What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 175 added, 176 removed, 322 unchanged (52% of the section changed)

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A number of factors, many of which are beyond Management’s control, could cause future results to vary materially from current Management expectations.

Such factors include, but are not limited to, 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, economic uncertainty in the United States and abroad, changes in interest rates, deposit flows, real estate values, costs or effects of acquisitions, competition, changes in accounting principles, policies or guidelines, legislation or regulation (including the Tax Cuts & Jobs Act of 2017 and the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended), interruptions of utility service in our markets for sustained periods, and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting Bancorp's operations, pricing, products and services.

Such factors include, but are not limited to, natural disasters (such as wildfires and earthquakes), our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance, general economic conditions, economic uncertainty in the United States and abroad, changes in interest rates, deposit flows, real estate values, costs or effects of acquisitions, competition, changes in accounting principles, policies or guidelines, legislation or regulation (including the Tax Cuts & Jobs Act of 2017 and the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended), interruptions of utility service in our markets for sustained periods, and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting Bancorp's operations, pricing, products and services.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in the Risk Factors section of this Form 10-Q and in Item 1A .

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For a detailed discussion, refer to Note 1 to the Consolidated Financial Statements included in our 2019 Form 10-K filed with the SEC on March 13, 2020 and Note 2, 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.

Executive Summary

Net income for the second quarter of 2020 totaled $7.4 million, compared to $8.2 million in the second quarter of 2019.

Diluted earnings per share were $0.55 in the second quarter of 2020, compared to $0.60 in the same quarter a year ago.

Earnings for the first six months of 2020 totaled $14.6 million compared to $15.7 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 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 $0.23 in the first half of 2020.

The Bank has responded to the COVID-19 pandemic in a number of ways, distributing funds to over 1,800 small businesses with nearly 28,000 employees in our markets through 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 certificates of deposit when allowed by law.

Net income for the third quarter of 2020 totaled $7.5 million, compared to $9.4 million in the third quarter of 2019.

Diluted earnings per share were $0.55 in the third quarter of 2020, compared to $0.69 in the same quarter a year ago.

Earnings for the first nine months of 2020 totaled $22.1 million compared to $25.2 million in the same period last year.

Diluted earnings per share were $1.62 and $1.82 in the first nine months of 2020 and 2019, respectively.

Our net income for the first nine months of 2020 was $3.1 million lower than 2019, primarily due to the economic impact of the pandemic, resulting in a $5.1 million year-over-year increase in the provision for loan losses and an historic low interest rate environment.

Our credit quality remained strong with non-accrual loans representing only 0.07% of total loans.

We continue to focus on increasing efficiencies and controlling expenses to offset the impacts of net interest margin compression.

Non-interest expenses remained relatively flat during 2020 resulting in an efficiency ratio of 56.21%.

The Bank has responded to the COVID-19 pandemic in a number of ways, including third quarter charitable contributions to non-profit organizations of $360 thousand to ensure equitable access to remote learning resources for underserved students in Marin, Napa and Sonoma counties and the City of Alameda.

In addition, to assist our employees during the pandemic, we paid $1,200 to each employee totaling $360 thousand in the third quarter, with executive management directing their payments to non-profit organizations of their choice.

Since the onset of the pandemic, Bank of Marin has made Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans to over 1,800 small businesses, reaching nearly 28,000 employees in our markets.

We also accommodated loan payment relief requests for borrowers, lowered interest rate floors on commercial Prime Rate loans, waived ATM and overdraft fees, and cancelled early withdrawal penalties for certificates of deposit when allowed by law.

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

• Loans totaled $2,110.2 million at June 30, 2020, compared to $1,843.3 million at December 31, 2019, an increase of $266.9 million, primarily due to SBA PPP loans, which totaled $298.9 million or 14% of loan balances at June 30, 2020.

During the first half of 2020, new non-PPP-related loan originations of $71.6 million were offset by $83.4 million in loan payoffs and a $16.8 million decrease in line utilization.

• In the first six months of 2020, 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 PPP loans, exposure to these segments totaled $429.8 million at June 30, 2020, or 20% of the loan portfolio, $365.7 million (or 85%) of which was real estate secured with an average loan-to-value ratio of 38%.

The greatest exposure was related to both retail businesses and retail-related commercial real estate loans totaling $198.0 million or 9% 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.

• As of June 30, 2020, we had made $102.5 million in PPP loans to industries most impacted by the pandemic, the largest 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 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 payment

relief loans are secured by real estate and have an average LTV of 49%, with average LTVs being 43% for retail-related properties, 39% for hotels and motels, and 37% for education-related properties.

• Strong credit quality remains a cornerstone of the Bank's consistent performance.

Non-accrual loans totaled $1.6 million, or 0.08% of total 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 losses was $4.2 million for the first six months of 2020 compared to no provision for the same period 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 the same period in 2019.

• Total deposits increased $443.4 million in the first half of 2020 to $2,779.9 million at June 30, 2020, largely due to temporary increases in our deposits from SBA PPP borrowers.

Non-interest bearing deposits represented 52% of total deposits as of June 30, 2020, compared to 48% at December 31, 2019.

The cost of average deposits decreased 4 basis points to 0.15% during 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.

• All capital ratios were above regulatory requirements to be considered well-capitalized.

The total risk-based capital ratio for Bancorp was 15.8% at June 30, 2020, compared to 15.1% at December 31, 2019.

• Return on assets was 1.05% for the six months ended June 30, 2020, 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.

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.

• The Board of Directors declared a cash dividend of $0.23 per share on July 17, 2020.

This represents the 61st consecutive quarterly dividend paid by Bank of Marin Bancorp.

The dividend is payable on August 7, 2020, to shareholders of record at the close of business on July 31, 2020.

• Loans totaled $2,108.0 million at September 30, 2020, compared to $1,843.3 million at December 31, 2019, an increase of $264.7 million, primarily due to SBA PPP loans, which totaled $301.7 million, or 14% of loan balances at September 30, 2020.

During the first nine months of 2020, new non-PPP-related loan originations of $122.4 million were offset by $124.7 million in loan payoffs and a $24.5 million decrease in line utilization.

• Bank of Marin is awaiting further guidance from the SBA and the Department of Treasury regarding the PPP loan forgiveness process.

We are prepared to open our secure portal for customers to submit forgiveness applications online in the fourth quarter of 2020.

Of the total PPP loans, 48% (870 loans) totaling $18.4 million had principal balances of less than or equal to $50,000 as of September 30, 2020.

• While California’s wildfire season has once again been challenging for many communities in Northern California, fortunately, Bank of Marin and our clients have been minimally impacted.

The fires had a negligible impact on our third quarter results.

• Since granting $388.5 million in payment relief for 264 loans at the onset of the pandemic, 236 loans totaling $336.3 million have resumed or are scheduled to resume normal payments and eight loans totaling $5.0 million paid off.

As of October 19, 2020, twenty loans totaling $47.2 million (balances as of September 30, 2020) had either requested additional payment relief or the relief period had not expired.

We know each of these clients very well and presently expect the majority will navigate through the pandemic and resume normal payments.

The following table summarizes these loans by industry:

Payment Relief by Type

Industry Outstanding Loan Balance

(in thousands) Weighted Average LTV

Education $17,481 26%

Hospitality 10,431 49%

Retail Related CRE 6,295 48%

Health Clubs 6,201 60%

Office and Mixed Use 5,371 55%

Non-CRE Related 1,459 N/A

Payment Relief Totals $47,238 42%

• Credit quality remains a cornerstone of the Bank's consistent performance.

Non-accrual loans totaled $1.4 million, or 0.07% of total loans at September 30, 2020, compared to $226 thousand, or 0.01% at December 31, 2019.

Despite the low non-accrual totals, we considered the potential impact of the COVID-19 pandemic on the economy in general and recorded a provision for loan losses of $5.45 million for the first nine months of 2020, compared to a $400 thousand provision for the same period in 2019.

Provision for losses on off-balance sheet commitments for the first nine months of 2020 was $610 thousand compared to $129 thousand for the same period in 2019.

SBA PPP loans are fully guaranteed by the SBA and did not contribute to the provisions.

• Total deposits increased $232.8 million in the first nine months of 2020 to $2,569.3 million at September 30, 2020.

• Non-interest bearing deposits represented 54% of total deposits as of September 30, 2020, compared to 48% at December 31, 2019.

The cost of average deposits decreased 7 basis points to 0.13% during the first nine months of 2020.

• Return on assets was 1.03% for the nine months ended September 30, 2020, compared to 1.33% for the first nine months of 2019.

Return on equity was 8.47% for the nine months ended September 30, 2020, compared to 10.40% for the nine months ended September 30, 2019.

• All capital ratios were above well capitalized regulatory requirements.

The total risk-based capital ratio for the Bank was 15.5% at September 30, 2020, compared to 14.6% at December 31, 2019.

• On October 23, 2020, the Board of Directors approved the reactivation of the share repurchase program that was suspended on March 20, 2020 as part of the early pandemic response, of which $23.2 million remains available for future repurchases.

• The Board of Directors declared a cash dividend of $0.23 per share on October 23, 2020.

This represents the 62nd consecutive quarterly dividend paid by Bank of Marin Bancorp.

The dividend is payable on November 13, 2020, to shareholders of record at the close of business on November 6, 2020.

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 believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics and low-cost deposit base will help us navigate the pandemic and low interest rate environment.

For the remainder of 2020 and looking forward into 2021, we believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics and low-cost deposit base should help us navigate the pandemic and low interest rate environment.

RESULTS OF OPERATIONS

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

(dollars in thousands) June 30, 2020 December 31, 2019

(dollars in thousands) September 30, 2020 December 31, 2019

Selected financial condition data:

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Common equity Tier 1 capital (to risk weighted assets) 14.79 % 14.11 %

Three months ended Six months ended

(dollars in thousands, except per share data) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019

Three months ended Nine months ended

(dollars in thousands, except per share data) September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

Selected operating data:

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1 The allowance for loan losses to total loans, excluding non-impaired non-PCI and guaranteed SBA 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 loans that were not impaired at June 30, 2020 and December 31, 2019 totaled $95.6 million and $106.8 million, respectively.

SBA PPP loans totaled $298.9 million at June 30, 2020.

Non-PCI loans that were not impaired at September 30, 2020 and December 31, 2019 totaled $90.4 million and $106.8 million, respectively.

SBA PPP loans totaled $301.7 million at September 30, 2020.

There were no SBA PPP loans as of December 31, 2019.

2 Tangible 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 million and $302 million at June 30, 2020 and December 31, 2019, 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 million and $34.8 million at June 30, 2020 and December 31, 2019, respectively.

Tangible common equity of $323 million and $302 million at September 30, 2020 and December 31, 2019, 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 $34.2 million and $34.8 million at September 30, 2020 and December 31, 2019, 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.

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June 30, 2020 June 30, 2019

September 30, 2020 September 30, 2019

Interest Interest

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Tax-equivalent net interest rate spread 3.33 % 3.80 %

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June 30, 2020 June 30, 2019

Nine months ended Nine months ended

September 30, 2020 September 30, 2019

Interest Interest

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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.

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

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the nine months ended September 30, 2020.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019 Nine Months Ended September 30, 2020 Compared to Nine Months Ended

September 30, 2019

(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total

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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%.

Second Quarter of 2020 Compared to Second Quarter of 2019

Net interest income totaled $24.4 million in the second quarter of 2020, compared to $23.8 million in the same quarter a year ago.

The $586 thousand increase was primarily due to higher balances in most loan categories led by SBA PPP loans and higher interest-earning 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 lower rates on interest-earning assets and interest-bearing liabilities.

The tax-equivalent net interest margin was 3.53% in the second quarter of 2020 compared to 4.04% in the same quarter of the previous year.

The decrease from 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 PPP loans lowered the second quarter of 2020 tax-equivalent net interest margin by 3 basis points.

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

Net interest income totaled $48.5 million in the six months ended June, 30 2020, compared to $47.6 million in the same period a year ago.

The $859 thousand increase was primarily due to higher average loan and interest-earning cash balances driven by SBA PPP loans and deposits.

These increases were partially offset by the net effect of lower rates on interest-earning assets and interest-bearing liabilities for a full quarter.

The tax-equivalent net interest margin was 3.70% in the six months ended June 30, 2020, compared to 4.03% in the same period a year ago.

The decrease from the first six months of 2019 was mostly attributed to low interest rates impacting yields on interest-earning assets, partially offset by lower rates on non-maturing deposit accounts.

SBA PPP loans lowered the tax-equivalent net interest margin by 2 basis points during 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.

Third Quarter of 2020 Compared to Third Quarter of 2019

Net interest income totaled $24.6 million in the third quarter of 2020, compared to $24.2 million in the same quarter a year ago.

The $415 thousand increase from the comparative quarter a year ago was primarily attributed to $2.4 million from SBA PPP loans, higher non-PPP loan balances and lower interest expense on deposits.

These positive variances were partially offset by the impact of lower interest rates on non-PPP loans, cash and investments.

The tax-equivalent net interest margin was 3.44% in the third quarter of 2020 compared to 4.04% in the same quarter of the previous year.

The decrease in tax-equivalent net interest margin was attributable to both the lower interest rate environment and SBA PPP loans.

SBA PPP loans lowered the third quarter 2020 net interest margin by 4 basis points.

In October 2020, due to the continued delay in the PPP forgiveness process, the Bank extended the payment deferral period from six to sixteen months for PPP loans that originated prior to June 5, 2020 in accordance with the PPP Flexibility Act.

The extension of the first payment due date decreased the effective rate used to accrete net loan origination fees and costs, which will affect the timing of when the accretion of PPP net loan origination fees will be recognized.

We estimate this change will decrease fourth quarter 2020 net interest income by approximately $850 thousand.

The decrease may be partially or fully offset by the accelerated fee accretion related to loans that are forgiven and paid off during the fourth quarter, which cannot be estimated at this time.

First Nine Months of 2020 Compared to First Nine Months of 2019

Net interest income totaled $73.1 million in the nine months ended September, 30 2020, compared to $71.8 million in the same period a year ago.

The $1.3 million increase was primarily due to SBA PPP loan income, higher commercial loan balances, higher yields on investments and lower rates on deposits partially offset by lower yields on loans.

The tax-equivalent net interest margin was 3.61% in the nine months ended September 30, 2020, compared to 4.03% in the same period a year ago.

The decrease in tax-equivalent net interest margin was attributable to both the lower interest rate environment and SBA PPP loans.

SBA PPP loans lowered the 2020 net interest margin by 3 basis points.

To offset the impacts of margin compression, we continue to focus on increasing efficiencies and controlling expenses including evaluating the cost of our facilities.

Market Interest Rates

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

Impaired loan balances totaled $11.9 million at June 30, 2020 and $11.5 million at December 31, 2019, with specific valuation allowances of $434 thousand and $397 thousand for the same respective dates.

Loans graded special mention totaled $72.4 million at June 30, 2020 and $73.4 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.

The $3.6 million increase was primarily due to the downgrade of two non-owner occupied commercial real estate loans and one loan secured by a triplex property (both with low loan-to-value ratios), and three home equity loans.

There were no loans with doubtful risk grades at June 30, 2020 or December 31, 2019.

Impaired loans totaled $13.8 million at September 30, 2020 and $11.5 million at December 31, 2019, with specific valuation allowances of $1,106 thousand and $397 thousand at the same respective dates.

Loans graded special mention totaled $87.7 million at September 30, 2020 and $73.4 million at December 31, 2019.

While special mention graded loans are not considered adversely classified, the $14.4 million increase was largely due to a small number of commercial real estate borrowers who, after further analysis, were granted additional payment relief beyond the initial relief period and a few commercial real estate loans that were considered temporarily affected by the pandemic.

All of these loans have low loan-to-value ratios and will be monitored at least quarterly as part of the Bank's credit management process.

Classified assets (loans with substandard or doubtful risk grades) totaled $11.0 million at September 30, 2020, compared to $9.9 million at December 31, 2019.

There were no loans with doubtful risk grades at September 30, 2020 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.

The ratio of allowance for loan losses to total loans, including acquired loans and SBA-guaranteed PPP loans, was 0.99% at June 30, 2020, compared to 0.90% at December 31, 2019.

Excluding the $298.9 million in guaranteed SBA PPP loans and $96.8 million in non-PCI acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.22% at June 30, 2020.

The Bank had no SBA loans at December 31, 2019.

Non-accrual loans totaled $1.6 million, or 0.08% of total loans at June 30, 2020, compared to $226 thousand, or 0.01% 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.

Under the existing incurred loss model we adjusted certain qualitative factors, primarily to account for the significant increase in the unemployment rate and recorded a $5.45 million loan loss provision for the nine months ended September 30, 2020, compared to $400 thousand for the same period in the prior year.

Net charge-offs were $14 thousand for the nine months ended September 30, 2020, compared to net recoveries of $19 thousand same period in the prior year.

The ratio of allowance for loan losses to total loans, including acquired loans and SBA-guaranteed PPP loans, was 1.05% at September 30, 2020, compared to 0.90% at December 31, 2019.

Excluding guaranteed SBA PPP loans and non-PCI acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.29% and 0.96% at September 30, 2020 and December 31, 2019, respectively (Refer to footnote 1 on page 33 for a definition and reconciliation of this non-GAAP financial measure).

Non-accrual loans totaled $1.4 million, or 0.07% of total loans at September 30, 2020, compared to $226 thousand, or 0.01% of total loans at December 31, 2019.

The $1.4 million increase in non-accrual loans was primarily attributable to one loan secured by a triplex property with a low loan-to-value ratio as well as one home equity loan.

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

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Three months ended Amount Percent

(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)

(dollars in thousands) September 30, 2020 September 30, 2019 Increase (Decrease) Increase (Decrease)

Service charges on deposit accounts $ 284 $ 439 $ (155) (35.3) %

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Dividends on FHLB stock 149 202 (53) (26.2) %

Gains on sale of investment securities, net 115 61 54 88.5 %

Gains on sale of investment securities, net — — — N/A

Other income 229 305 (76) (24.9) %

Total non-interest income $ 1,790 $ 2,721 $ (931) (34.2) %

Six months ended Amount Percent

(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)

Nine months ended Amount Percent

(dollars in thousands) September 30, 2020 September 30, 2019 Increase (Decrease) Increase (Decrease)

Service charges on deposit accounts $ 1,028 $ 1,403 $ (375) (26.7) %

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Dividends on FHLB stock 503 591 (88) (14.9) %

Gains on investment securities, net 915 55 860 1,563.6 %

Gains on sale of investment securities, net 915 55 860 1,563.6 %

Other income 927 888 39 4.4 %

Total non-interest income $ 6,723 $ 6,766 $ (43) (0.6) %

Second Quarter of 2020 Compared to Second Quarter of 2019

Non-interest income decreased by $461 thousand in the second quarter of 2020 to $1.8 million, compared to $2.3 million in the same quarter a year ago.

The decrease was primarily related to lower service charges on deposit accounts from waiving ATM and overdraft fees in response to COVID-19, lower interchange fees due to decreased activity and volume, and small decreases in most other non-interest income categories.

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

Non-interest income increased by $888 thousand in the first six months of 2020 to $4.9 million, compared to $4.0 million in the same period a year ago.

The increase was mostly attributable to higher gains on the sale of investment securities in the first half of 2020 and $283 thousand non-refundable costs for underwriting two new bank-owned life insurance policies purchased in the first quarter of 2019.

These increases were partially offset by service charges on deposit accounts from waiving ATM and overdraft fees in response to COVID-19 and lower interchange fees due to decreased activity and volume.

Third Quarter of 2020 Compared to Third Quarter of 2019

Non-interest income decreased by $931 thousand in the third quarter of 2020 to $1.8 million, compared to $2.7 million in the same quarter a year ago.

The decrease was primarily due to a $562 thousand benefit collected on BOLI policies in the third quarter of 2019.

Additionally fewer ATM fees and service charges on deposit accounts, lower dividends on FHLB stock, and lower fee income from one-way deposit sales to third-party deposit networks in the third quarter of 2020 all contributed to the decrease.

First Nine Months of 2020 Compared to First Nine Months of 2019

Non-interest income decreased by $43 thousand in the first nine months of 2020 to $6.7 million, compared to $6.8 million in the same period a year ago.

The small decline was driven by decreases across most non-interest income categories, partially offset by higher gains on sales of investment securities in the first nine months of 2020.

Non-interest Expense

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Three months ended Amount Percent

(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)

(dollars in thousands) September 30, 2020 September 30, 2019 Increase (Decrease) Increase (Decrease)

Salaries and related benefits $ 8,638 $ 8,412 $ 226 2.7 %

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Amortization of core deposit intangible 213 222 (9) (4.1) %

Provision for losses on off-balance sheet commitments 260 — 260 NM

Provision for losses on off-balance sheet commitments 248 — 248 100.0 %

Charitable contributions 481 111 370 333.3 %

Other non-interest expense

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Total non-interest expense $ 15,238 $ 14,200 $ 1,038 7.3 %

NM - Not Meaningful

Six months ended Amount Percent

(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)

Nine months ended Amount Percent

(dollars in thousands) September 30, 2020 September 30, 2019 Increase (Decrease) Increase (Decrease)

Salaries and related benefits $ 25,979 $ 26,426 $ (447) (1.7) %

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Information technology 758 822 (64) (7.8) %

Core deposit intangible amortization 426 443 (17) (3.8) %

Amortization of core deposit intangible 639 665 (26) (3.9) %

Provision for losses on off-balance sheet commitments 610 129 481 372.9 %

Charitable contributions 921 377 544 144.3 %

Other non-interest expense

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Total non-interest expense $ 44,848 $ 44,644 $ 204 0.5 %

Second Quarter 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 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 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, 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 organizations in the third quarter of 2020.

We have contracted with third-party consultants to assist us and our customers with the SBA PPP loan forgiveness application and approval process and expect to incur approximately $400 thousand in consulting-related expenses over the remainder of 2020.

Third Quarter of 2020 Compared to Third Quarter of 2019

Non-interest expense increased by $1.0 million to $15.2 million, compared to $14.2 million in the same period a year ago.

The increase was primarily due to $370 thousand more in charitable contributions to non-profit organizations, $248 thousand provision for losses on off-balance sheet commitments, and higher salaries and benefits driven by annual merit increases.

Additionally, the third quarter of 2020 included higher FDIC insurance expense due to fewer FDIC assessment credits, and higher occupancy expense associated with the renewal of leases for our existing headquarters offices and a new lease for a loan production office in San Mateo.

First Nine Months of 2020 Compared to First Nine Months of 2019

Non-interest expense increased by $204 thousand to $44.8 million in the first nine months of 2020, compared to $44.6 million in the same period a year ago.

The increase was primarily due to $544 thousand higher charitable contributions to non-profit organizations, $484 thousand higher occupancy expense associated with new and renewed leases mentioned above, and $481 thousand higher provision for losses on off-balance sheet commitments.

These increases were partially offset by decreases in salaries and related benefits primarily due to $915 thousand SBA PPP-related deferred loan origination costs and fewer data processing costs from our digital platform conversion.

Provision for Income Taxes

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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 totaled $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 totaled $5.0 million at an effective tax rate of 25.4%, compared to $5.5 million at an

effective tax rate of 26.0% for the first half of 2019.

The decrease in the provision reflected the lower level of pre-tax income and higher tax exempt earnings on investment securities and BOLI.

The decrease in the effective tax rate reflected a higher level of discrete tax benefits in 2020 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options compared to 2019, partially offset by a decrease in tax benefits associated with the vesting of restricted stock.

The provision for income taxes for the third quarter of 2020 totaled $2.4 million at an effective tax rate of 24.1%, compared to $2.8 million at an effective tax rate of 23.0% in the same quarter last year.

The decrease in the provision reflected a lower level of pre-tax income in 2020, partially offset by a favorable deferred tax liability true-up adjustment recognized in the third quarter of 2019.

The increase in the effective tax rate was primarily due to the true-up adjustment recognized in third quarter of 2019.

The provision for income taxes for the first nine months of 2020 totaled $7.4 million at an effective tax rate of 25.0%, compared to $8.3 million at an effective tax rate of 24.9% for the first nine months of 2019.

The decrease in the provision reflected a lower level of pre-tax income and higher tax exempt earnings on investment securities in 2020.

The slight increase in the effective tax rate was primarily due to the 2019 favorable deferred tax liability true-up

adjustment as described above and a lower tax benefit from BOLI income in 2020.

These increases were substantially offset by a higher level of discrete tax benefits in 2020 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options compared to 2019.

We file a consolidated return in the U.S.

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There were no ongoing federal or state income tax examinations at the issuance of this report.

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

At September 30, 2020, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At June 30, 2020, assets totaled $3,181.5 million, an increase of $474.2 million, from $2,707.3 at December 31, 2019, mainly due to an increase in cash and loans related to our participation in the PPP in response to the COVID-19 pandemic as explained below.

At September 30, 2020, assets totaled $2,975.2 million, an increase of $267.9 million, from $2,707.3 million at December 31, 2019, mainly due to an increase in cash and loans related to our participation in the PPP in response to the COVID-19 pandemic as explained below, partially offset by a $38.9 million decrease in investment securities.

Cash, Cash Equivalents and Restricted Cash

Total cash, cash equivalents and restricted cash were $397.7 million at June 30, 2020, compared to $183.4 million at December 31, 2019.

Total cash, cash equivalents and restricted cash were $213.6 million at September 30, 2020, compared to $183.4 million at December 31, 2019.

The $30.2 million increase was largely due to temporary increases in SBA PPP borrowers' 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 as of June 30, 2020.

Cash and cash equivalents as of September 30, 2020 do not include $146.6 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management.

Restricted cash held at the Federal Reserve as of December 31, 2019 totaled $4.8 million.

Investment Securities

The investment securities portfolio totaled $555.6 million at June 30, 2020, a decrease of $14.1 million from December 31, 2019.

The decrease reflects 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 the fair value of available-for-sale securities in 2020.

The investment securities portfolio totaled $530.8 million at September 30, 2020, a decrease of $38.9 million from December 31, 2019.

The decrease reflects paydowns, calls and maturities totaling $88.0 million and sales totaling $32.8 million during the first nine months of 2020, partially offset by purchases of $71.7 million high credit quality longer duration securities and increase in the fair value of available-for-sale securities in 2020.

During the first and second quarters of 2020, respectively, we sold $26.6 million 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.

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

June 30, 2020 December 31, 2019

There were no security sales in the third quarter.

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

September 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

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Total obligations of state and political subdivisions $ 91,190 $ 95,463 100.0 % $ 69,555 $ 70,870 100.0 %

The portion of the portfolio outside the state of California is distributed among twelve states.

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (55.5%), Maryland (7.1%), and Florida (5.6%).

During March 2020, we strategically increased our credit exposure to obligations issued by high credit quality municipal issuers in Texas that are either guaranteed by the AAA-rated

Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation).

The portion of the portfolio outside the state of California is distributed among eleven states.

Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (47.6%), Washington (9.7%) and Maryland (7.5%).

During March 2020, we strategically increased our credit

exposure to obligations issued by high credit quality municipal issuers in Texas that are either guaranteed by the AAA-rated 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.

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• Credit ratings by major credit rating agencies

Loans increased by $266.9 million and totaled $2,110.2 million at June 30, 2020, primarily due to SBA PPP loans which totaled $298.9 million (net of $8.1 million in deferred loan origination fees and costs) or 14% of loan balances at June 30, 2020.

During the first nine months of 2020, loans increased by $264.7 million and totaled $2,108.0 million at September 30, 2020, primarily due to SBA PPP loans which totaled $308.2 million.

We ended the origination of new PPP loans on June 30, 2020 to focus our efforts on helping our customers through the loan forgiveness process.

New non-PPP related loan originations totaled $71.6 million in the first six months of 2020.

Payoffs totaled $83.4 million and line utilization decreased $16.8 million during the first six months of 2020.

During the first six months of 2020, total liabilities increased by $458.8 million to $2,829.3 million.

Deposits increased $443.4 million in the first six months of 2020, primarily driven by a combination of PPP loan proceeds and increased liquidity throughout the banking system as a result of depositors' higher level of savings during these uncertain economic times.

Non-interest bearing deposits increased $314.0 million in the first six months of 2020 to $1,442.8 million, and represented 51.9% of total deposits at June 30, 2020, compared to 48.3% at December 31, 2019.

Liabilities as of June 30, 2020 included operating lease liabilities totaling $24.6 million, which increased $12.0 million in the first six months of 2020 due to the extension of lease terms for our existing headquarters office and three retail branches and a new lease agreement for one of our retail branches.

New non-PPP related loan originations totaled $122.4 million in the first nine months of 2020.

Payoffs totaled $124.7 million and line utilization decreased $24.5 million during the first nine months of 2020.

While we have had success originating new loans this year, we have found that the pandemic has extended traditional timelines as loans move through the origination process.

During these unprecedented times, we are focused on maintaining relationships with our customers and bringing in new client relationships where prudent and possible.

During the first nine months of 2020, total liabilities increased by $247.2 million to $2,617.7 million.

Deposits increased $232.8 million in the first nine months of 2020, primarily driven by a combination of PPP loan proceeds and increased liquidity throughout the banking system as a result of depositors' higher level of savings during these uncertain economic times.

Non-interest bearing deposits increased $254.9 million in the first nine months of 2020 to $1,383.7 million, and represented 53.9% of total deposits at September 30, 2020, compared to 48.3% at December 31, 2019.

Liabilities as of September 30, 2020 included operating lease liabilities totaling $27.5 million, which increased $14.9 million in the first nine months of 2020 due to the extension of lease terms for our existing headquarters office and seven retail branches and a new lease agreement for one of our retail branches.

Capital Adequacy

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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.

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

In July 2013, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ("Agencies") finalized regulatory capital rules known as “Basel III.” 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 addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of September 30, 2020.

There are no conditions or events since that

notification that Management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

In 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.

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.

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2020 and December 31, 2019 are presented in the following tables.

As a result, Bancorp was not subject to separate minimum capital requirements as of September 30, 2020 and December 31, 2019.

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 2020 and 2019.

The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2020 and December 31, 2019 are presented in the following tables.

Bancorp's Tier 1 capital includes the subordinated debenture, which are not included at the Bank level.

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(dollars in thousands)

Actual Ratio Adequately Capitalized Threshold 1

Ratio to be a Well Capitalized Bank Holding Company

June 30, 2020 Amount Ratio Amount Ratio Amount Ratio

Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company

September 30, 2020 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 338,841 16.05 % ≥ $ 221,701 ≥ 10.50 % ≥ $ 211,144 ≥ 10.00 %

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Common Equity Tier 1 (to risk-weighted assets) $ 298,845 14.11 % ≥ $ 148,287 ≥ 7.00 % ≥ $ 137,695 ≥ 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 1

Ratio to be Well Capitalized under Prompt Corrective Action Provisions

June 30, 2020 Amount Ratio Amount Ratio Amount Ratio

Actual Ratio Adequately Capitalized Threshold Ratio to be Well Capitalized under Prompt Corrective Action Provisions

September 30, 2020 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 326,658 15.47 % ≥ $ 221,693 ≥ 10.50 % ≥ $ 211,136 ≥ 10.00 %

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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.

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals.

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Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the President and Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

ALCO has adopted a contingency

funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis.

ALCO has adopted a contingency funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis.

Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.

We also have relationships with third party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales, as part of our cash management strategy.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.

We obtain funds from the collection of loan payments, deposit inflows, investment security maturities, paydowns and sales, 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.

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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 our financial strength.

The $443.4 million increase 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, 2020, the Bank had funded $298.9 million in PPP loans (net of $8.1 million of deferred loan origination fees, net of costs).

Deposit balances increased by $232.8 million in the first nine months of 2020 due to the increased level of liquidity in the financial markets.

In addition, there has been an influx of deposits throughout the banking system as a result of depositors' higher level of savings during the uncertain economic times.

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.

Our cash and cash equivalents increased $214.3 million from December 31, 2019, primarily due an increase in deposits of $443.4 million as explained above.

Other significant sources 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, $56.9 million in investment securities purchases, and $6.2 million in cash dividends paid on common stock to our shareholders.

There were no common stock repurchases in the second quarter of 2020.

Since March 2020, we have granted $388.5 in payment relief for 264 loans by allowing certain borrowers with hardship requests either full payment deferrals or interest-only payments.

As of October 19, 2020, 236 loans totaling $336.3 million have resumed or are scheduled to resume normal payments and eight loans totaling $5.0 million have paid off.

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.

At September 30, 2020, our cash and cash equivalents increased $30.2 million from December 31, 2019, primarily due to an increase in deposits of $232.8 million, as explained above.

Other significant sources of liquidity during the first nine months of 2020 included $121.7 million in paydowns, maturities and sales of investment securities and $31.3 million net cash provided by operating activities (including $10.7 million in processing fees received from the SBA for the origination of PPP loans as of September 30, 2020).

Uses of liquidity during the first nine months of 2020 included $269.4 million in loan originations, net of principal collected, $71.7 million in investment securities purchases, and $9.4 million in cash dividends paid on common stock to our shareholders.

Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity.

Management anticipates that our current strong liquidity position and core deposit base will provide adequate liquidity to fund our operations.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $553.3 million at June 30, 2020.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $567.5 million at September 30, 2020.

These commitments, to the extent used, are expected to be funded primarily through the repayment of existing loans, deposit growth and liquid assets.

Over the next twelve months, $70.7 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 to withdraw time deposits during the uncertain economic environment.

In addition, we waived the early withdrawal penalties for certificates of deposit when allowed by law in response to the pandemic, which might cause more depositors to withdraw time deposits during the uncertain economic environment.

Our emphasis on local deposits combined with our equity position is expected to provide a strong funding base.

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The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses.

Bancorp held $15.5 million of cash at June 30, 2020.

Bancorp held $12.2 million of cash at September 30, 2020.

The cash level at Bancorp is deemed sufficient to cover Bancorp's operational needs and cash dividends to shareholders through mid-2021.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis