thousand at a weighted-average price of $41.78~~ for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a ~~Share Repurchase Program~~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~~share repurchase program through February 28, 2020. OnAfter expiration of this share repurchase program, a new share repurchase program began on March 5, 2020. This new program was approved on January 24, 2020 by Bancorp Board of Directors, allowing Bancorp to repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. The share repurchase program, which began on March 5, 2020, was suspended by the Board of Directors on March 20, 2020 in response to the COVID-19 pandemic. The program was reactivated by the Board of Directors on October 23, 2020 and completed in May 2021 upon depletion of repurchase funds. A new share repurchase program was approved ~~a new Share Repurchase Program~~by Bancorp Board of Directors on July 16, 2021 under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. The new share repurchase program began on March 1, 2020 and was suspended indefinitely by the Board of Directors on March 20, 2020 to focus our resources on responding to customer needs during the COVID-19 pandemic.July 31, 2023.

Under the ~~Share Repurchase Program,~~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,~~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 six months ended June 30, ~~2020,~~2021, Bancorp repurchased ~~92,664~~521,948 shares totaling ~~$3.2~~$19.3 million for a cumulative ~~619,881~~691,519 shares ~~totaling $25.2~~amounting to $25.0 million ~~repurchased from May 1, 2018 through June 30, 2020. Due to~~under the ~~suspension~~$25.0 million share repurchase program that was approved by the Board of ~~the program in March 2020, there were 0 shares repurchased during the three months ended June 30,~~Directors on January 24, 2020.

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.

Page-23

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~~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~~unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:

(in thousands) June 30, 2020 December 31, 2019
Commercial lines of credit $ 305,233 $ 287,533
Revolving home equity lines 189,107 189,035
Undisbursed construction loans 45,209 41,033
Personal and other lines of credit 10,967 9,567
Standby letters of credit 2,784 1,964
Total commitments and standby letters of credit $ 553,300 $ 529,132

~~Page-24~~


(in thousands)	June 30, 2021		December 31, 2020
Commercial lines of credit	$	282,611	$	287,533
Revolving home equity lines	201,986		189,035
Undisbursed construction loans	73,757		41,033
Personal and other lines of credit	10,185		9,567
Standby letters of credit	3,167		1,964
Total commitments and standby letters of credit	$	571,706	$	529,132

We record an allowance for credit losses on ~~these off-balance~~unfunded loan commitments at the balance sheet ~~commitments~~date based on ~~an estimate of probabilities~~estimates of the ~~utilization of~~probability that these commitments will be drawn upon according to ~~our~~ historical utilization experience onof the different types of commitments and expected ~~loss.~~loss rates determined for pooled funded loans. The allowance for credit losses on ~~off-balance sheet~~unfunded commitments totaled ~~$1.4~~$1.6 million and ~~$1.1~~$2.8 million as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition. We adopted the CECL accounting standard on December 31, 2020. We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020. We recorded reversals of the allowance for credit losses on unfunded commitments totaling $612 thousand and $1.2 million for the three and six month periods ended June 30, 2021, respectively. This compares to provisions for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020 totaling $260 thousand and $362 thousand, respectively. In the current period, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 1211 years, most of which include escalation clauses and one or more options to extend the lease term, and some of 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 54 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 finance lease right-of-use assets and lease ~~liabilities as of June 30, 2020.~~liabilities.


(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		(in thousands)	June 30, 2021		December 31, 2020
Operating leases:	Operating leases:					Operating leases:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	23,090	$	11,002	Operating lease right-of-use assets	$	23,506	$	25,612
Operating lease liabilities	Operating lease liabilities	$	24,574	$	12,615	Operating lease liabilities	$	24,919	$	27,062
Finance leases:	Finance leases:					Finance leases:
Finance lease right-of-use assets	Finance lease right-of-use assets	$	397	$	379	Finance lease right-of-use assets	$	473	$	365
Accumulated amortization	Accumulated amortization	(258)		(170)		Accumulated amortization	(37)		(307)
Finance lease right-of-use assets, net¹	Finance lease right-of-use assets, net¹	$	139	$	209	Finance lease right-of-use assets, net1	$	436	$	58
Finance lease liabilities²	Finance lease liabilities²	$	140	$	212	Finance lease liabilities2	$	438	$	58
¹Included in premises and equipment in the consolidated statements of condition.	¹Included in premises and equipment in the consolidated statements of condition.							1 Included in premises and equipment in the consolidated statements of condition.
²Included in borrowings and other obligations in the consolidated statements of condition.	²Included in borrowings and other obligations in the consolidated statements of condition.							2 Included in borrowings and other obligations in the consolidated statements of condition.

Page-24

The following table shows supplemental disclosures of noncash investing and financing activities for the period presented.


		Six months ended							Six months ended
(in thousands)	(in thousands)	June 30, 2020		June 30, 2019		(in thousands)	June 30, 2021		June 30, 2020
Right-of-use assets obtained in exchange for operating lease liabilities	Right-of-use assets obtained in exchange for operating lease liabilities	$	14,030	$	1,286	Right-of-use assets obtained in exchange for operating lease liabilities	$	0	$	14,030
Right-of-use assets obtained in exchange for finance lease liabilities	Right-of-use assets obtained in exchange for finance lease liabilities	$	18	$	31	Right-of-use assets obtained in exchange for finance lease liabilities	$	412	$	18
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets upon adoption of ASC 842		$	—	$	1,967

The following table shows components of operating and finance lease cost.

Three months ended Six months ended
(in thousands) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Operating lease cost $ 1,114 $ 1,067 $ 2,169 $ 2,071
Variable lease cost 2 — 3 —
Total operating lease cost¹
$ 1,116 $ 1,067 $ 2,172 $ 2,071
Finance lease cost:
Amortization of right-of-use assets²
$ 44 $ 43 $ 88 $ 85
Interest on finance lease liabilities³
1 2 2 $ 5
Total finance lease cost 45 45 $ 90 $ 90
Total lease cost $ 1,161 $ 1,112 $ 2,262 $ 2,161
¹Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
²Included in depreciation and amortization in the consolidated statements of comprehensive income.
³Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

~~Page-25~~


	Three months ended				Six months ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Operating lease cost	$	1,164	$	1,114	$	2,328	$	2,169
Variable lease cost	0		2		0		3
Total operating lease cost1	$	1,164	$	1,116	$	2,328	$	2,172
Finance lease cost:
Amortization of right-of-use assets2	$	7	$	44	$	34	$	88
Interest on finance lease liabilities3	0		1		0		$	2
Total finance lease cost	7		45		$	34	$	90
Total lease cost	$	1,171	$	1,161	$	2,362	$	2,262
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

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, 2020. Total minimum lease payments do not include obligations of approximately $3.1 million for operating lease modifications related to 2 existing retail branches and an operating lease agreement for a new loan production office in San Mateo that commenced subsequent to June 30, 2020.2021. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.

(in thousands) June 30, 2020
Year Operating Leases Finance Leases
2020 $ 2,301 $ 83
2021 3,835 42
2022 3,487 13
2023 3,039 4
2024 2,407 —
Thereafter 11,714 —
Total minimum lease payments 26,783 142
Amounts representing interest (present value discount) (2,209) (2)
Present value of net minimum lease payments (lease liability) $ 24,574 $ 140
Weighted average remaining term (in years) 8.5 1.3
Weighted average discount rate 2.08 % 2.64 %


(in thousands)	June 30, 2021
Year	Operating Leases			Finance Leases
2021	$	2,246		$	52
2022	4,424			118
2023	4,004			108
2024	3,300			104
2025	2,876			61
Thereafter	9,867			0
Total minimum lease payments	26,717			443
Amounts representing interest (present value discount)	(1,798)			(5)
Present value of net minimum lease payments (lease liability)	$	24,919		$	438
Weighted average remaining term (in years)	7.5			4.0
Weighted average discount rate	1.79		%	0.66		%

Litigation Matters

Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's ~~Management~~management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or 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

Page-25

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. Visa's share of the settlement amount under the amended class settlement agreement increased to $4.1 billion. On September 27, 2019, Visa deposited an additional $300 million into the litigation escrow account. Certain merchants chose to opt out of the class settlement agreement and on December 13, 2019, the court entered the final judgment order approving the amended settlement agreement. On December 27, 2019, Visa received a takedown payment of approximately $467 million, which was deposited into the litigation escrow account with a corresponding increase in accrued litigation to address opt-out claims. The escrow balance of ~~$1.1 billion~~$894 million as of June 30, ~~2020,~~2021, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

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~~is subject to 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

~~Page-26~~

as contemplated by the amended class settlement agreement, and additional lawsuits may 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 related to the Covered Litigation, as we consider the probability of losses to be remote.

Note 9: Derivative Financial Instruments and Hedging Activities

We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.

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 June 30, ~~2020,~~2021, we had 54 interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, ~~August 2037~~ and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled ~~$13~~$10 thousand at June 30, ~~2020~~2021 and $6$11 thousand at December 31, ~~2019.~~2020. Information on our derivatives follows:


		Asset Derivatives						Liability Derivatives							Asset Derivatives					Liability Derivatives
(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		(in thousands)	June 30, 2021		December 31, 2020			June 30, 2021		December 31, 2020
Fair value hedges:	Fair value hedges:									Fair value hedges:
Interest rate contracts notional amount	Interest rate contracts notional amount	$	—	$	—	$	16,466	$	16,956	Interest rate contracts notional amount	$	0	$	0		$	13,518	$	13,991
Interest rate contracts fair value¹	Interest rate contracts fair value¹	$	—	$	—	$	2,682	$	1,178	Interest rate contracts fair value1	$	0	$	0		$	1,363	$	1,912

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

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 June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


		Carrying Amounts of Hedged Assets						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans							Carrying Amounts of Hedged Assets					Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)	(in thousands)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		(in thousands)	June 30, 2021		December 31, 2020			June 30, 2021		December 31, 2020
Loans	Loans	$	18,938	$	17,900	$	2,473	$	944	Loans	$	14,734	$	15,745		$	1,216	$	1,753

~~Page-27~~

The following table presents the net ~~gains (losses)~~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, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Interest and fees on loans ¹
$ 21,217 $ 20,988 $ 42,104 $ 41,683
Decrease in value of designated interest rate swaps due to LIBOR interest rate movements $ (63) $ (547) $ (1,504) $ (904)
Payment on interest rate swaps (96) (14) (146) (26)
Increase in value of hedged loans 59 573 1,529 935
Decrease in value of yield maintenance agreement (3) (3) (6) (7)
Net (losses) gains on fair value hedging relationships recognized in interest income $ (103) $ 9 $ (127) $ (2)

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^{Three months ended Six months ended
(in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Interest and fees on loans 1 $ 21,429 $ 21,217 $ 42,090 $ 42,104
(Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements $ (170) $ (63) $ 549 $ (1,504)
Payment on interest rate swaps (93) (96) (185) (146)
Increase (decrease) in fair value hedging adjustment of hedged loans 177 59 (537) 1,529
Decrease in value of yield maintenance agreement (2) (3) (6) (6)
Net losses on fair value hedging relationships recognized in interest income $ (88) $ (103) $ (179) $ (127)}

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.

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

~~Offsetting of Financial Assets and Derivative Assets~~

~~Gross Amounts~~

~~Net Amounts of~~

~~Gross Amounts Not Offset in~~

~~Gross Amounts~~

~~Offset in the~~

~~Assets Presented~~

~~the Statements of Condition~~

~~of Recognized~~

~~Statements of~~

~~in the Statements~~

~~Financial~~

~~Cash Collateral~~

(~~in thousands)~~

~~Assets~~

~~Condition~~

~~of Condition~~

~~Instruments~~

~~Received~~

~~Net Amount~~

~~June 30, 2020~~

~~Derivatives by Counterparty:~~

~~Counterparty A~~

—

~~Total~~

—

~~December 31, 2019~~

~~Derivatives by Counterparty:~~

~~Counterparty A~~

—

~~Total~~

—


Offsetting of Financial Assets and Derivative Assets
			Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
	Gross Amounts		Offset in the		Assets Presented		the Statements of Condition
	of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	Assets		Condition		of Condition		Instruments		Received		Net Amount
June 30, 2021
Derivatives by Counterparty:
Counterparty A	$	0	$	0	$	0	$	0	$	0	$	0


December 31, 2020
Derivatives by Counterparty:
Counterparty A	$	0	$	0	$	0	$	0	$	0	$	0


Offsetting of Financial Liabilities and Derivative Liabilities	Offsetting of Financial Liabilities and Derivative Liabilities																									Offsetting of Financial Liabilities and Derivative Liabilities
				Gross Amounts		Net Amounts of		Gross Amounts Not Offset in											Gross Amounts		Net Amounts of		Gross Amounts Not Offset in
		Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition									Gross Amounts		Offset in the		Liabilities Presented		the Statements of Condition
		of Recognized		Statements of		in the Statements		Financial		Cash Collateral					of Recognized		Statements of		in the Statements		Financial		Cash Collateral
(in thousands)	(in thousands)	Liabilities¹		Condition		of Condition¹		Instruments		Pledged		Net Amount		(in thousands)	Liabilities1		Condition		of Condition1		Instruments		Pledged		Net Amount
June 30, 2020
June 30, 2021														June 30, 2021
Derivatives by Counterparty:	Derivatives by Counterparty:													Derivatives by Counterparty:
Counterparty A	Counterparty A	$	2,682	$	—	$	2,682	$	—	$	(2,682)	$	—	Counterparty A	$	1,363	$	0	$	1,363	$	0	$	(1,363)	$	0

Total		$	2,682	$	—	$	2,682	$	—	$	(2,682)	$	—
December 31, 2019

December 31, 2020														December 31, 2020
Derivatives by Counterparty:	Derivatives by Counterparty:													Derivatives by Counterparty:
Counterparty A	Counterparty A	$	1,178	$	—	$	1,178	$	—	$	(1,178)	$	—	Counterparty A	$	1,912	$	0	$	1,912	$	0	$	(1,912)	$	0

Total		$	1,178	$	—	$	1,178	$	—	$	(1,178)	$	—

¹Amounts exclude accrued interest on swaps.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our ~~2019~~2020 Form 10-K filed with the SEC on March ~~13, 2020.~~15, 2021.

Note 10: Merger Agreement

On April 16, 2021, Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company of American River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and into Bank of Marin (collectively, the "Merger"). The acquisition will expand Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB has 10 branches. Under the terms of the merger agreement, AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp's common stock for each share of AMRB's common stock outstanding upon consummation of the Merger. AMRB had total assets of $906.1 million, total deposits of $787.7 million, and total loans of $434.2 million as of June 30, 2021. These amounts are subject to fair value adjustments upon the close of the Merger. The merger has been approved by the Boards of Directors of each company, all applicable regulatory agencies and shareholders of AMRB and BMRC. The Merger is expected to close on August 6, 2021.

~~Page-28~~Page-27

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 ~~2019~~2020 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~~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~~management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond ~~Management’s~~management’s control, could cause future results to vary materially from current ~~Management~~management expectations. Such factors include, but are not limited to, ~~natural disasters (such as wildfires and earthquakes), pandemics such as COVID-19 and the economic impact caused directly by the disease and by government responses thereto,~~ 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,~~acquisitions; competition; changes in accounting principles, policies or ~~guidelines,~~guidelines; changes in legislation or regulation (including ~~the Tax Cuts & Jobs Act of 2017 and~~ the Coronavirus Aid, Relief and Economic Security Act of 2020, as ~~amended),~~amended, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020); our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance; natural disasters (such as wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained ~~periods,~~periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting ~~Bancorp's~~our operations, pricing, products and services.

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

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

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

•revenues following the merger may be lower than expected;

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

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

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 ~~2019~~2020 Form 10-K as filed with the SEC, copies of which are available from us at no charge. These and other important factors are detailed in various securities law filings made periodically by Bancorp, copies of which are available from Bancorp without charge. Forward-looking statements speak only as of the date they are made. Bancorp undertakes no obligationWe do not undertake to ~~release publicly the result of any revisions to these~~update forward-looking statements ~~that may be made~~ to reflect circumstances or events ~~or circumstances~~that occur after the date ~~of this Form 10-Q~~the forward-looking statements are made or to reflect the occurrence of unanticipated events.

Page-28

Critical Accounting Policies and Estimates

~~Critical~~The SEC requires us to disclose "critical accounting ~~policies are~~policies" defined as those that are both most important to the ~~portrayal~~presentation of our financial condition and results of operations and require ~~Management's~~management's most difficult, subjective, or complex judgments, often ~~as a result~~because of the need to make estimates about the effect of matters that are inherently uncertain and imprecise. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. There have been no material changes to our critical accounting policies, which include: Allowance for ~~Loan~~Credit Losses ~~Other-than-temporary Impairment of Investment~~on Loans and Unfunded Commitments, Allowance for Credit Losses on Investments Securities, Accounting for Income Taxes, and Fair Value Measurements. For a detailed discussion of these accounting policies, refer to Note 1 toin the Consolidated Financial Statements included in our ~~2019~~2020 Form 10-K filed with the SEC on March ~~13, 2020 and Note 2,~~ 15, 2021.~~Recently Adopted and Issued Accounting Standards~~, to the Consolidated Financial Statements in this Form 10-Q. Under the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, which was signed into law on March 27, 2020, the Bank postponed the adoption of the current expected credit losses (“CECL”) accounting standard until the earlier of the end of the national emergency or December 31, 2020 to focus on customers' needs during the COVID-19 pandemic. Additionally, the lack of clarity around the extent and duration of the COVID-19 pandemic hindered the development of reasonable and supportable economic forecasts early in the pandemic.

~~Page-29~~

Executive Summary

As previously reported, on April 16, 2021, Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company of American River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and into Bank of Marin (collectively, the "Merger"). We expect the transaction to be accretive to Bancorp's earnings, adding to shareholder value. AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp common stock for each share of AMRB common stock outstanding. Based on Bancorp's closing stock price of $39.06 on April 16, 2021 (date of merger agreement), the transaction was valued at $134.5 million (with approximately 3.4 million of additional shares of Bancorp common stock to be issued), or $22.46 per share of AMRB common stock, which includes the value of AMRB options being paid in cash. Such value will fluctuate with changes in Bancorp's stock price. Based on information currently available, Bank of Marin will have approximately $4.0 billion in assets and operate 31 branches in ten counties (Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo, and Sonoma) upon closing. The merger has been approved by the Boards of Directors of each company, all applicable regulatory agencies and shareholders of AMRB and BMRC. The Merger is expected to close on August 6, 2021. For other important factors regarding the AMRB acquisition, please see Note 10, Merger Agreement, and the Forward-Looking Statements section of this Form 10-Q.

Net income for the second quarter of ~~2020~~2021 totaled ~~$7.4~~$9.3 million, compared to ~~$8.2~~$7.4 million in the second quarter of ~~2019.~~2020. Diluted earnings per share were ~~$0.55~~$0.71 in the second quarter of ~~2020,~~2021, compared to ~~$0.60~~$0.55 in the same quarter a year ago. Earnings for the first six months of ~~2020~~2021 totaled ~~$14.6~~$18.2 million, compared to ~~$15.7~~$14.6 million in the same period ~~last year.~~

Net income included the positive pretax impact of $1.7 million in interest income and accreted processing fees, net of amortized loan origination costs, related to Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, which contributed $0.09 to diluteda year ago. Diluted earnings per share in the second quarter and first six months of 2020. A $2.0 million provision for loan losses negatively impacted diluted earnings per share by approximately $0.11 in the second quarter. Year-to-date provisions of $4.2 million reduced earnings per share by $0.23were $1.37, compared to $1.07 in the first half of 2020.

~~The Bank has responded~~Net income included the recognition of $2.6 million and $4.3 million of SBA PPP fees, net of costs in the second quarter of 2021 and first six months of 2021, respectively, compared to $1.2 million in the same periods a year ago. Additionally, reversals of the allowance for credit losses on loans totaling $920 thousand and $3.8 million in the second quarter and first half of 2021 contributed to the ~~COVID-19 pandemic~~increase in earnings when compared to provisions of $2.0 million and $4.2 million in the comparative periods a ~~number~~year ago. Increases to income in the first half of ~~ways, distributing funds to over 1,800 small businesses with nearly 28,000 employees~~2021 were partially offset by the early redemption of our last subordinated debenture, generating $1.3 million accelerated discount accretion in ~~our markets through~~interest expense in the PPP, while also accommodating loan payment relief requests for over 260 loans with balances exceeding $386 million, lowering interest rate floors on commercial Prime Rate-indexed loans, waiving ATM and overdraft fees, and cancelling early withdrawal penalties for certificatesfirst quarter of ~~deposit when allowed by law.~~2021.

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

•Loans totaled ~~$2,110.2 million~~$2.003 billion at June 30, ~~2020,~~2021, compared to ~~$1,843.3 million~~$2.089 billion at December 31, ~~2019,~~ an ~~increase~~2020, a decrease of ~~$266.9 million, primarily due to SBA PPP loans, which totaled $298.9~~$85.8 million, or ~~14% of loan balances at June 30, 2020. During the~~4.1%. The first half of ~~2020, new non-PPP-related~~2021 included a $43.3 million net decrease in PPP loans. Non-PPP-related loan originations of ~~$71.6~~$69.1 million were more than offset by ~~$83.4 million in~~ loan payoffs of $95.4 million and a ~~$16.8~~$34.8 million decrease in line utilization.

•~~In the first six months of 2020,~~Credit quality remained strong, with the onset of the pandemic, we identified industries within our loan portfolio that could be most impacted by the pandemic, including retail-related commercial real estate, retail businesses, transportation and energy, medical and dental, hospitality, health clubs and movie theaters, private schools, and the wine industry. Not including SBA PPPnon-accrual loans ~~exposure to these segments totaled $429.8~~representing $9.2 million at June 30, 2021 and December 31, 2020, or ~~20%~~0.46% and 0.44% of ~~the loan portfolio, $365.7 million (or 85%) of which was real estate secured with an average loan-to-value~~total loans, respectively. The ratio of ~~38%. The greatest exposure~~allowance for credit losses on loans to total loans was ~~related to both retail businesses~~0.95% at June 30, 2021 and ~~retail-related commercial real estate~~1.10% at December 31, 2020. Excluding acquired and SBA PPP loans, ~~totaling $198.0 million or 9%~~the allowance for credit losses on loans represented 1.09% of ~~the~~ total portfolio, $184.8 million of which are secured by commercial real estate with an average loan-to-value ratio ("LTV") of 39%, and the majority are also backed by personal guarantees. The wine-industry exposure was $76.7 million, or 4% of the total portfolio, of which $42.1 million is real estate secured, education was $67.4 million, or 3% of the total portfolio, of which $63.0 million is secured by real estate, and hospitality was $48.1 million, of which $45.3 million is secured by real estate.

•Asloans as of June 30, 2021, compared to 1.27% as of December 31, 2020 ~~we had made $102.5 million in PPP loans to industries most impacted by the pandemic, the largest~~(see Results of ~~which were in the medical and dental sector at $33.4 million, hospitality at $16.6 million, retail businesses at $16.3 million and education at $11.7 million. As~~Operations for a definition of June 30, 2020, the Bank had originated $298.9 million (net of $8.1 million in deferred fees and costs) in SBA PPP loans to small businesses, the majority of which were our existing customers. Approximately 80% of these customers did not have loans outstanding with the Bank at the onset of the pandemic. We were able to assist 178 non-profit organizations, employing over 6,000 individuals, in receiving $57.4 million in PPP loans. Notably, 73% of the PPP loans were for $150 thousand or less, and almost 90% were $350 thousand or less. Only 48 loans were one million dollars or greater, representing approximately 30% of the total balance. We ended the origination of new PPP loans on June 30, 2020 to help our customers through the loan forgiveness process.

•To provide immediate relief to our clients experiencing hardship, the Bank has granted payment relief on over 260 loans with balances exceeding $386 million, providing full payment deferral or interest-only payments for up to 120 days. Of the loans on payment relief, almost 50% fell into pandemic-impacted industries, the largest being retail-related commercial real estate at $69.7 million, hotels and motels at $36.9 million, and education-related commercial real estate at $25.3 million. Approximately 94% of the paymentthis non-GAAP financial measure).

~~Page-30~~Page-29

~~relief loans are secured by real estate~~•Return on average assets ("ROA") and ~~have an~~return on average ~~LTV~~equity ("ROE") were 1.20% and 10.72% in the second quarter of ~~49%, with average LTVs being 43% for retail-related properties, 39% for hotels~~2021, compared to 1.21% and ~~motels,~~10.47% in the first half of 2021, respectively. ROA and ~~37% for education-related properties.~~ROE were 1.01% and 8.52% in the second quarter of 2020, compared to 1.05% and 8.53% in the first half of 2020.

•~~Strong credit quality remains~~The tax-equivalent net interest margin was 3.37% and 3.53% in the second quarters of 2021 and 2020, respectively. The decrease from the same quarter a ~~cornerstone of~~year ago was primarily attributed to the ~~Bank's consistent performance. Non-accrual~~low interest rate environment. SBA PPP loans ~~totaled $1.6 million, or 0.08% of total~~contributed 12 basis points to the second quarter's net interest margin due to PPP loans at June 30, 2020, compared to $226 thousand, or 0.01% at December 31, 2019. Accruing loans past due 30 to 89 days totaled $83 thousand at June 30, 2020, compared to $1.5 million at December 31, 2019. Classified assets (loans with substandard or doubtful risk grades) increased to $13.5 million at June 30, 2020, from $9.9 million at December 31, 2019. Provision for loan lossesforgiven and paid off by the SBA. The tax-equivalent net interest margin was ~~$4.2 million for~~3.28% in the first six months of ~~2020~~2021 compared to ~~no provision for the same period~~3.70% in ~~2019. Provision for losses on off-balance sheet commitments for~~ the first six months ~~of 2020 was $362 thousand compared to $129 thousand for~~a year ago. The decrease from the same period a year ago was primarily attributed to the lower interest rate environment. SBA PPP loans added 5 basis points to the first six months' net interest margin as compared to a 2 basis points reduction to the same period a year ago. The early redemption of our last subordinated debenture reduced first quarter 2021 tax-equivalent net interest margin by approximately 18 basis points.

•The efficiency ratio was 58.58% for the three months ended June 30, 2021, up from 53.01% in ~~2019.~~the comparative period a year ago, mainly due to a $1.7 million increase in non-interest expense mostly attributable to fewer salary-related deferred SBA PPP loan origination costs and ARB acquisition-related expenses. The efficiency ratio for the first half of 2021 was 61.43%, compared to 54.74% the same period a year ago. The increase was primarily due to a $1.9 million decrease in net interest income and $1.1 million decrease in non-interest income. Additionally, non-interest expenses increased by $1.7 million.

•Total deposits increased ~~$443.4~~$179.3 million ~~in the first half of 2020~~ to ~~$2,779.9 million~~$2.684 billion at June 30, ~~2020, largely~~2021 from $2.504 billion at December 31, 2020. The increase was primarily due to ~~temporary increases~~customers depositing PPP funds into their accounts and new account openings in ~~our deposits from SBA PPP borrowers.~~the second quarter of 2021. Non-interest bearing deposits represented ~~52%~~54% of total deposits as of June 30, ~~2020, compared to 48% at~~2021 and December 31, ~~2019.~~2020. The cost of average deposits ~~decreased 4~~was 0.07% in the second quarter and first half of 2021, a decrease of 2 basis points ~~to 0.15% during~~and 8 basis points from the ~~first six months of 2020, compared to the same period of 2019.~~

•Total cash, cash equivalents and restricted cash were $397.7 million at June 30, 2020, compared to $183.4 million at December 31, 2019. Deposits by SBA PPP borrowers contributed significantly to the increase.equivalent periods a year ago.

•All capital ratios were above well capitalized regulatory ~~requirements to be considered well-capitalized.~~requirements. The total risk-based capital ratio for Bancorp was ~~15.8%~~15.5% at June 30, ~~2020,~~2021, compared to ~~15.1%~~16.0% at December 31, ~~2019.~~

•~~Return on~~2020. Tangible common equity to tangible assets was ~~1.05%~~10.4% at June 30, 2021, compared to 11.3% at December 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure). The total risk-based capital ratio for the ~~six months ended~~Bank was 15.3% at June 30, ~~2020,~~2021, compared to ~~1.26% for the first six months of 2019. Return on equity was 8.53% for the six months ended June 30, 2020, compared to 9.90% for the six months ended June 30, 2019.~~

•~~The Board of Directors has suspended its search for a Chief Executive Officer. Our current CEO, Russell A. Colombo, is committed to remaining in the job as long as needed.~~

•As announced on June 30, 2020, Timothy D. Myers was appointed Executive Vice President and Chief Operating Officer of Bank of Marin. Mr. Myers will be responsible for the management of Commercial Banking, Retail Banking, Wealth Management & Trust Services and Marketing.

•Also in June, the Bank hired Jake Nguyen, Senior Vice President and Commercial Banking Regional Manager for the San Mateo Commercial Banking Office ("CBO"), which opened August 3, 2020 to serve commercial banking clients in the Peninsula and South Bay regions.15.8% at December 31, 2020.

•The Board of Directors declared a cash dividend of ~~$0.23~~$0.24 per share on July ~~17, 2020.~~16, 2021, a $0.01 increase from the prior quarter. This represents the ~~61st~~65th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August ~~7, 2020,~~6, 2021, to shareholders of record at the close of business on July 30, 2021.

•Given our strong capital and liquidity, the Board of Directors approved a new share repurchase program on July 16, 2021 under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through July 31, ~~2020.~~2023. The share repurchase program became effective July 22, 2021.

•As announced in May 2021, Tim Myers, Chief Operating Officer, was promoted from Executive Vice President to President. Tim is now responsible for the management of Centralized Operations and Technology in addition to Commercial Banking, Retail Banking, Wealth Management & Trust, and Marketing.

Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve. ~~For the remainder of 2020 and looking forward into 2021, we~~We believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics, and low-cost deposit base, as well as our acquisition of AMRB will ~~help~~reinforce the long-term success of the bank and position us ~~navigate~~well for the ~~pandemic and low interest rate environment.~~remainder of 2021.

~~Page-31~~Page-30

RESULTS OF OPERATIONS

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


(dollars in thousands)	(dollars in thousands)	June 30, 2020			December 31, 2019			(dollars in thousands)	June 30, 2021			December 31, 2020
Selected financial condition data:	Selected financial condition data:							Selected financial condition data:
Total assets	Total assets	$	3,181,540		$	2,707,280		Total assets	$	3,073,818		$	2,911,926
Loans, net	Loans, net	2,089,333			1,826,609			Loans, net	1,983,667			2,065,682
Deposits	Deposits	2,779,866			2,336,489			Deposits	2,683,575			2,504,249
Borrowings and other obligations	Borrowings and other obligations	2,883			2,920			Borrowings and other obligations	438			58
Subordinated debenture								Subordinated debenture	—			2,777
Stockholders' equity	Stockholders' equity	352,240			336,788			Stockholders' equity	348,649			358,253
Asset quality ratios:	Asset quality ratios:							Asset quality ratios:
Allowance for loan losses to total loans		0.99		%	0.90		%
Allowance for loan losses to total loans, excluding non-PCI and SBA PPP loans¹		1.22		%	0.96		%
Allowance for loan losses to non-accrual loans		13.15x			73.86x
Allowance for credit losses on loans to total loans								Allowance for credit losses on loans to total loans	0.95		%	1.10		%
Allowance for credit losses on loans to total loans, excluding SBA PPP loans 1								Allowance for credit losses on loans to total loans, excluding SBA PPP loans 1	1.09		%	1.27		%
Allowance for credit losses on loans to non-accrual loans								Allowance for credit losses on loans to non-accrual loans	2.08x			2.48x
Non-accrual loans to total loans	Non-accrual loans to total loans	0.08		%	0.01		%	Non-accrual loans to total loans	0.46		%	0.44		%
Capital ratios:	Capital ratios:							Capital ratios:
Equity to total assets ratio	Equity to total assets ratio	11.07		%	12.44		%	Equity to total assets ratio	11.34		%	12.30		%
Tangible common equity to tangible assets ²	Tangible common equity to tangible assets ²	10.10		%	11.30		%	Tangible common equity to tangible assets 2	10.36		%	11.27		%
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)	15.77		%	15.07		%	Total capital (to risk-weighted assets)	15.53		%	16.03		%
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)	14.71		%	14.24		%	Tier 1 capital (to risk-weighted assets)	14.54		%	14.82		%
Tier 1 capital (to average assets)	Tier 1 capital (to average assets)	10.71		%	11.66		%	Tier 1 capital (to average assets)	10.04		%	10.80		%
Common equity Tier 1 capital (to risk weighted assets)	Common equity Tier 1 capital (to risk weighted assets)	14.58		%	14.11		%	Common equity Tier 1 capital (to risk weighted assets)	14.54		%	14.69		%


		Three months ended									Six months ended										Three months ended							Six months ended
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019			(dollars in thousands, except per share data)	June 30, 2021			June 30, 2020				June 30, 2021			June 30, 2020
Selected operating data:	Selected operating data:													Selected operating data:
Net interest income	Net interest income	$	24,375		$	23,789		$	48,494		$	47,635		Net interest income	$	24,534		$	24,375			$	46,565		$	48,494
Provision for loan losses		2,000			—			4,200			—
(Reversal of) provision for credit losses on loans														(Reversal of) provision for credit losses on loans	(920)			2,000				(3,849)			4,200
Non-interest income	Non-interest income	1,813			2,274			4,933			4,045			Non-interest income	2,022			1,813				3,848			4,933
Non-interest expense	Non-interest expense	14,141			14,916			29,610			30,444			Non-interest expense	15,556			13,881				30,968			29,248
Net income	Net income	7,406			8,235			14,634			15,714			Net income	9,285			7,406				18,232			14,634
Net income per common share:	Net income per common share:													Net income per common share:
Basic	Basic	$	0.55		$	0.60		$	1.08		$	1.15		Basic	$	0.71		$	0.55			$	1.38		$	1.08
Diluted	Diluted	$	0.55		$	0.60		$	1.07		$	1.13		Diluted	$	0.71		$	0.55			$	1.37		$	1.07
Performance and other financial ratios:	Performance and other financial ratios:													Performance and other financial ratios:
Return on average assets	Return on average assets	1.01		%	1.32		%	1.05		%	1.26		%	Return on average assets	1.20		%	1.01		%		1.21		%	1.05		%
Return on average equity	Return on average equity	8.52		%	10.26		%	8.53		%	9.90		%	Return on average equity	10.72		%	8.52		%		10.47		%	8.53		%
Tax-equivalent net interest margin³	Tax-equivalent net interest margin³	3.53		%	4.04		%	3.70		%	4.03		%	Tax-equivalent net interest margin 3	3.37		%	3.53		%		3.28		%	3.70		%
Cost of deposits	Cost of deposits	0.09		%	0.20		%	0.15		%	0.19		%	Cost of deposits	0.07		%	0.09		%		0.07		%	0.15		%
Efficiency ratio	Efficiency ratio	54.00		%	57.23		%	55.42		%	58.91		%	Efficiency ratio	58.58		%	53.01		%		61.43		%	54.74		%
Cash dividend payout ratio on common stock ⁴	Cash dividend payout ratio on common stock ⁴	41.82		%	31.67		%	42.59		%	33.04		%	Cash dividend payout ratio on common stock 4	32.39		%	41.82		%		33.33		%	42.59		%

¹ The allowance for ~~loan~~credit losses on loans to total loans, excluding ~~non-impaired non-PCI and guaranteed SBA~~SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for ~~loan losses. Non-PCI~~credit losses on loans. SBA PPP loans ~~that were not impaired~~ at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 totaled ~~$95.6~~$248.3 million and ~~$106.8~~$291.6 million, respectively. ~~SBA PPP loans totaled $298.9 million at June 30, 2020. There were no SBA PPP loans as of December 31, 2019.~~

²Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of ~~$318~~$315 million and ~~$302~~$324 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of ~~$34.4~~$33.6 million and ~~$34.8~~$34.0 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

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, by total average interest-earning assets.

⁴ Calculated as dividends on common shares divided by basic net income per common share.

~~Page-32~~Page-31

Net Interest Income

Net interest income is the ~~difference between the~~ interest earned on loans, ~~investments~~investment and other interest-earning assets ~~and~~minus 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 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
			June 30, 2020													June 30, 2019															June 30, 2021									June 30, 2020
					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-earning deposits with banks¹	$	173,161	$	39	0.09		%			$	30,928	$	190	2.43		%		Interest-earning deposits with banks 1		$	193,749	$	54	0.11		%			$	173,161	$	39	0.09		%
		Investment securities^{2, 3}	550,483		3,886		2.82		%			567,813		3,844		2.71		%		Investment securities 2, 3		661,361		3,666		2.22		%			550,483		3,886		2.82		%
		Loans ^{1, 3, 4}	2,043,197		21,399		4.14		%			1,758,874		21,180		4.76		%		Loans 1, 3, 4		2,062,497		21,601		4.14		%			2,043,197		21,399		4.14		%
		Total interest-earning assets¹	2,766,841		25,324		3.62		%			2,357,615		25,214		4.23		%		Total interest-earning assets 1		2,917,607		25,321		3.43		%			2,766,841		25,324		3.62		%
		Cash and non-interest-bearing due from banks	37,680									34,437								Cash and non-interest-bearing due from banks		39,252									37,680
		Bank premises and equipment, net	5,543									7,108								Bank premises and equipment, net		4,795									5,543
		Interest receivable and other assets, net	133,639									107,089								Interest receivable and other assets, net		131,667									133,639
Total assets	Total assets				$	2,943,703								$	2,506,249						Total assets			$	3,093,321								$	2,943,703
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity																				Liabilities and Stockholders' Equity
		Interest-bearing transaction accounts	$	142,778	$	39	0.11		%			$	124,620	$	91	0.29		%		Interest-bearing transaction accounts		$	167,787	$	39	0.09		%			$	142,778	$	39	0.11		%
		Savings accounts	182,371		17		0.04		%			174,102		17		0.04		%		Savings accounts		227,767		21		0.04		%			182,371		17		0.04		%
		Money market accounts	794,654		383		0.19		%			661,363		787		0.48		%		Money market accounts		735,784		312		0.17		%			794,654		383		0.19		%
		Time accounts including CDARS	95,076		142		0.60		%			115,272		175		0.61		%		Time accounts including CDARS		95,354		81		0.34		%			95,076		142		0.60		%
		Borrowings and other obligations ¹	156		1		2.62		%			3,608		24		2.59		%		Borrowings and other obligations 1		61		—		1.15		%			156		1		2.62		%
		Subordinated debenture ¹	2,733		40		5.73		%			2,664		58		8.69		%		Subordinated debenture 1, 5		—		—		—		%			2,733		40		5.73		%
		Total interest-bearing liabilities	1,217,768		622		0.21		%			1,081,629		1,152		0.43		%		Total interest-bearing liabilities		1,226,753		453		0.15		%			1,217,768		622		0.21		%
		Demand accounts	1,332,986									1,073,909								Demand accounts		1,478,119									1,332,986
		Interest payable and other liabilities	43,255									28,621								Interest payable and other liabilities		40,976									43,255
		Stockholders' equity	349,694									322,090								Stockholders' equity		347,473									349,694
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity				$	2,943,703								$	2,506,249						Total liabilities & stockholders' equity			$	3,093,321								$	2,943,703
Tax-equivalent net interest income/margin ¹	Tax-equivalent net interest income/margin ¹						$	24,702		3.53	%					$	24,062		4.04	%	Tax-equivalent net interest income/margin 1					$	24,868		3.37	%					$	24,702		3.53	%
Reported net interest income/margin¹	Reported net interest income/margin¹						$	24,375		3.49	%					$	23,789		3.99	%	Reported net interest income/margin 1					$	24,534		3.33	%					$	24,375		3.49	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread									3.41	%								3.80	%	Tax-equivalent net interest rate spread								3.28	%								3.41	%

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			Six months ended													Six months ended															Six months ended									Six months ended
			June 30, 2020													June 30, 2019															June 30, 2021									June 30, 2020
					Interest									Interest										Interest									Interest
			Average		Income/		Yield/					Average		Income/		Yield/						Average		Income/		Yield/					Average		Income/		Yield/
(in thousands; unaudited)					Balance		Expense			Rate				Balance		Expense			Rate
(in thousands)																			(in thousands)			Balance		Expense		Rate					Balance		Expense		Rate
Assets	Assets																				Assets
		Interest-earning deposits with banks¹	$	136,261	$	371	0.54		%			$	26,832	$	329	2.44		%		Interest-earning deposits with banks 1		$	179,846	$	96	0.11		%			$	136,261	$	371	0.54		%
		Investment securities^{2, 3}	553,690		8,151		2.94		%			593,545		8,034		2.71		%		Investment securities 2, 3		601,498		6,948		2.31		%			553,690		8,151		2.94		%
		Loans ^{1, 3, 4}	1,938,189		42,465		4.33		%			1,757,602		42,067		4.76		%		Loans 1, 3, 4		2,081,069		42,437		4.06		%			1,938,189		42,465		4.33		%
		Total interest-earning assets¹	2,628,140		50,987		3.84		%			2,377,979		50,430		4.22		%		Total interest-earning assets 1		2,862,413		49,481		3.44		%			2,628,140		50,987		3.84		%
		Cash and non-interest-bearing due from banks	39,262									32,702								Cash and non-interest-bearing due from banks		45,059									39,262
		Bank premises and equipment, net	5,741									7,308								Bank premises and equipment, net		4,786									5,741
		Interest receivable and other assets, net	126,274									105,894								Interest receivable and other assets, net		132,675									126,274
Total assets	Total assets				$	2,799,417								$	2,523,883						Total assets			$	3,044,933								$	2,799,417
Liabilities and Stockholders' Equity	Liabilities and Stockholders' Equity																				Liabilities and Stockholders' Equity
		Interest-bearing transaction accounts	$	140,587	$	105	0.15		%			$	126,168	$	168	0.27		%		Interest-bearing transaction accounts		$	170,943	$	78	0.09		%			$	140,587	$	105	0.15		%
		Savings accounts	172,905		33		0.04		%			177,211		35		0.04		%		Savings accounts		220,946		40		0.04		%			172,905		33		0.04		%
		Money market accounts	777,635		1,354		0.35		%			667,218		1,551		0.47		%		Money market accounts		719,769		598		0.17		%			777,635		1,354		0.35		%
		Time accounts including CDARS	95,616		303		0.64		%			114,336		294		0.52		%		Time accounts including CDARS		95,849		177		0.37		%			95,616		303		0.64		%
		Borrowings and other obligations ¹	257		3		2.06		%			5,500		71		2.56		%		Borrowings and other obligations 1		50		—		1.46		%			257		3		2.06		%
		Subordinated debenture ¹	2,724		89		6.46		%			2,655		118		8.87		%		Subordinated debenture 1, 5		1,076		1,361		251.54		%			2,724		89		6.46		%
		Total interest-bearing liabilities	1,189,724		1,887		0.32		%			1,093,088		2,237		0.41		%		Total interest-bearing liabilities		1,208,633		2,254		0.38		%			1,189,724		1,887		0.32		%
		Demand accounts	1,226,481									1,080,392								Demand accounts		1,442,320									1,226,481
		Interest payable and other liabilities	38,150									30,383								Interest payable and other liabilities		42,753									38,150
		Stockholders' equity	345,062									320,020								Stockholders' equity		351,227									345,062
Total liabilities & stockholders' equity	Total liabilities & stockholders' equity				$	2,799,417								$	2,523,883						Total liabilities & stockholders' equity			$	3,044,933								$	2,799,417
Tax-equivalent net interest income/margin ¹	Tax-equivalent net interest income/margin ¹						$	49,100		3.70	%					$	48,193		4.03	%	Tax-equivalent net interest income/margin 1					$	47,227		3.28	%					$	49,100		3.70	%
Reported net interest income/margin¹	Reported net interest income/margin¹						$	48,494		3.65	%					$	47,635		3.98	%	Reported net interest income/margin 1					$	46,565		3.24	%					$	48,494		3.65	%
Tax-equivalent net interest rate spread	Tax-equivalent net interest rate spread									3.52	%								3.81	%	Tax-equivalent net interest rate spread								3.06	%								3.52	%

¹Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.	¹Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.																																			1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
²Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.	²Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.																																			2 Yields 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%.	³Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21%.																																			3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21%.
⁴Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.	⁴Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.																																			4 Average 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.
5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.																			5 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

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~~periods 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, including one more day in the six months ended June 30, 2020.

~~Page-34~~Page-33


		Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019														Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019															Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020				Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
(in thousands)	(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total		(in thousands)	Volume		Yield/Rate		Mix		Total		Volume		Yield/Rate		Mix		Total
Interest-earning deposits with banks	Interest-earning deposits with banks	$	875	$	(184)	$	(842)	$	(151)	$	1,343	$	(257)	$	(1,044)	$	42	Interest-earning deposits with banks	$	5	$	9	$	1	$	15	$	119	$	(298)	$	(96)	$	(275)
Investment securities ¹	Investment securities ¹	(117)		165		(6)		42		(539)		703		(47)		117		Investment securities 1	783		(835)		(168)		(220)		704		(1,755)		(152)		(1,203)
Loans¹	Loans¹	3,424		(2,759)		(446)		219		4,322		(3,770)		(154)		398		Loans 1	202		—		—		202		3,130		(2,723)		(435)		(28)
Total interest-earning assets	Total interest-earning assets	4,182		(2,778)		(1,294)		110		5,126		(3,324)		(1,245)		557		Total interest-earning assets	990		(826)		(167)		(3)		3,953		(4,776)		(683)		(1,506)
Interest-bearing transaction accounts	Interest-bearing transaction accounts	13		(57)		(8)		(52)		19		(74)		(8)		(63)		Interest-bearing transaction accounts	7		(6)		(1)		—		23		(40)		(10)		(27)
Savings accounts	Savings accounts	1		—		(1)		—		(1)		—		(1)		(2)		Savings accounts	4		—		—		4		9		—		(2)		7
Money market accounts	Money market accounts	158		(468)		(94)		(404)		257		(396)		(58)		(197)		Money market accounts	(28)		(46)		3		(71)		(101)		(704)		49		(756)
Time accounts, including CDARS	Time accounts, including CDARS	(31)		(2)		—		(33)		(48)		66		(9)		9		Time accounts, including CDARS	—		(61)		—		(61)		1		(125)		(2)		(126)
Borrowings and other obligations	Borrowings and other obligations	(23)		—		—		(23)		(68)		(14)		14		(68)		Borrowings and other obligations	(1)		—		—		(1)		(2)		(1)		—		(3)
Subordinated debenture		2		(20)		—		(18)		3		(32)		—		(29)
Subordinated debenture 2																		Subordinated debenture 2	(40)		—		—		(40)		(54)		1,326		—		1,272
Total interest-bearing liabilities	Total interest-bearing liabilities	120		(547)		(103)		(530)		162		(450)		(62)		(350)		Total interest-bearing liabilities	(58)		(113)		2		(169)		(124)		456		35		367
Changes in tax-equivalent net interest income	Changes in tax-equivalent net interest income	$	4,062	$	(2,231)	$	(1,191)	$	640	$	4,964	$	(2,874)	$	(1,183)	$	907	Changes in tax-equivalent net interest income	$	1,048	$	(713)	$	(169)	$	166	$	4,077	$	(5,232)	$	(718)	$	(1,873)
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%.																																	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%.
2 Six months ended June 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.																		2 Six months ended June 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

Second Quarter of ~~2020~~2021 Compared to Second Quarter of ~~2019~~2020

Net interest income totaled ~~$24.4~~$24.5 million in the second quarter of ~~2020,~~2021, compared to ~~$23.8~~$24.4 million in the same quarter a year ago. The ~~$586~~$159 thousand increase was primarily due to higher ~~balances in most loan categories led by~~income from SBA PPP loans, higher average investment securities and ~~higher interest-earning~~commercial real estate loan balances, ~~with banks due to temporary increases in SBA PPP borrowers' deposit accounts. These increases were partially offset by the net effect of a full quarter of~~and lower rates on ~~interest-earning assets~~interest-bearing liabilities. Increases were mostly offset by lower yields on investment securities, and ~~interest-bearing liabilities.~~lower average commercial, home equity, and other residential loan balances.

The tax-equivalent net interest margin was ~~3.53%~~3.37% in the second quarter of ~~2020~~2021 compared to ~~4.04%~~3.53% in the same quarter of the previous year. The decrease ~~from~~in tax-equivalent net interest margin was primarily attributed to the lower interest rate environment. SBA PPP loans added 12 basis points to the second quarter 2021's net interest margin as compared to 3 basis points reduction for the same quarter a year ago due to higher fee income accretion in the second quarter of ~~2019 was mostly attributed to low interest rates impacting yields on interest-earning assets, partially offset by lower rates on deposit accounts. The SBA~~2021 as more PPP loans ~~lowered~~were forgiven and paid off by the ~~second quarter of 2020 tax-equivalent net interest margin by 3 basis points.~~SBA.

First Six Months of ~~2020~~2021 Compared to First Six Months of ~~2019~~2020

Net interest income totaled ~~$48.5~~$46.6 million in the six months ended June 30, ~~2020,~~2021, compared to ~~$47.6~~$48.5 million in the same period a year ago. The ~~$859 thousand increase~~decrease was primarily ~~due~~attributed to $1.3 million in accelerated discount accretion from the early redemption of a subordinated debenture in the first quarter of 2021, lower yielding interest-earning assets, lower average balances of commercial and consumer loans, and one less day in the period. Decreases were partially offset by higher ~~average loan and interest-earning cash balances driven by~~income from SBA PPP loans and ~~deposits. These increases were partially offset by the net effect of~~higher investment securities, commercial real estate, and construction loan balances, and lower rates on ~~interest-earning assets~~interest-bearing liabilities. We recognized $4.3 million in SBA PPP fees, net of cost in the first six months of 2021, compared to $1.2 million in the first six months a year ago. As of June 30, 2021 $6.5 million PPP fees, net of deferred costs remain outstanding and ~~interest-bearing liabilities for a full quarter.~~will be recognized into income in future periods.

The tax-equivalent net interest margin was ~~3.70%~~3.28% in the six months ended June 30, ~~2020,~~2021, compared to ~~4.03%~~3.70% in the same period a year ago. The decrease from the first six months of ~~2019~~2020 was ~~mostly~~primarily attributed to ~~low~~the lower interest ~~rates impacting yields on interest-earning assets, partially offset by lower rates on non-maturing deposit accounts.~~rate environment. SBA PPP loans ~~lowered~~added 5 basis points to the ~~tax-equivalent~~first six months' net interest margin byas compared to a 2 basis points ~~during~~reduction to the first six months of 2020. As of June 30, 2020, deferred SBA PPP processing fees, net of costs, totaled $8.1 million, which will be recognized in interest income over the remaining contractual term and accelerated when these loans are forgiven or paid off. Once the SBA finalizes the guidelines, we will work with our customers toward the objective of maximizing loan forgiveness.same period a year ago.

Market Interest Rates

Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each

other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").

Page-34

In response to the evolving risks to economic activity posed by the COVID-19 pandemic, the ~~Federal Reserve Open Market Committee ("FOMC")~~FOMC made two emergency cuts totaling 150 basis points to the federal funds rate in March 2020. ~~This~~The federal funds target rate range has resided between 0.0% and 0.25% since March 15, 2020, putting downward pressure on our asset yields and net interest margin. A low interest rate environment will continue to put downward pressure on our asset yields and net interest margin. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.

Provision for ~~Loan~~Credit Losses on Loans

~~Page-35~~

Management assesses the adequacy of the allowance for ~~loan~~credit losses on loans quarterly based on several factors including growth of the loan portfolio, ~~analysis~~past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of ~~probable~~our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.

The following table shows the provision for credit losses activity for the periods presented.


	Three months ended				Six months ended
(dollars in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
(Reversal of) provision for credit losses on loans	$	(920)	$	2,000	$	(3,849)	$	4,200

The provision reversals in 2021 were primarily due to continued improvements in the forecasted California unemployment rates over the next four quarters and a $42.5 million year-to-date decrease in non-PPP loan balances. Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which decreased to 8.0% at June 30, 2021 from 9.1% at December 31, 2020. The provision for credit losses in 2020 calculated under the ~~portfolio, historical~~incurred loss ~~experience and~~method (prior to the ~~current economic climate, including~~adoption of the ~~economic uncertainties~~excepted credit loss method on December 31, 2020) was largely due to the uncertainty about the impact of the COVID-19 ~~pandemic. While loss recoveries~~pandemic on the local and ~~provisions for loan losses charged~~regional economies and our customers at that time.

Loans designated special mention, which are not considered adversely classified, decreased by $37.9 million to ~~expense increase the allowance, actual losses on loans reduce the allowance.~~

~~Impaired loan balances totaled $11.9~~$49.0 million at June 30, ~~2020 and $11.5~~2021 from $86.9 million at December 31, ~~2019, with specific valuation allowances~~2020. The decrease was largely due to the upgrading of ~~$434 thousand~~several borrowing relationships totaling approximately $25.5 million because of their improved financial condition, loan reductions and ~~$397 thousand for~~payoffs totaling approximately $16.4 million, and the ~~same respective dates. Loans graded~~downgrade from special mention to substandard of one well-secured commercial real estate loan totaling $4.6 million. These decreases were partially offset by two well-secured commercial real estate loans totaling $8.8 million that were downgraded from pass to special mention risk rating. Classified assets (loans with risk ratings of substandard or doubtful) totaled ~~$72.4~~$30.8 million at June 30, ~~2020 and $73.4~~2021, compared to $25.8 million at December 31, ~~2019. Classified assets (loans with substandard or doubtful risk grades) increased to $13.5 million at June 30, 2020, from $9.9 million at December 31, 2019.~~2020. The ~~$3.6~~$5.0 million increase was primarily due to the downgrade of ~~two non-owner occupied~~a $4.6 million commercial real estate ~~loans and one~~ loan ~~secured by a triplex property (both with low loan-to-value ratios), and three home equity loans.~~mentioned above. There were no loans ~~with~~considered doubtful ~~risk grades~~ at June 30, ~~2020~~2021 or December 31, ~~2019.~~

In accordance with the accounting relief provisions of the CARES Act, the Bank has postponed the adoption of the CECL accounting standard to focus on our customers' needs during the COVID-19 pandemic and due to the lack of clarity around the extent and duration of the COVID-19 pandemic, which hindered development of reasonable and supportable forecasts in the early days of the pandemic. Under the existing incurred loss model we adjusted certain qualitative factors, primarily to account for the significant increase in the unemployment rate and recorded $2.0 million and $4.2 million loan loss provisions in the three and six month periods ended June 30, 2020, compared to no provisions for the same periods in the prior year. Net charge-offs were $16 thousand and $9 thousand in the three and six month periods ended June 30, 2020, compared to net recoveries of $18 thousand and $14 thousand for the same respective periods in the prior year.2020.

The ratio of allowance for ~~loan~~credit losses on loans to total loans ~~including acquired loans and SBA-guaranteed PPP loans,~~ was ~~0.99%~~0.95% at June 30, ~~2020,~~2021, compared to ~~0.90%~~1.10% at December 31, ~~2019.~~2020. Excluding ~~the $298.9 million in guaranteed SBA~~SBA-guaranteed PPP ~~loans and $96.8 million in non-PCI acquired~~ loans, the ratio of the allowance for ~~loan~~credit losses on loans to total loans ~~would have been 1.22%~~was 1.09% and 1.27% at June 30, ~~2020. The Bank had no SBA loans at~~2021 and December 31, ~~2019.~~2020, respectively (Refer to footnote 1 on page 31 for a definition and reconciliation of this non-GAAP financial measure). Non-accrual loans totaled ~~$1.6~~$9.2 million, or ~~0.08%~~0.46% of total loans at June 30, ~~2020, compared to $226 thousand,~~2021, and remained largely unchanged from $9.2 million, or ~~0.01%~~0.44% of total loans at December 31, ~~2019. The $1.4 million increase in non-accrual loans was attributable to one loan secured by a triplex property and one home equity loan.~~2020.

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

Page-35

Non-interest Income

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

Three months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Service charges on deposit accounts $ 293 $ 485 $ (192) (39.6) %
Wealth Management and Trust Services 421 473 (52) (11.0) %
Debit card interchange fees, net 308 414 (106) (25.6) %
Merchant interchange fees, net 47 87 (40) (46.0) %
Earnings on bank-owned life insurance 234 235 (1) (0.4) %
Dividends on FHLB stock 146 193 (47) (24.4) %
Gains on sale of investment securities, net 115 61 54 88.5 %
Other income 249 326 (77) (23.6) %
Total non-interest income $ 1,813 $ 2,274 $ (461) (20.3) %

~~Page-36~~


		Six months ended						Amount			Percent			Three months ended				Amount			Percent
(dollars in thousands)	(dollars in thousands)	June 30, 2020		June 30, 2019		Increase (Decrease)			Increase (Decrease)		(dollars in thousands)	June 30, 2021		June 30, 2020		Increase (Decrease)			Increase (Decrease)
Wealth Management and Trust Services											Wealth Management and Trust Services	$	530	$	421	$	109		25.9	%
Debit card interchange fees											Debit card interchange fees	419		308		111			36.0	%
Service charges on deposit accounts	Service charges on deposit accounts	$	744	$	964	$	(220)		(22.8)	%	Service charges on deposit accounts	317		293		24			8.2	%
Wealth Management and Trust Services		925		911		14			1.5	%
Debit card interchange fees, net		668		794		(126)			(15.9)	%
Merchant interchange fees, net		120		174		(54)			(31.0)	%
Earnings on bank-owned life insurance, net	Earnings on bank-owned life insurance, net	509		175		334			190.9	%	Earnings on bank-owned life insurance, net	233		234		(1)			(0.4)	%
Dividends on FHLB stock	Dividends on FHLB stock	354		389		(35)			(9.0)	%	Dividends on FHLB stock	177		146		31			21.2	%
Gains on investment securities, net		915		55		860			1,563.6	%
Merchant interchange fees											Merchant interchange fees	61		47		14			29.8	%
Gains on sale of investment securities, net											Gains on sale of investment securities, net	—		115		(115)			(100.0)	%
Other income	Other income	698		583		115			19.7	%	Other income	285		249		36			14.5	%
Total non-interest income	Total non-interest income	$	4,933	$	4,045	$	888		22.0	%	Total non-interest income	$	2,022	$	1,813	$	209		11.5	%

												Six months ended				Amount			Percent
(dollars in thousands)											(dollars in thousands)	June 30, 2021		June 30, 2020		Increase (Decrease)			Increase (Decrease)
Wealth Management and Trust Services											Wealth Management and Trust Services	$	1,018	$	925	$	93		10.1	%
Debit card interchange fees											Debit card interchange fees	785		668		117			17.5	%
Service charges on deposit accounts											Service charges on deposit accounts	598		744		(146)			(19.6)	%
Earnings on bank-owned life insurance, net											Earnings on bank-owned life insurance, net	490		509		(19)			(3.7)	%
Dividends on FHLB stock											Dividends on FHLB stock	326		354		(28)			(7.9)	%
Merchant interchange fees											Merchant interchange fees	118		120		(2)			(1.7)	%
Gains on sale of investment securities, net											Gains on sale of investment securities, net	—		915		(915)			(100.0)	%
Other income											Other income	513		698		(185)			(26.5)	%
Total non-interest income											Total non-interest income	$	3,848	$	4,933	$	(1,085)		(22.0)	%

Second Quarter of ~~2020~~2021 Compared to Second Quarter of ~~2019~~2020

Non-interest income ~~decreased~~increased by ~~$461~~$209 thousand in the second quarter of ~~2020~~2021 to ~~$1.8~~$2.0 million, compared to ~~$2.3~~$1.8 million in the same quarter a year ago. The ~~decrease~~increase was ~~primarily related~~mostly attributed to ~~lower service charges on deposit accounts from waiving ATM and overdraft fees in response to COVID-19, lower~~debit card interchange fees ~~due to decreased~~from increased levels of activity and volume, and ~~small decreases~~higher wealth management and trust services income generated from new accounts and favorable market performance. Increases relative to the prior year quarter were partially offset by the absence of gains on investment security sales in ~~most other non-interest income categories.~~the second quarter of 2021.

First Six Months of ~~2020~~2021 Compared to First Six Months of ~~2019~~2020

Non-interest income ~~increased~~decreased by ~~$888 thousand~~$1.1 million in the first six months of ~~2020~~2021 to $3.8 million, from $4.9 million in the first half of 2020. The decrease was primarily attributed to the absence of gains on investment security sales in the first six months of 2021, versus $915 thousand realized in the same period a year ago, lower service charges on deposit accounts, and lower fee income from one-way deposit sales to third-party deposit networks in the first quarter of 2021. On March 30, 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic. After honoring the fee waivers for one year, we provided our customers a 30-day notice and reinstituted the fees as of May 3, 2021.

Page-36

Non-interest Expense

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


	Three months ended				Amount		Percent
(dollars in thousands)	June 30, 2021		June 30, 2020		Increase (Decrease)		Increase (Decrease)
Salaries and related benefits	$	8,888	$	7,864	$	1,024	13.0	%
Occupancy and equipment	1,751		1,661		90		5.4	%
Professional services	986		550		436		79.3	%
Data processing	820		829		(9)		(1.1)	%
Charitable contributions	462		273		189		69.2	%
Depreciation and amortization	389		526		(137)		(26.0)	%
Information technology	296		252		44		17.5	%
Directors' expense	230		175		55		31.4	%
Amortization of core deposit intangible	204		213		(9)		(4.2)	%
Federal Deposit Insurance Corporation insurance	182		116		66		56.9	%
Other non-interest expense
Advertising	175		158		17		10.8	%
Other expense	1,173		1,264		(91)		(7.2)	%
Total other non-interest expense	1,348		1,422		(74)		(5.2)	%
Total non-interest expense	$	15,556	$	13,881	$	1,675	12.1	%


	Six months ended				Amount		Percent
(dollars in thousands)	June 30, 2021		June 30, 2020		Increase (Decrease)		Increase (Decrease)
Salaries and related benefits	$	18,096	$	17,341	$	755	4.4	%
Occupancy and equipment	3,502		3,324		178		5.4	%
Professional services	1,849		1,094		755		69.0	%
Data processing	1,639		1,615		24		1.5	%
Depreciation and amortization	848		1,052		(204)		(19.4)	%
Information technology	609		502		107		21.3	%
Charitable contributions	493		440		53		12.0	%
Amortization of core deposit intangible	408		426		(18)		(4.2)	%
Directors' expense	405		349		56		16.0	%
Federal Deposit Insurance Corporation insurance	361		118		243		205.9	%
Other non-interest expense
Advertising	414		409		5		1.2	%
Other expense	2,343		2,578		(235)		(9.1)	%
Total other non-interest expense	2,758		2,987		(229)		(7.7)	%
Total non-interest expense	$	30,968	$	29,248	$	1,720	5.9	%

Second Quarter of 2021 Compared to Second Quarter of 2020

Non-interest expense increased by $1.7 million to $15.6 million in the second quarter of 2021, compared to ~~$4.0~~$13.9 million in the same period a year ago. The increase was ~~mostly~~primarily attributed to $1.0 million in higher salaries and related benefits (mostly attributable to fewer deferred SBA PPP loan origination costs), $351 thousand increase in ARB acquisition-related expenses (mostly related to professional services), and $189 thousand increase in charitable contributions. We expect higher ~~gains on~~ARB acquisition related expenses in the ~~sale~~next two quarters. The majority of ~~investment securities~~our expected 2021 charitable contributions were disbursed in the second quarter.

First Six Months of 2021 Compared to First Six Months of 2020

Non-interest expense increased by $1.7 million to $31.0 million in the first half of ~~2020 and $283 thousand non-refundable costs for underwriting two new bank-owned life insurance policies purchased~~2021, compared to $29.2 million in the first ~~quarter~~half of ~~2019. These increases were partially offset~~2020. The increase was driven by ~~service charges on deposit accounts from waiving ATM~~higher salaries and ~~overdraft fees in response~~related benefits of $755 thousand, most of which was attributed to ~~COVID-19 and lower interchange fees~~fewer deferred SBA PPP loan origination costs. Professional services increased by $755 thousand due to ~~decreased activity~~some pandemic-related delays in 2020 activities and ~~volume.~~

~~Non-interest Expense~~

~~The following tables detail the components of non-interest expense.~~

Three months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 7,864 $ 8,868 $ (1,004) (11.3) %
Occupancy and equipment 1,661 1,578 83 5.3 %
Depreciation and amortization 526 572 (46) (8.0) %
Federal Deposit Insurance Corporation insurance 116 174 (58) (33.3) %
Data processing 829 1,004 (175) (17.4) %
Professional services 550 535 15 2.8 %
Directors' expense 175 187 (12) (6.4) %
Information technology 252 284 (32) (11.3) %
Amortization of core deposit intangible 213 221 (8) (3.6) %
Provision for losses on off-balance sheet commitments 260 — 260 NM
Other non-interest expense
Advertising 158 194 (36) (18.6) %
Other expense 1,537 1,299 238 18.3 %
Total other non-interest expense 1,695 1,493 202 13.5 %
Total non-interest expense $ 14,141 $ 14,916 $ (775) (5.2) %
NM - Not Meaningful
ARB acquisition-related activities. In addition,

Page-37

Six months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 17,341 $ 18,014 $ (673) (3.7) %
Occupancy and equipment 3,324 3,109 215 6.9 %
Depreciation and amortization 1,052 1,128 (76) (6.7) %
Federal Deposit Insurance Corporation insurance 118 353 (235) (66.6) %
Data processing 1,615 2,019 (404) (20.0) %
Professional services 1,094 1,121 (27) (2.4) %
Directors' expense 349 366 (17) (4.6) %
Information technology 502 543 (41) (7.6) %
Core deposit intangible amortization 426 443 (17) (3.8) %
Provision for losses on off-balance sheet commitments 362 129 233 180.6 %
Other non-interest expense
Advertising 409 405 4 1.0 %
Other expense 3,018 2,814 204 7.2 %
Total other non-interest expense 3,427 3,219 208 6.5 %
Total non-interest expense $ 29,610 $ 30,444 $ (834) (2.7) %

~~Second Quarter~~FDIC deposit insurance expenses increased by $243 thousand relative to the first six months of 2020 ~~Compared to Second Quarter of 2019~~

~~Non-interest expense decreased by $775 thousand to $14.1 million, compared to $14.9 million in the same period a year ago. The decrease was primarily~~ due to ~~deferral~~the absence of approximately $890 thousand in salaries and benefits related to SBA PPP loan origination costs and lower data processing expenses due to our digital platform conversion. These decreases were partially offset by the $260 thousand provision for losses on off-balance sheet loan commitments and increases in other expenses primarily due to higher recruiting costs and contributions to nonprofit organizations affected by the pandemic.

~~First Six Months of 2020 Compared to First Six Months of 2019~~

Non-interest expense decreased by $834 thousand to $29.6 million in the first half of 2020, compared to $30.4 million in the same period a year ago. The decrease was primarily associated with the deferral of $890 thousand in salaries and benefits related to SBA PPP loan origination costs, lower data processing expenses due to our digital platform conversion, and lower FDIC insurance expenses due to assessment credits, ~~from the FDIC. These assessment credits~~which were fully utilized as of June 30, 2020. These positive variances were partially offset by higher recruiting expenses, contributions to nonprofit organizations, higher occupancy and equipment costs, and higher provision for losses on off-balance sheet loan commitments.

~~To assist our employees through the pandemic,~~The (reversal of) or provision for credit losses on July 31, 2020 we paid $1,200 per employee totaling $360 thousand. In addition to employee assistance, we expect to donate approximately $350 thousand in charitable contributions to nonprofit organizationsunfunded commitments was reclassified out of non-interest expense and included as a separate line item under net interest income in the ~~third quarter~~consolidated statements of ~~2020.~~

Wecomprehensive income for all periods presented. Efficiency ratios for all periods reported have ~~contracted with third-party consultants~~been updated to ~~assist us and our customers with~~reflect the ~~SBA PPP loan forgiveness application and approval process and expect~~reclassification. Reclassification conforms to ~~incur approximately $400 thousand in consulting-related expenses over the remainder of 2020.~~Call Report instructions.

Provision for Income Taxes

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. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes for the second quarter of ~~2020~~2021 totaled $3.2 million at an effective tax rate of 25.9%, compared to $2.6 million at an effective tax rate of 26.3%~~, compared to $2.9 million at an effective tax rate of 26.1%~~ in the same quarter last year. The provision for income taxes for the first half of ~~2020~~2021 totaled $6.3 million at an effective tax rate of 25.6%, compared to $5.0 million at an effective tax rate of 25.4%~~, compared to $5.5 million at an~~

~~Page-38~~

~~effective tax rate of 26.0%~~ for the first half of ~~2019.~~2020. The ~~decrease~~increase in the provision reflected ~~the lower level of~~higher pre-tax income for both the second quarter and ~~higher tax exempt earnings on investment securities and BOLI.~~first half of 2021 compared to the same periods a year ago. The 40 basis point decrease in the effective tax rate ~~reflected a higher level~~in the second quarter of ~~discrete tax benefits in 2020 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options~~2021 as compared to ~~2019, partially offset by~~the same quarter a ~~decrease in~~year ago was primarily due to the true-up of low-income tax ~~benefits associated with the vesting of restricted stock.~~credits.

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 June 30, ~~2020,~~2021, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At June 30, ~~2020,~~2021, assets totaled ~~$3,181.5 million,~~$3.074 billion, an increase of ~~$474.2~~$161.9 million, from ~~$2,707.3~~$2.912 billion at December 31, ~~2019,~~2020, mainly due to ~~an increase~~increases in ~~cash and loans related to~~investment securities as we redeploy our ~~participation in the PPP in response to the COVID-19 pandemic~~excess liquidity from deposit inflows as ~~explained~~discussed below.

Cash, Cash Equivalents and Restricted Cash

Total cash, cash equivalents and restricted cash were ~~$397.7~~$257.5 million at June 30, ~~2020,~~2021, compared to ~~$183.4~~$200.3 million at December 31, ~~2019.~~2020. The ~~$214.3 million~~ increase was ~~largely~~mainly due to ~~temporary increases in~~ SBA PPP ~~borrowers'~~loan forgiveness and an increase in deposits. Cash and cash equivalents do not include $174.0 million and $173.4 million in temporary one-way sale transfers of deposits to third-party deposit ~~accounts. Effective March 26, 2020, the Federal Reserve reduced the reserve requirement ratios to zero percent in response to the COVID-19 pandemic resulting in no restricted cash requirements~~networks as part of our liquidity management at June 30, ~~2020. Restricted cash held at the Federal Reserve as of~~2021 and December 31, ~~2019 totaled $4.8 million.~~2020, respectively.

Investment Securities

The investment securities portfolio totaled ~~$555.6~~$687.0 million at June 30, ~~2020, a decrease~~2021, an increase of ~~$14.1~~$185.6 million from December 31, ~~2019.~~2020. The ~~decrease reflects~~increase was primarily due to purchases of $244.7 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2021, partially offset by paydowns, calls and maturities ~~totaling $48.5 million and sales totaling $32.8 million during the first half~~ of ~~2020, partially offset by purchases of $56.9 million high credit quality longer duration securities and increase in~~$51.3 million. Additionally, the fair value of available-for-sale securities decreased $6.3 million as a result of the higher interest rate environment in ~~2020. During~~ the first ~~and second quarters~~six months of ~~2020, respectively, we sold $26.6 million~~2021. There were no security sales in the first six months of short duration agency residential mortgage-backed securities subject to increasing prepayment speeds and $6.2 million of obligations of state and political subdivisions that were sensitive to the credit exposure posed by the COVID-19 pandemic.2021. See Note 4, Investment Securities, for additional information.

The following table summarizes our investment in obligations of state and political subdivisions at June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

June 30, 2020 December 31, 2019
(dollars in thousands) Amortized Cost Fair Value % of Total State and Political Subdivisions Amortized Cost Fair Value % of Total State and Political Subdivisions
Within California:
General obligation bonds $ 3,860 $ 4,102 4.0 % $ 4,597 $ 4,813 6.6 %
Revenue bonds 2,570 2,675 2.7 2,928 2,977 4.2
Tax allocation bonds 3,354 3,443 3.5 3,376 3,456 4.9
Total within California 9,784 10,220 10.2 10,901 11,246 15.7
Outside California:
General obligation bonds 56,711 59,035 58.9 45,974 46,976 66.1
Revenue bonds 29,798 30,780 30.9 12,680 12,648 18.2
Total outside California 86,509 89,815 89.8 58,654 59,624 84.3
Total obligations of state and political subdivisions $ 96,293 $ 100,035 100.0 % $ 69,555 $ 70,870 100.0 %

Page-38


		June 30, 2021						December 31, 2020
(dollars in thousands)		Amortized Cost		Fair Value		% of Total State and Political Subdivisions		Amortized Cost		Fair Value		% of Total State and Political Subdivisions
Within California:
	General obligation bonds	$	3,315	$	3,532	2.8	%	$	3,327	$	3,565	3.1	%
	Revenue bonds	2,044		2,113		1.7		2,352		2,448		2.2
	Tax allocation bonds	1,746		1,767		1.5		2,832		2,876		2.7
Total within California		7,105		7,412		6.0		8,511		8,889		8.0
Outside California:
	General obligation bonds	91,366		95,434		77.3		78,299		82,100		73.5
	Revenue bonds	19,704		20,966		16.7		19,744		21,351		18.5
Total outside California		111,070		116,400		94.0		98,043		103,451		92.0
Total obligations of state and political subdivisions		$	118,175	$	123,812	100.0	%	$	106,554	$	112,340	100.0	%

The portion of the portfolio outside the state of California is distributed among ~~twelve~~eleven states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas ~~(55.5%~~(51.0%), Washington (16.0%) and Maryland ~~(7.1%), and Florida (5.6%~~(5.7%). ~~During March 2020, we strategically increased our credit exposure to~~Our investment in obligations issued by ~~high credit quality~~ municipal issuers in Texas ~~that~~ are either guaranteed by the AAA-rated

~~Page-39~~

Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We have little or no exposure to municipal sectors such as higher education or health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.

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

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

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

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

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

•Credit ratings by major credit rating agencies

Loans

~~Loans increased~~During the first six months of 2021, loans decreased by ~~$266.9~~$85.8 million and totaled ~~$2,110.2 million~~$2.003 billion at June 30, ~~2020,~~2021, primarily due to SBA PPP loans which totaled ~~$298.9~~$248.3 million ~~(net of $8.1 million in deferred loan origination fees and costs) or 14% of loan balances~~ at June 30 ~~2020. We ended the origination of new PPP loans on June 30, 2020~~2021, compared to ~~focus our efforts on helping our customers through the loan forgiveness process.~~$291.6 million at December 31, 2020. New non-PPP related loan originations totaled ~~$71.6~~$69.1 million in the first six months of ~~2020.~~2021. Payoffs totaled ~~$83.4~~$95.4 million and credit line utilization decreased ~~$16.8~~$34.8 million during the first six months of ~~2020.~~2021. Loan payoffs in the first half of 2021 consisted largely of loans on which underlying assets were sold or paid off with cash (including completed construction projects). Residential real estate and consumer loan payoffs as well as loans refinanced with other banks contributed to the decline.

As of June 30, 2021, there were 1,532 PPP loans outstanding totaling $248.3 million (net of $6.5 million in unrecognized fees and costs). Of the total 2,876 PPP loans granted amounting to $444.1 million, we funded 1,813 loans totaling $307.9 million in the first round and 1,063 loans totaling $136.2 million in the second round. As of June 30, 2021, PPP loans forgiven and paid off were 1,344 totaling $189.3 million. Forgiveness of PPP loans continues with an additional 126 loans totaling $24.1 million approved between June 30, 2021 and July 31, 2021. Of the number of PPP loans remaining as of July 31, 2021, 71% (1,002 loans) totaling $43.0 million were less than or equal to $150 thousand and had access to streamlined forgiveness processing.

Page-39

As of July 31, 2021, 6 borrowing relationships with 9 loans totaling $43.4 million were benefiting from payment relief. We monitor the financial situation of these clients closely and expect the majority to resume payments as the economy continues to reopen.

Liabilities

During the first six months of ~~2020,~~2021, total liabilities increased by ~~$458.8~~$171.5 million to ~~$2,829.3 million.~~$2.725 billion. Deposits increased ~~$443.4~~$179.3 million in the first six months of ~~2020,~~2021, primarily driven by a combination of PPP loan proceeds and ~~increased liquidity throughout the banking system as a result~~normal fluctuations in some of ~~depositors' higher level of savings during these uncertain economic times.~~our larger commercial accounts. Non-interest bearing deposits increased ~~$314.0~~$105.4 million in the first six months of ~~2020~~2021 to ~~$1,442.8 million,~~$1.460 billion, and represented ~~51.9%~~54.4% of total deposits at June 30, ~~2020,~~2021, compared to ~~48.3%~~54.1% at December 31, ~~2019. Liabilities as~~2020. The cost of ~~June 30, 2020 included operating lease liabilities totaling $24.6 million, which increased $12.0 million~~average deposits was 0.07% in the second quarter and first ~~six months~~half of ~~2020 due to~~2021, a decrease of 2 basis points and 8 basis points from the ~~extension of lease terms for our existing headquarters office and three retail branches and~~ equivalent periods a ~~new lease agreement for one of our retail branches.~~year ago.

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, ~~2020.~~2021. There are no conditions or events since that notification that ~~Management~~management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

~~Page-40~~

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.” Fully phased in on January 1, 2019, Basel III required the Bank to maintain (i) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 8.5%, and (ii) a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 7.0%, both inclusive of a 2.50% “capital conservation buffer." The implementation of the 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 Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion. As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, ~~2019.~~2020. However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in ~~2019.~~2020.

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are presented in the following tables. As of December 31, 2020, Bancorp's Tier 1 capital ~~includes the~~included a subordinated debenture, which ~~are~~was not included at the Bank level. On March 15, 2021, Bancorp redeemed in full our last subordinated debenture due to NorCal Community Bancorp Trust II. The redemption reduced Bancorp's total risk-based capital ratio by approximately 18 basis points.

Capital Ratios for Bancorp
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold¹
Ratio to be a Well Capitalized Bank Holding Company
June 30, 2020 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 332,166 15.77 % ≥ $ 221,176 ≥ 10.50 % ≥ $ 210,644 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 309,849 14.71 % ≥ $ 179,048 ≥   8.50 % ≥ $ 168,515 ≥   8.00 %
Tier 1 Capital (to average assets) $ 309,849 10.71 % ≥ $ 115,702 ≥   4.00 % ≥ $ 144,627 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 307,106 14.58 % ≥ $ 147,451 ≥   7.00 % ≥ $ 136,919 ≥   6.50 %
December 31, 2019
Total Capital (to risk-weighted assets) $ 319,317 15.07 % ≥ $ 222,430 ≥ 10.50 % ≥ $ 211,838 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 301,553 14.24 % ≥ $ 180,063 ≥   8.50 % ≥ $ 169,471 ≥   8.00 %
Tier 1 Capital (to average assets) $ 301,553 11.66 % ≥ $ 103,489 ≥   4.00 % ≥ $ 129,361 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 298,845 14.11 % ≥ $ 148,287 ≥   7.00 % ≥ $ 137,695 ≥   6.50 %

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¹~~The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.~~


Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold				Ratio to be a Well Capitalized Bank Holding Company
June 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	326,698	15.53	%	≥ $	220,955	≥ 10.50	%	≥ $	210,433	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	306,021	14.54	%	≥ $	178,868	≥ 8.50	%	≥ $	168,346	≥ 8.00	%
Tier 1 Capital (to average assets)	$	306,021	10.04	%	≥ $	121,892	≥ 4.00	%	≥ $	152,365	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	306,021	14.54	%	≥ $	147,303	≥ 7.00	%	≥ $	136,781	≥ 6.50	%
December 31, 2020
Total Capital (to risk-weighted assets)	$	339,544	16.03	%	≥ $	222,393	≥ 10.50	%	≥ $	211,802	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	313,891	14.82	%	≥ $	180,032	≥ 8.50	%	≥ $	169,442	≥ 8.00	%
Tier 1 Capital (to average assets)	$	313,891	10.80	%	≥ $	116,224	≥ 4.00	%	≥ $	145,280	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	311,114	14.69	%	≥ $	148,262	≥ 7.00	%	≥ $	137,672	≥ 6.50	%

Capital Ratios for the Bank
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold¹
Ratio to be Well Capitalized under Prompt Corrective Action Provisions
June 30, 2020 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 316,621 15.03 % ≥ $ 221,177 ≥ 10.50 % ≥ $ 210,644 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 294,305 13.97 % ≥ $ 179,048 ≥   8.50 % ≥ $ 168,516 ≥   8.00 %
Tier 1 Capital (to average assets) $ 294,305 10.17 % ≥ $ 115,701 ≥   4.00 % ≥ $ 144,626 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 294,305 13.97 % ≥ $ 147,451 ≥   7.00 % ≥ $ 136,919 ≥   6.50 %
December 31, 2019
Total Capital (to risk-weighted assets) $ 309,875 14.63 % ≥ $ 222,437 ≥ 10.50 % ≥ $ 211,844 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 292,111 13.79 % ≥ $ 180,068 ≥   8.50 % ≥ $ 169,476 ≥   8.00 %
Tier 1 Capital (to average assets) $ 292,111 11.29 % ≥ $ 103,488 ≥   4.00 % ≥ $ 129,360 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 292,111 13.79 % ≥ $ 148,291 ≥   7.00 % ≥ $ 137,699 ≥   6.50 %

¹~~The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.~~


Capital Ratios for the Bank (dollars in thousands)	Actual Ratio				Adequately Capitalized Threshold				Ratio to be Well Capitalized under Prompt Corrective Action Provisions
June 30, 2021	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	321,837	15.30	%	≥ $	220,905	≥ 10.50	%	≥ $	210,386	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	301,160	14.31	%	≥ $	178,828	≥ 8.50	%	≥ $	168,309	≥ 8.00	%
Tier 1 Capital (to average assets)	$	301,160	9.88	%	≥ $	121,877	≥ 4.00	%	≥ $	152,346	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	301,160	14.31	%	≥ $	147,270	≥ 7.00	%	≥ $	136,751	≥ 6.50	%
December 31, 2020
Total Capital (to risk-weighted assets)	$	334,686	15.80	%	≥ $	222,391	≥ 10.50	%	≥ $	211,801	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	309,033	14.59	%	≥ $	180,031	≥ 8.50	%	≥ $	169,441	≥ 8.00	%
Tier 1 Capital (to average assets)	$	309,033	10.64	%	≥ $	116,224	≥ 4.00	%	≥ $	145,280	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	309,033	14.59	%	≥ $	148,261	≥ 7.00	%	≥ $	137,671	≥ 6.50	%

Liquidity

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as 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~~Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency

~~Page-41~~

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~~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.

The most significant ~~factor in~~component of our daily liquidity position ~~has been the level of~~is customer deposits. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, ~~and~~ rates paid to customers, ~~as well as~~and our financial strength. The ~~$443.4 million increase~~cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in ~~deposits in the first half of 2020 was primarily due to temporary increases in deposits from PPP borrowers, which we expect to be utilized by the end of 2020. As of June 30,~~their deposit balances held with us. Since 2020, the ~~Bank had funded $298.9 million in~~banking industry experienced abundant liquidity driven by pandemic-related government programs such as PPP ~~loans (net of $8.1 million of deferred loan origination fees, net of costs). In addition, there has been~~and stimulus checks as well as an ~~influx of deposits throughout the banking system as a result of depositors' higher level of~~elevated savings ~~during the uncertain economic times.~~rate system-wide.

In March 2020, we began providing loan payment relief by allowing certain borrowers with hardship requests either full payment deferrals or interest-only payments for up to 120 days. As of July 10, 2020, the Bank had approved over 260 loan modifications exceeding $386 million. The Bank has substantial contingent and on-balance-sheet liquidity to support the loan payment relief programs, including unencumbered available-for-sale securities and cash totaling $1.1 billion at June 30, 2020.

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~~Our cash and cash equivalents increased $214.3 million from December 31, 2019, primarily due~~The most significant source of liquidity during 2021 was an increase in deposits of ~~$443.4~~$179.3 million. The increase was primarily due to increases in PPP borrower-related accounts and normal fluctuations in some of our large business accounts. Proceeds from loans collected net of loan origination was $84.3 million. Proceeds from principal paydowns and maturities of securities totaled $51.3 million, ~~as explained above. Other significant sources~~and $19.8 million in net cash was provided by operating activities.

Significant uses of liquidity during the first six months of 2020 included $82.2 million in paydowns, maturities and sales of investment securities and $29.6 million net cash provided by operating activities (including $10.4 million in processing fees received from the SBA for the origination of PPP loans as of June 30, 2020). Uses of liquidity during the first six months of 2020 included $273.2 million in loan originations, net of principal collected, $56.92021 were $244.7 million in investment securities ~~purchases, and $6.2~~purchased, $19.7 million in common stock repurchases, $6.1 million in cash dividends paid on common stock to our ~~shareholders. There were no common stock repurchases~~shareholders, and $4.1 million in ~~the second quarter~~repayment of ~~2020.~~a subordinated debenture. 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~~are 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 ~~$553.3~~$571.7 million at June 30, ~~2020. These~~2021. We expect to fund these commitments to the extent ~~used, are expected to be funded~~utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, ~~$67.3~~$69.0 million of time deposits will mature. ~~In addition, we waived the early withdrawal penalties for certificates of deposit as part of the CARES Act, which might cause more depositors~~We expect to ~~withdraw time deposits during the uncertain economic environment.~~replace these funds with new deposits. Our emphasis on local deposits, combined with our ~~equity position is expected to provide~~liquid investment portfolio, provides a ~~strong~~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 ~~$15.5~~$4.6 million of cash at June 30, ~~2020. The~~2021. Combined with $34.0 million of dividend from the Bank to the Bancorp in July 2021, there is sufficient cash ~~level at Bancorp is deemed sufficient~~ to cover Bancorp's operational needs, share repurchases, and cash dividends to shareholders through ~~mid-2021.~~2022. Management anticipates that there will be sufficient earnings at the Bank ~~will continue to have sufficient earnings~~ to provide dividends to Bancorp to meet its funding requirements ~~going forward.~~for the foreseeable future.

~~Page-42~~

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

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

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

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~~management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At June 30, ~~2020,~~2021, 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.

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
up 400 (2.5) % 9.7 %
up 300 (1.7) % 7.6 %
up 200 (1.1) % 4.8 %
up 100 (0.9) % 1.3 %
down 100 (0.6) % (1.1) %

Page-42


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
up 400	9.1	%	25.2	%
up 300	6.9	%	19.2	%
up 200	4.6	%	12.8	%
up 100	2.2	%	6.1	%
down 100	(1.9)	%	(3.6)	%

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 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 could vary significantly from the assumptions applied in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our ~~Management,~~management, including our Chief Executive Officer and Chief Financial Officer, of the

~~Page-43~~

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 et seq.) 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,~~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

While many employees have been working remotely due to the COVID-19 pandemic, our branches remain open and we are continually monitoring our internal controls over financial reporting to minimize any related impact of pandemic. In April 2020, Bank of Marin began participating in the SBA PPP and integrated the related processes and systems into our overall internal control over financial reporting. As a result, we implemented or modified certain internal controls, including but not limited to the following:

~~• Enhanced controls to facilitate SBA PPP loan application, approval, and data input processes.~~

~~• Added controls for the deferral and recognition of the SBA PPP processing fees and loan origination costs.~~

~~• Implemented controls over SBA PPP loan reporting (Form 1502).~~

~~• Began to establish controls and necessary systems related to the SBA PPP loan forgiveness program, which we expect to begin in the third quarter of 2020.~~

During the quarter ended June 30, ~~2020, other than the items described above,~~2021, there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

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Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our ~~2019~~2020 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q.

ITEM 1A Risk Factors

~~The following~~There have been no material changes from the risk factors ~~are~~previously disclosed in ~~addition~~our 2020 Form 10-K. Refer to ~~the risks described~~"Risk Factors" in ~~the Company’s~~Item 1A of our 2020 Form 10-K, under Item 1A, “Risk Factors” for its year ended December 31, 2019 and in its subsequent periodic reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. The effects of the events and circumstances described in the following risk factors may have heightened several of the risks contained in our Form 10-K.

~~Our Business, Results of Operations, and Financial Condition Have Been, and Will Likely Continue to be, Adversely Affected by the Ongoing COVID-19 Pandemic~~

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, which has spread globally including in the United States. On March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency. The pandemic has caused significant economic disruption and many states and local governments have continued to order non-essential businesses to close or scale back services. The extent to which the pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California. As a result, we are subject to the

~~Page-44~~

~~following risks, which could have a material effect on our business, financial condition, results of operations, capital position and liquidity:~~

•The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and equity market valuations, and increased unemployment levels. This may lead to an increase in loan delinquencies, problem assets and foreclosures, which may increase loan losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Additionally, the expiration of the payment relief provided under Section 4013 of the CARES Act may result in loan delinquencies and impairments that could increase the provision for loan losses.

•~~Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and necessitate increases in the allowance for loan losses.~~

•~~Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.~~

•The decline in the target federal funds rate has decreased yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may continue to reduce our net interest margin.

•The future adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

•~~The continued market turmoil could reduce our wealth management and trust services revenue.~~

•Our business operations may be disrupted if significant portions of our workforce are unable to work effectively because of illness, quarantines, government actions, and other restrictions in connection with the pandemic.

Recent government actions to provide substantial financial support to businesses (e.g., Paycheck Protection Program) could partially mitigate the financial impact to us and our borrowers. However, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic.

~~Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic~~

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees. All branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as a maximum of two customers allowed in a branch at one time. Our customers have been encouraged to utilize alternative banking options including ATM, digital and telephone banking. Further, many employees are working remotely, and travel as well as face-to-face meeting restrictions are in effect. In addition, given the increasing risk of cybersecurity incidents during the pandemic, we have enhanced our cybersecurity protocols. If the pandemic worsens or lasts for an extended period of time, to protect the health of the Bank’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period. These changes to our traditional service delivery channels may negatively impact our customers' experience of banking with us, and therefore negatively impact our financial condition and results of operations.pages 12 through 21.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the period covered by this report.

Issuer Purchases of Equity Securities

On ~~April 23, 2018,~~January 24, 2020, Bancorp ~~announced that its~~ Board of Directors approved a ~~Share Repurchase Program~~share repurchase program under which Bancorp could repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. During the three months ended June 30, 2021, Bancorp repurchased 297,935 shares at an average price of $36.04 per share for a total cost of $10.7 million. This share repurchase program ended in May 2021 with 691,519 cumulative shares repurchased totaling $25.0 million. The following table reflects repurchases under this share repurchase program for the periods presented.


(in thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid per Share 1		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value That May yet Be Purchased Under the Program


Period



April 1-30, 2021	130,680	$	36.63	130,680	$	5,959
May 1-31, 2021	167,255	35.58		167,255	$	—
June 1-30, 2021	—	—		—	$	—






Total	297,935	$	36.04	297,935
1 Average price paid per share excludes commission.

On July 16, 2021, the Board of Directors approved a new share repurchase program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. The Board subsequently extended the Share Repurchase Program, which expired on February 28, 2020, with cumulative purchases of 561,355 shares totaling $23.5 million. Approximately $1.5 million in authorized share repurchases expired utilized.

On January 24, 2020, Bancorp Board of Directors approved a new Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. The new share repurchase program began in March 2020 and was suspended indefinitely by the Board of Directors on March 20, 2020 to focus our resources on responding to customer needs during the COVID-19 pandemic. Repurchases under the new program were 58,526 shares totaling $1.8 million, with approximately $23.2 million available for future repurchases. The program will be monitored with the opportunity to reinstitute when the Board deems appropriate.

~~Page-45~~

There were 92,664 shares repurchased totaling $3.2 million in the first half of 2020, none of which took place in the second quarter of 2020. For additional information, refer to Note 7 to the Consolidated Financial Statements in this Form 10-Q.

July 31, 2023.

ITEM 3 Defaults upon Senior Securities

None.

ITEM 4 Mine Safety Disclosures

Not applicable.

ITEM 5 Other Information

None.

~~Page-46~~Page-44

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
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
Bylaws 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
4.02
Description of Capital Stock
10-K 001-33572 4.02 March 13, 2020
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
2020 Director Stock Plan
S-8 333-239555 4.1 June 30, 2020
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
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

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

2.01

Agreement to Merge and Plan of Reorganization, dated April 16, 2021 by and among Bank of Marin Bancorp and American River Bankshares

8-K

001-33572

2.1

April 19, 2021

3.01

Articles of Incorporation, as amended

S-4

333-257025

3.01

June 11, 2021

3.02

Bylaws, as amended

S-4

333-257025

3.02

June 11, 2021

4.01

Rights Agreement, dated July 6, 2017

8-A12B

001-33572

4.1

July 7, 2017

4.02

Description of Capital Stock

10-K

001-33572

4.02

March 13, 2020

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

2020 Director Stock Plan

S-8

333-239555

4.1

June 30, 2020

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, revised 2019

10-K

001-33572

10.07

March 15, 2021

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 Tani Girton, Chief Financial Officer, dated October 18, 2013

8-K

001-33572

10.2

November 4, 2014

10.10

Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014

8-K

001-33572

10.3

November 4, 2014

10.11

2007 Form of Change in Control Agreement

8-K

001-33572

10.1

October 31, 2007

10.12

Salary Continuation Agreement for executive officer Timothy Myers, President and Chief Operating Officer, dated January 1, 2016

10-Q

001-33572

10.12

November 6, 2020

10.13

Director Deferred Fee Plan, dated December 17, 2020

10-K

001-33572

10.13

March 15, 2021

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

~~Page-47~~Page-45

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)


			August ~~7, 2020~~5, 2021						/s/ Russell A. Colombo
			Date						Russell A. Colombo
									~~President &~~
									Chief Executive Officer
									(Principal Executive Officer)



			August ~~7, 2020~~5, 2021						/s/ Tani Girton
			Date						Tani Girton
									Executive Vice President &
									Chief Financial Officer
									(Principal Financial Officer)


			August ~~7, 2020~~5, 2021						/s/ David A. Merck
			Date						David A. Merck
									Vice President &
									Financial Reporting Manager
									(Principal Accounting Officer)

~~Page-48~~Page-46


	June 30, 2020														December 31, 2019
	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	$	74,688	$	79,006	$	4,318	$	—	$	80,451	$	81,325	$	1,018	$	(144)
SBA-backed securities	7,029		7,473		444		—		7,999		8,264		265		—
CMOs issued by FNMA	9,011		9,524		513		—		10,210		10,492		282		—
CMOs issued by FHLMC	30,444		32,140		1,696		—		31,477		32,157		685		(5)
CMOs issued by GNMA	2,687		2,714		27		—		3,763		3,816		53		—
Obligations of state and political subdivisions	1,922		1,979		57		—		3,513		3,588		75		—
Total held-to-maturity	125,781		132,836		7,055		—		137,413		139,642		2,378		(149)
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	62,337		65,587		3,250		—		98,502		100,071		1,617		(48)
SBA-backed securities	32,517		33,993		1,536		(60)		35,674		36,286		688		(76)
CMOs issued by FNMA	20,018		20,849		831		—		22,702		23,092		390		—
CMOs issued by FHLMC	150,360		158,698		8,339		(1)		139,398		143,226		3,892		(64)
CMOs issued by GNMA	10,089		10,575		486		—		11,719		11,755		42		(6)
Debentures of government- sponsored agencies	41,355		42,018		663		—		48,389		49,046		727		(70)

Obligations of state and political subdivisions	94,371		98,055		3,684		—		66,042		67,282		1,386		(146)
Corporate bonds	—		—		—		—		1,497		1,502		6		(1)
Total available-for-sale	411,047		429,775		18,789		(61)		423,923		432,260		8,748		(411)
Total investment securities	$	536,828	$	562,611	$	25,844	$	(61)	$	561,336	$	571,902	$	11,126	$	(560)


Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio						Adequately Capitalized Threshold¹						Ratio to be a Well Capitalized Bank Holding Company
June 30, 2020	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk-weighted assets)	$	332,166	15.77	%	≥ $	221,176	≥ 10.50	%	≥ $	210,644	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	309,849	14.71	%	≥ $	179,048	≥ 8.50	%	≥ $	168,515	≥ 8.00	%
Tier 1 Capital (to average assets)	$	309,849	10.71	%	≥ $	115,702	≥ 4.00	%	≥ $	144,627	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	307,106	14.58	%	≥ $	147,451	≥ 7.00	%	≥ $	136,919	≥ 6.50	%
December 31, 2019
Total Capital (to risk-weighted assets)	$	319,317	15.07	%	≥ $	222,430	≥ 10.50	%	≥ $	211,838	≥ 10.00	%
Tier 1 Capital (to risk-weighted assets)	$	301,553	14.24	%	≥ $	180,063	≥ 8.50	%	≥ $	169,471	≥ 8.00	%
Tier 1 Capital (to average assets)	$	301,553	11.66	%	≥ $	103,489	≥ 4.00	%	≥ $	129,361	≥ 5.00	%
Common Equity Tier 1 (to risk-weighted assets)	$	298,845	14.11	%	≥ $	148,287	≥ 7.00	%	≥ $	137,695	≥ 6.50	%