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Item 8. Financial Statements and Supplementary Data

2021-03-15 compared with 2020-03-13 · 831 added, 808 removed, 1003 unchanged (62% of the section changed)

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

To the Shareholders and the Board of Directors of

Bank of Marin Bancorp

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated statements of condition of Bank of Marin Bancorp and subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses effective December 31, 2020, due to the adoption of Accounting Standards Codification Topic 326:

Financial Instruments – Credit Losses (“Topic 326”).

The Company adopted the new credit loss standard using the modified retrospective approach such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and it subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

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(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Moss Adams LLP

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses - Loans

As discussed in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses on loans at December 31, 2020, was $22.9 million on a total loan portfolio of $2.1 billion.

The Company adopted the current expected credit losses standard, and all related amendments as of December 31, 2020, and has an established process to determine the appropriateness of the allowance for credit losses on loans receivable.

The allowance for credit losses provides an estimate of lifetime expected losses in the loan portfolio.

The measurement of expected credit losses is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.

We identified the allowance for credit losses on loans as a critical audit matter.

The principal considerations for our determination of allowance for credit losses on loans as a critical audit matter are subjectivity of the estimation and application of forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and qualitative internal and external risk factors used in the calculation of the allowance for credit losses.

The economic forecast component of the allowance for credit losses on loans is used to compare the conditions that existed during the historical period to current conditions and future expectations.

The probabilities of default and loss given default are used to establish estimated losses at the loan portfolio segment level.

Prepayments and curtailments over the contractual terms of the loans are used to estimate future cash flows.

The qualitative internal and external risk factors are used to adjust for differences in segment-specific risk characteristics or to reflect the extent to which expected current conditions and reasonable and supportable forecasts of economic conditions differ from conditions that existed during the historical period included in the probability of default and loss given default development.

Auditing management’s judgements regarding forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and qualitative internal and external risk factors applied to the allowance for credit losses involved a high degree of subjectivity.

The primary procedures we performed to address this critical audit matter included:

Test the design, implementation, and operating effectiveness of controls related to management’s calculation of the allowance for credit losses on loans, including controls over the forecasted economic conditions used, probabilities of default, loss given default, prepayments and curtailments, and qualitative internal and external risk factors used.

Obtaining management’s analysis and supporting documentation related to the forecasted economic conditions, and testing whether the forecasts used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

Obtaining management’s analysis and supporting documentation related to the probabilities of default, and loss given default, and testing whether factors used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

Obtaining management’s analysis and supporting documentation related to prepayments and curtailments, and testing whether factors used in the calculation of the allowance for credit losses on loans are reasonable and supportable based on the analysis provided by management.

Obtaining management’s analysis and supporting documentation related to the qualitative factors, and testing whether the environmental and qualitative factors used in the calculation of the allowance for credit losses on loans are supported by the analysis provided by management.

Testing the appropriateness of the methodology and assumptions used in the calculation of the allowance for credit losses on loans, as well as testing completeness and accuracy of the data used in the calculation, application of the forecasted economic conditions, probabilities of default, loss given default, prepayments and curtailments over the contractual terms of the loan, and factors determined by management and used in the calculation, and verifying calculations in the allowance for credit losses on loans.

Los Angeles, California

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Investment securities:

Held-to-maturity, at amortized cost

Available-for-sale, at fair value

Held-to-maturity, at amortized cost (net of zero allowance for credit losses at December 31, 2020 1 )

109,036 137,413

Available-for-sale, at fair value (net of zero allowance for credit losses at December 31, 2020 1 )

392,351 432,260

Total investment securities 501,387 569,673

Loans, net of allowance for loan losses of $16,677 and $15,821 at December 31, 2019 and 2018, respectively

Loans, at amortized cost 2,088,556 1,843,286

Allowance for credit losses ( 22,874 ) ( 16,677 )

Loans, net of allowance for credit losses 1

2,065,682 1,826,609

Bank premises and equipment, net 4,919 6,070

Goodwill 30,140 30,140

Core deposit intangible 3,831 4,684

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Interest receivable and other assets 80,035 75,714

Total assets $ 2,911,926 $ 2,707,280

Liabilities and Stockholders' Equity

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Borrowings and other obligations 58 212

Subordinated debentures

Subordinated debenture 2,777 2,708

Operating lease liabilities 27,062 12,615

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Authorized - 30,000,000 shares;

Issued and outstanding - 13,577,008 and 13,844,353 at December 31, 2019 and

2018, respectively

Issued and outstanding - 13,500,453 and 13,577,008 at December 31, 2020 and 2019, respectively

125,905 129,058

Retained earnings 219,747 203,227

Accumulated other comprehensive income (loss), net of taxes

Accumulated other comprehensive income, net of taxes 12,601 4,503

Total stockholders' equity 358,253 336,788

Total liabilities and stockholders' equity $ 2,911,926 $ 2,707,280

1 Refer to Note 1, Summary of Accounting Policies, for information on the adoption of ASU 2016-13 in 2020.

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

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Net interest income 96,659 95,680 91,544

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses on loans 4,594 900 —

Net interest income after provision for credit losses 92,065 94,780 91,544

Non-interest income

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Wealth Management and Trust Services 1,851 1,907 1,919

Debit card interchange fees, net

Merchant interchange fees, net

Debit card interchange fees 1,438 1,586 1,561

Earnings on bank-owned life Insurance, net 973 1,196 913

Dividends on FHLB stock

Gains on investment securities, net 915 55 876

Dividends on FHLB stock 654 799 959

Merchant interchange fees 239 331 378

Other income 1,166 1,345 1,642

Total non-interest income 8,550 9,084 10,139

Non-interest expense

Salaries and related benefits

Salaries and employee benefits 34,393 34,253 33,335

Occupancy and equipment 6,943 6,143 5,976

Depreciation and amortization

Federal Deposit Insurance Corporation insurance

Data processing 3,184 3,717 4,358

Professional services 2,181 2,132 3,317

Directors' expense

Depreciation and amortization 2,149 2,228 2,143

Provision for credit losses on unfunded loan commitments 1,570 129 —

Information technology 1,050 1,065 1,023

Charitable contributions 1,034 508 463

Amortization of core deposit intangible 853 887 921

Provision for losses on off-balance sheet commitments

Directors' expense 713 735 700

Federal Deposit Insurance Corporation insurance 474 361 756

Other expense 5,484 5,812 5,274

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Provision for income taxes 10,345 11,653 10,795

Net income $ 30,242 $ 34,241 $ 32,622

Net income per common share:

Weighted average shares:

Basic $ 2.24 $ 2.51 $ 2.35

Diluted $ 2.22 $ 2.48 $ 2.33

Weighted average common shares:

Basic 13,525 13,620 13,864

Diluted 13,617 13,794 14,029

Comprehensive income:

Net income $ 30,242 $ 34,241 $ 32,622

Other comprehensive income (loss):

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Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 524 445 516

Other comprehensive income (loss), before tax 11,500 12,229 ( 1,390 )

Deferred tax expense (benefit) 3,402 3,624 ( 412 )

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Years ended December 31, 2020, 2019 and 2018

(in thousands, except share data)

Accumulated Other Comprehensive

(Loss) Income ("AOCL" or "AOCI"),

(in thousands, except share data) Common Stock Retained

Earnings Accumulated Other Comprehensive

Income (Loss),

Net of Taxes Total

Balance at December 31, 2017 13,843,084 $ 143,967 $ 155,544 $ ( 2,486 ) $ 297,025

Net income — — 32,622 — 32,622

Other comprehensive loss — — — ( 978 ) ( 978 )

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Cash dividends paid on common stock ($ 0.64 per share) 1

— — ( 8,860 ) — ( 8,860 )

Stock purchased by directors under director stock plan 998 37 — — 37

Stock issued in payment of director fees 5,470 204 — — 204

Stock repurchased, including commissions

Stock repurchased, net of commissions ( 171,217 ) ( 7,012 ) — — ( 7,012 )

Balance at December 31, 2018 13,844,353 $ 140,565 $ 179,944 $ ( 4,102 ) $ 316,407

Net income — — 34,241 — 34,241

Other comprehensive income — — — 8,605 8,605

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Cash dividends paid on common stock ($ 0.80 per share)

— — ( 10,958 ) — ( 10,958 )

Stock purchased by directors under director stock plan 591 24 — — 24

Stock issued in payment of director fees 5,544 231 — — 231

Stock repurchased, including commissions

Stock repurchased, net of commissions ( 356,000 ) ( 15,022 ) — — ( 15,022 )

Balance at December 31, 2019 13,577,008 $ 129,058 $ 203,227 $ 4,503 $ 336,788

Net income — — 30,242 — 30,242

Other comprehensive income — — — 8,098 8,098

Cumulative effect of change in accounting principle ASU 2016-13 2

— — ( 1,216 ) — ( 1,216 )

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 65,407 1,304 — — 1,304

Stock issued under employee stock purchase plan 2,392 72 — — 72

Stock issued under employee stock ownership plan 39,900 1,289 — — 1,289

Restricted stock granted 29,100 — — — —

Restricted stock surrendered for tax withholdings upon vesting ( 2,200 ) ( 73 ) — — ( 73 )

Restricted stock forfeited / cancelled ( 14,314 ) — — — —

Stock-based compensation - stock options — 319 — — 319

Stock-based compensation - restricted stock — 884 — — 884

Cash dividends paid on common stock ($ 0.92 per share)

— — ( 12,506 ) — ( 12,506 )

Stock purchased by directors under director stock plan 1,146 43 — — 43

Stock issued in payment of director fees 5,723 217 — — 217

Stock repurchased, net of commissions ( 203,709 ) ( 7,208 ) — — ( 7,208 )

Balance at December 31, 2020 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253

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

2 Refer to Note 1, Summary of Accounting Policies, for information on the adoption of ASU 2016-13 in 2020.

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

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Cash Flows from Operating Activities:

Net income $ 30,242 $ 34,241 $ 32,622

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

Provision for loan losses

Provision for losses on off-balance sheet commitments

Provision for credit losses 4,594 900 —

Provision for credit losses on unfunded loan commitments 1,570 129 —

Noncash contribution expense to employee stock ownership plan 1,289 1,245 1,173

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Earnings on bank-owned life insurance policies ( 973 ) ( 1,196 ) ( 913 )

Net change in operating assets and liabilities:

Net changes in:

Interest receivable and other assets ( 5,135 ) ( 329 ) 1,148

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Proceeds from stock options exercised 1,304 669 537

Payment of tax withholding for stock options exercised and vesting of restricted stock

Payment of tax withholdings for vesting of restricted stock ( 73 ) ( 220 ) ( 45 )

Federal Home Loan Bank (repayment) borrowings — ( 7,000 ) 7,000

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Stock repurchased, net of commissions ( 6,898 ) ( 15,062 ) ( 6,869 )

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

Proceeds from stock issued under employee and director stock purchase plans 115 78 76

Net cash provided by financing activities 149,530 128,988 13,872

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Change in net unrealized gain or loss on available-for-sale securities $ 11,891 $ 11,839 $ ( 1,707 )

Securities transferred from available-for-sale to held-to-maturity

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity

Subscription in low income housing tax credit investment

Stock issued to employee stock ownership plan $ 1,289 $ 1,245 $ 1,173

Stock issued in payment of director fees

Cumulative effect of change in accounting principle ASU 2016-13 $ ( 1,216 ) $ — $ —

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 524 $ 445 $ 516

Repurchase of stock not yet settled $ 413 $ 103 $ 143

Stock issued in payment of director fees $ 217 $ 231 $ 204

Securities transferred from available-for-sale to held-to-maturity $ — $ — $ 27,422

Subscription in low income housing tax credit investment $ — $ — $ 3,000

Restricted cash 1

Federal Reserve Bank reserve requirements included in cash, cash equivalents and restricted cash

$ — $ 4,806 $ 5,971

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.

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Summary of Significant Accounting Policies

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.

Nature of Operations - Bank of Marin Bancorp ("Bancorp"), headquartered in Novato, California, conducts business primarily through its wholly-owned subsidiary, Bank of Marin (the "Bank"), a California state-chartered commercial bank that provides a wide range of financial services to customers who are predominantly professionals, small and middle-market businesses, and individuals who work and/or reside in Marin, Sonoma, Napa, San Francisco, Alameda, Contra Costa and San Mateo counties.

Besides its headquarters located in Novato, CA, the Bank operates ten branches in Marin County, two in Napa County, one in San Francisco, five in Sonoma County, three in Alameda County, and one loan production office in both Contra Costa County and San Mateo County.

Basis of Presentation - The consolidated financial statements include the accounts of Bancorp and the Bank.

References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes.

Our accounting and reporting policies conform to U.S.

generally accepted accounting principles ("GAAP"), general practice, and regulatory guidance within the banking industry.

A summary of our significant policies follows.

All material intercompany transactions have been eliminated.

We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined that there were no subsequent events that require additional recognition or disclosure.

We evaluated subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”) and determined that, other than the early redemption of the subordinated debenture mentioned below, there were no subsequent events that require additional recognition or disclosure.

The NorCal Community Bancorp Trusts I and II, respectively (the "Trusts"), were formed for the sole purpose of issuing trust preferred securities.

Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the subordinated debentures are shown as a liability on our consolidated statements of condition.

Bancorp's investment in the securities of the Trusts is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition.

Refer to Note 7, Borrowings, for detail on the early redemption on October 7, 2018 of one subordinated debenture due to NorCal Community Bancorp Trust I.

Nature of Operations :

Bancorp, headquartered in Novato, CA, conducts business primarily through its wholly-owned subsidiary, the Bank, which provides a wide range of financial services to customers who are predominantly professionals, small and middle-market businesses, and individuals who work and/or reside in Marin, Sonoma, Napa, San Francisco, Alameda and Contra Costa counties.

Besides its headquarters located in Novato, CA, the Bank operates ten branches in Marin County, three in Napa County, one in San Francisco, five in Sonoma County, three in Alameda County, and one loan production office in Contra Costa County.

Our accounting and reporting policies conform to Generally Accepted Accounting Principles ("GAAP"), general practice, and regulatory guidance within the banking industry.

A summary of our significant policies follows.

Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements.

Bancorp's investments in these Trusts are accounted for under the e quity method and included in interest receivable and other assets and the subordinated debenture and related accrued interest payable are recorded as liabilities in our consolidated statements of condition.

Refer to Note 7, Borrowings and Other Obligations, for detail on the early redemption on October 7, 2018 of the subordinated debenture due to Trust I and early redemption on March 15, 2021 of the subordinated debenture due to Trust II.

Accounting Changes and Reclassifications - Certain items in prior financial statements have been reclassified to conform to the current presentation.

In addition, on December 31, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments and all applicable amendments as subsequently updated for certain clarifications, targeted relief and codification improvements.

Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) replaced the incurred loss method for measuring credit losses with a current expected credit loss ("CECL") method for financial assets recorded at amortized cost (i.e., loans originated by us and held-to-maturity investment securities).

The previous incurred loss method included a general allowance on loans for known and inherent losses within the portfolio, which reflected adjusted historical loss rates and a specific allowance component for impaired loans.

The CECL method requires the measurement of all expected credit losses for financial assets measured at amortized cost and certain off-balance-sheet credit exposures to consider credit losses expected to be incurred over the life of the financial asset based on past events, current conditions, and reasonable and supportable forecasts.

ASC 326 also requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards.

In addition, ASC 326 includes certain changes to the accounting for available-for-sale investment securities including the requirement to recognize an allowance wh en management intends to sell or believes that it is more likely than not they will be required to sell the security before recovery of its amortized cost.

ASC 326 was effective January 1, 2020.

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 to the earlier of the end of the national emergency or December 31, 2020.

Therefore, we adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures, 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.

Results for reporting periods beginning after September 30, 2020 will be presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP.

adoption, we recorded a cumulative adjustment to retained earnings, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019.

That adjustment resulted in an increase to our allowance for credit losses of $ 1.6 million and an increase to the allowance for unfunded loan commitments of $ 122 thousand.

In addition, we recognized the remaining difference between the allowance for credit losses calculated under the CECL model as of December 31, 2020 and the allowance for credit losses calculated under the incurred loss model as of September 30, 2020 as a reversal of the provision for credit losses and a provision for credit losses on unfunded loan commitments, as showed in the tables below.

The following tables show the impact to our financial statement line items due to adoption of ASC 326 as of and during the quarter ended December 31, 2020.

(in thousands) Pre-Tax Increase (Decrease) Upon the Adoption of CECL Deferred Tax Effect After Tax Impact of Adoption of CECL

Impact to allowance for credit losses on loans:

Allowance for credit losses on loans $ 748

Retained earnings (cumulative transition adjustment) $ ( 1,604 ) $ 474 $ ( 1,130 )

Net income (reversal of provision for credit losses on loans) $ 856 $ ( 253 ) $ 603

Impact to allowance for credit losses on unfunded loan commitments:

Allowance for credit losses on unfunded commitments $ 1,082

Retained earnings (cumulative transition adjustment) $ ( 122 ) $ 36 $ ( 86 )

Net income (provision for credit losses on unfunded commitments) $ ( 960 ) $ 284 $ ( 676 )

The following table shows the impact on the allowance for credit losses due to the transition from the incurred loss method to the CECL method by loan class.

(in thousands) Pre-Adoption Balance at

September 30, 2020 Cumulative Transition Adjustment 1

Post Adoption Adjusted Balance at

October 1, 2020

Allowance for credits losses on loans:

Commercial and industrial $ 2,525 $ ( 278 ) $ 2,247

Commercial owner-occupied 3,135 138 3,273

Commercial investor-owned 11,624 1,755 13,379

Construction 860 201 1,061

Home equity 1,038 ( 361 ) 677

Other residential 1,260 ( 212 ) 1,048

Installment and other consumer loans 406 ( 125 ) 281

Unallocated 1,265 486 1,751

Total $ 22,113 $ 1,604 $ 23,717

Allowance for credit losses on unfunded commitments $ 1,697 $ 122 $ 1,819

1 The cumulative transition adjustment resulted from applying the CECL method, which was based on economic forecasts and other assumptions as of December 31, 2019.

Refer to Note 3, Loans and Allowance for Credit Losses, for more information.

The Bank did not record an allowance for credit losses on available-for-sale or held-to-maturity investment securities upon the adoption of CECL as the investment portfolio consisted primarily of debt securities explicitly or implicitly backed by the U.S.

government and high credit quality obligations of state and political subdivisions.

Refer to Note 2, Investment Securities, for more information.

Use of Estimates - The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Significant accounting estimates reflected in the consolidated financial statements include the allowance for credit losses, income taxes, and fair value measurements (including fair values of acquired assets and assumed liabilities at acquisition dates) as discussed in the Notes herein.

Cash, Cash Equivalents and Restricted Cash - include cash, due from banks, federal funds sold and other short-term investments with maturities of less than three months at the time of purchase.

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For discussion of our methodology in determining fair value, see Note 9, Fair Value of Assets and Liabilities.

Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value at the date of transfer.

Unrealized holding gains or losses on the dates of the transfer of securities from available-for-sale to held-to-maturity are included in the balance of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets.

These unrealized holding gains or losses on the dates of transfer are amortized over the remaining life of the securities as yield adjustments in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security.

At each financial statement date, we assess whether declines in the fair values of held-to-maturity and available-for-sale securities below their costs are deemed to be other-than-temporary.

We consider, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

Evidence evaluated includes, but is not limited to, the remaining payment terms of the instrument and economic factors that are relevant to the collectability of the instrument, such as:

current prepayment speeds, the current financial condition of the issuer(s), industry analyst reports, credit ratings, credit default rates, interest rate trends, the quality of any credit enhancement and the value of any underlying collateral.

For each security in an unrealized loss position ("impaired security"), we assess whether we intend to sell the security or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date is recognized against earnings.

For impaired securities that are not intended for sale and will not be required to be sold prior to recovery of our amortized cost basis, we determine if the impairment has a credit loss component.

For both held-to-maturity and available-for-sale securities, if the amount of cash flows expected to be collected are less than the amortized cost, then other-than-temporary impairment shall be considered to have occurred and the credit loss component is recognized against earnings as the difference between present value of the expected future cash flows and the amortized cost.

In determining the present value of the expected cash flows, we discount the expected cash flows at the effective interest rate implicit in the security at the date of purchase.

The remaining difference between the fair value and the amortized basis is deemed to be due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

For held-to-maturity securities, if there is no credit loss component, no impairment is recognized.

The portion of other-than-temporary impairment recognized in other comprehensive income for credit impaired debt securities classified as held-to-maturity is accreted from other comprehensive income to the amortized cost of the debt security over the remaining life of the debt security in a prospective manner on the basis of the amount and timing of future estimated cash flows.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method.

Purchase premiums and discounts on investment securities are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method.

For certain callable debt securities purchased at a premium, we amortize the premium to the earliest call date.

Dividend and interest income are recognized when earned.

Realized gains and losses on the sale of securities and credit losses related to other-than-temporary impairment on available-for-sale and held-to-maturity securities are included in non-interest income as gains (losses) on investment securities, net.

Realized gains and losses on the sale of securities are included in non-interest income.

The specific identification method is used to calculate realized gains and losses on sales of securities.

Originated Loans are reported at the principal amount outstanding net of deferred fees (costs), charge-offs and the allowance for loan losses (“ALLL”).

Securities transferred from the available-for-sale category to the held-to-maturity category are recorded at fair value at the date of transfer.

Allowance for Credit Losses on Investment Securities - The allowance for credit losses on h eld-to-maturity securities is a contra-asset valuation account determined in accordance with ASC 326, which is deducted from the securities' amortized cost basis at the balance sheet date as a result of management's assessment of the net amount expected to be collected.

The allowance is measured on a pooled basis for securities with similar risk characteristics using historical credit loss information, adjusted for current conditions and reasonable and supportable forecasts.

Securities that are determined to be uncollectible are written off against the allowance.

For available-for-sale securities in an unrealized loss position ("impaired security"), we assess whether 1) we intend to sell the security, or, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

Under either of these conditions, the security's amortized cost is written down to fair value through a charge to previously recognized allowances or earnings, as applicable.

For impaired securities that do not meet these conditions, we assess whether the decline in fair value was due to credit loss or other factors.

This assessment considers, among other things:

1) the extent to which the fair value is less than amortized cost, 2) the financial condition and near-term prospects of the issuer, 3) any changes to the rating of the security by a rating agency, and 4) our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss component.

Any impairment due to non-credit-related factors that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

The discount rate used in determining the present value of the expected cash flows is based on the effective interest rate implicit in the security at the date of purchase.

Accrued interest receivable is excluded from the amortized costs and fair values of both held-to-maturity and available-for-sale securities and included in interest receivable and other assets on the consolidated statements of condition.

Investment securities are placed on non-accrual status when principal or interest is contractually past due more than ninety days, or management does not expect full payment of principal and interest.

We do not record an allowance for credit losses for accrued interest on investment securities, as the amounts are written-off

when the investment is placed on non-accrual status.

There were no non-accrual investment securities in any of the years presented in the consolidated financial statements.

Originated Loans - are reported at amortized cost, which is the principal amount outstanding net of deferred fees (costs), purchase premiums (discounts) and net charge-offs (recoveries).

Amortized cost excludes accrued interest, which is reflected in interest receivable and other assets in the consolidated statements of condition.

We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status as discussed below.

Interest income is accrued daily using the simple interest method.

Loan origination fees and commitment fees, offset by certain direct loan origination costs, are deferred and amortized as yield adjustments over the contractual lives of the related loans.

Loans are placed on non-accrual status when Management believes that there is substantial doubt as to the collection of principal or interest, generally when they become contractually past due by ninety days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection.

When loans are placed on non-accrual status, any accrued but uncollected interest is reversed from current-period interest income.

Fees collected upon loan origination and certain direct costs of originating loans are deferred and recognized over the contractual lives of the related loans as yield adjustments using the interest method or straightline method, as applicable.

Upon prepayment or other disposition of the underlying loans before their contractual maturities, any associated unearned fees or unamortized costs are recognized.

Acquired Loans - ASC 326 modified 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 reported as a provision for credit losses.

Subsequent changes in the allowance for credit losses on PCD assets are recognized through the provision for credit losses.

Past-Due and Non-Accrual Loan Policy - A loan is considered past due when a payment has not been received by the contractual due date.

Loans are placed on non-accrual status when management believes that there is substantial doubt as to the collection of principal or interest, generally when they become contractually past due by 90 days or more with respect to principal or interest, except for loans that are well-secured and in the process of collection.

When loans are placed on non-accrual status, any accrued but uncollected interest is reversed from current-period interest income and the amortization of deferred loan origination fees and costs is suspended.

Interest payments received on nonaccrual loans are either applied against principal or reported as interest income, according to management’s judgment as to the ultimate collectability of principal.

We may return non-accrual loans to accrual status when one of the following occurs:

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• The loan has become well secured and is in the process of collection.

Loan Charge-Off Policy:

For all loan types excluding overdraft accounts, we generally make a charge-off determination at or before 90 days past due.

Loan Charge-Off Policy - For all loan types excluding overdraft accounts, we generally make a charge-off determination at or before 90 days past due.

A collateral-dependent loan is partially charged down to the fair value of collateral securing it if:

(1) it is deemed uncollectable, or (2) it has been classified as a loss by either our internal loan review process or external examiners.

(1) it is deemed unc ollectable, o r (2) it has been classified as a loss by either our internal loan review process or external examiners.

A non-collateral-dependent loan is partially charged down to its net realizable value under the same circumstances.

Overdraft accounts are generally charged off when they exceed 60 days past due.

Acquired Loans :

Acquired loans are recorded at their estimated fair values at the acquisition date in accordance with Accounting Standards Code ("ASC") 805, Business Combinations , factoring in credit losses expected to be incurred over the life of the loan.

Accordingly, an allowance for loan losses is not carried over or recorded for acquired loans as of the acquisition date.

We estimated the fair value of acquired loans at the acquisition date based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, risk classification, fixed or variable interest rate, term of loan, whether or not the loan was amortizing, and current discount rates.

Loans, except for purchased credit impaired ("PCI") loans, were grouped together according to similar risk characteristics and treated in the aggregate when applying various valuation techniques.

Expected cash flows incorporated our best estimate of key assumptions at the time, such as property values, default rates, loss severity and prepayment speeds.

Discount rates were based on market rates for new originations of comparable loans, where available, and included adjustments for liquidity factors.

To the extent comparable market rates were not readily available, a discount rate was derived based on the assumptions of market participants' cost of funds, servicing costs and return requirements for comparable risk assets.

In either case, the discount rate did not include a factor for credit losses, as that had been considered in estimating the cash flows.

The process of calculating fair values of acquired loans, including estimates of losses expected to be incurred over the estimated remaining lives of the loans at acquisition date and ongoing updates to Management's expectation of future cash flows, requires significant subjective judgments and assumptions.

The economic environment and lack of market liquidity and transparency are factors that have influenced, and may continue to affect, these assumptions and estimates.

We acquired loans with evidence of significant credit quality deterioration subsequent to their origination and for which it was probable, at acquisition, that we would be unable to collect all contractually required payments.

Management applied significant subjective judgment in determining which loans were PCI loans.

Evidence of credit quality deterioration as of the purchase date may include data such as past due and non-accrual status, risk grades and charge-off history.

The difference between the undiscounted expected cash flows expected to be collected and the fair value at the acquisition date ("accretable difference") is accreted into interest income at a level yield of return over the estimated remaining life of the PCI loan, provided that the timing and amount of future cash flows is reasonably estimable.

The accretable yield is affected by:

Changes in interest rate indices for variable rate loans – Expected future cash flows are based on the variable rates in effect at the time of the regular evaluations of cash flows expected to be collected;

Changes in prepayment assumptions – Prepayments affect the estimated life of the loans which may change the amount of interest income, and possibly principal, expected to be collected;

Changes in the expected principal and interest payments over the estimated life – Updates to expected cash flows are driven by the credit outlook and actions taken with borrowers.

Changes in expected future cash flows from loan modifications are included in the regular evaluations of cash flows expected to be collected.

The cash flows expected to be collected are updated each quarter based on current assumptions regarding default rates, loss severities, and other factors that are reflective of current financial conditions of the borrowers and the market conditions.

Probable decreases in expected cash flows after acquisition result in impairment recorded as a specific allowance for loan losses or a charge-off to the allowance.

Impairment is calculated as the present value of the expected future cash flows on the PCI loan, discounted at the loan's effective interest rate implicit in the loan.

The nonaccretable difference on the date of acquisition is defined as the difference between the contractually required payments and the cash flows expected to be collected, considering the result of prepayments, and is not recorded.

For purposes of accounting for the PCI loans from past business combinations, we elected not to apply the pooling method but to account for these loans individually.

Disposals of loans, which may include sales of loans to third parties, receipt of payments in full by the borrower, or foreclosure of the collateral, result in removal of the loan from the PCI loan portfolio at its carrying amount.

If a PCI loan pays off earlier than expected, a gain is recorded as interest income when the payoff amount exceeds the recorded investment.

For acquired loans not considered credit impaired ("non-PCI"), we recognize the entire fair value discount accretion as interest income, based on contractual cash flows using an effective interest rate method for term loans, and on a straight line basis for revolving lines.

When a non-PCI loan is placed on non-accrual status subsequent to acquisition, accretion stops until the loan is returned to accrual status.

The level of accretion on non-PCI loans varies from period to period due to maturities and early payoffs of these loans during the reporting periods.

Subsequent to acquisition, if the probable and estimable losses for non-PCI loans exceed the amount of the remaining unaccreted discount, the excess is established as an allowance for loan losses.

For further information regarding our acquired loans, see Note 3, Loans and Allowance for Loan Losses.

Allowance for Loan Losses is based upon estimates of loan losses and is maintained at a level considered adequate to provide for probable losses inherent in the loan portfolio.

The allowance is increased by provisions for loan losses charged against earnings and reduced by charge-offs, net of recoveries.

In periodic evaluations of the adequacy of the allowance balance, Management considers current economic conditions, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, our past loan loss experience and other factors.

The ALLL is based on estimates, and ultimate losses may vary from current estimates.

Our Board of Directors' Asset/Liability Management Committee (“ALCO”) reviews the adequacy of the ALLL at least quarterly.

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

The first component, specific allowances, results from the analysis of identified problem credits and the evaluation of sources of repayment including collateral, as applicable.

Through Management's ongoing loan grading and credit monitoring process, individual loans are identified that have conditions indicating the borrower may be unable to pay all amounts due in accordance with the contractual terms.

These loans are evaluated for impairment individually by Management.

Management considers an originated loan to be impaired when it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

When the fair value of the impaired loan is less than the recorded investment in the loan, the difference is recorded as an impairment through the establishment of a specific allowance.

For loans determined to be impaired, the extent of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate at origination (for originated loans), based on the loan's observable market price, or based on the fair value of the collateral if the loan is collateral dependent or if foreclosure is imminent.

Troubled Debt Restructured Loans - 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 may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

TDRs on non-accrual status at the time of restructure may be returned to accruing status after management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.

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

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

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

• Performance on the loan is reasonably assured;

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

Section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act of 2020 ("Economic Aid 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 the earlier of 60 days after the national emergency is terminated or January 1, 2022.

The Bank elected to apply these temporary accounting provisions to payment relief loans beginning in March 2020.

Accordingly, modifications that met certain criteria of the CARES Act were not categorized as troubled debt restructurings during 2020.

Collateral Dependent Loans - A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral.

For collateral dependent loans, including those for which management determines foreclosure is probable, the allowance for credit losses is based on the fair value of the collateral, adjusted for estimated selling costs when repayment is expected from the sale of the collateral, less the loan's amortized c ost.

In determining the fair value, management consi ders such information as the appraised value of the c ollateral, observed and potential future changes in collateral value, and historical loss experience for loans that were secured by similar collateral.

Generally, with problem credits that are collateral dependent, we obtain appraisals of the collateral at least annually.

We may obtain appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has occurred to the collateral, or if we believe foreclosure is imminent.

The second component is an estimate of the probable inherent losses in each loan pool with similar characteristics.

This analysis encompasses the entire loan portfolio, excluding individually identified impaired loans and acquired loans whose purchase discount has not been fully accreted.

Under our allowance model, loans are evaluated on a pool basis by federal regulatory reporting codes ("CALL codes" or "segments"), which are further delineated by assigned credit risk ratings, as described in Note 3, Loans and Allowance for Loan Losses.

Segments include the following:

We may obtain appraisals more frequently if we believe the collateral value is subject to market volatility, if a specific event has affected the collateral, or if we believe foreclosure is imminent.

Allowance for Credit Losses on Loans ("ACL") - is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected.

Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses (refer to the Past-Due and Non-Accrual Loan Policy section above).

Management estimates the allowance quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Credit loss experience provides the basis for the estimation of expected credit losses.

The ACL model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which are generally comprised of federal regulatory reporting codes (i.e., Call codes).

Pooled segments include the following:

• Loans secured by real estate:

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- Secured by farmland (including residential and other improvements)

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

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

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

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- Secured by multifamily (5 or more) residential properties

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

- Loans secured by other non-farm nonresidential properties

- Commercial real estate loans secured by owner-occupied non-farm nonresidential properties

- Commercial real estate loans secured by other non-farm nonresidential properties

• Loans to finance agricultural production and other loans to farmers

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

The model determines general allowances by loan segment based on quantitative (loss history) and qualitative risk factors.

The quantitative risk factor for each segment utilizes the greater result of either the historical loss method or migration analysis loss method based on loss history beginning March 2010.

• Municipal entities

• Non-profit organizations

• Other loans (overdraft credit lines)

The DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans.

Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate.

We elected to report the change in present values from one reporting period to the next due to the

passage of time and changes in the estimate of future expected cash flows through the provision for credit losses, rather than though interest income.

In determining the PD for each pooled segment, the Bank utilized regression analyses to identify certain economic drivers that were considered highly correlated to historical Bank or peer loan default experience.

As a result, management chose the California unemployment rate as the primary economic forecast driver for all segments, except for municipal loans.

In addition, the annual percentage change in the California gross domestic product was used in the commercial and industrial loan segment and the annual percentage change in California retail sales was used in the owner-occupied and investor-owned commercial real estate segments.

For municipal loans, the ACL model utilized a constant default rate obtained from a nationally recognized default rate st udy, which is updated annually.

A third party provides LGD estimates for each segment based on a banking industry Frye-Jacobs Risk Index approach.

The ACL model incorporates a one-year reasonable and supportable forecast of economic factors, updated quarterly, which is provided by a well-recognized economics advisory company.

For periods beyond the forecast horizon the economic factors revert to historical averages on a straight-line basis over a one-year period.

Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments and curtailments, when appropriate.

The pooled loans' contractual loan terms exclude extensions, renewals, and modifications unless one or more of the following applies:

1) management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual borrower, 2) the extension or renewal options are included in the original or modified contract, or 3) an existing troubled debt restructuring is within six months of maturity.

Loans that do not share the same risk characteristics as pooled loans are evaluated individually for credit loss and generally include all non-accrual loans, collateral dependent loans, and certain troubled debt restructured loans and loans graded substandard or worse as determined by management.

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Qualitative internal and external risk factors include, but are not limited to, the following:

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• The presence of specialized lending segments in the portfolio

Under the historical loss method, quarterly loss rates are calculated for each segment by dividing annualized net charge-offs during each quarter by the quarter's average segment balances.

The quarterly loss rates are averaged over the entire loss history period.

Under the migration analysis method, loss rates are calculated at the risk grade and segment levels by dividing the net charge-off amount by the total segment balance at the beginning of each migration period where the charged-off loan in question was present.

Migration loss rates are averaged for each risk grade and segment for the entire loss history period.

For each segment, the loss rates that result in the larger of the migration loss reserves or segment historical loss reserves are applied to the current loan balances.

Qualitative factors are combined with these quantitative factors at the segment level to arrive at the overall general allowances.

We establish specific allowances to account for credit deterioration for probable decreases in cash flows for PCI loans subsequent to acquisition.

The estimated cash flows expected to be collected on PCI loans are updated quarterly and require the use of key assumptions and estimates based on factors such as the current economic environment, changes in collateral values, loan workout plans, changes in the probability of default, loss severities, and prepayments.

Probable decreases in expected cash flows after acquisition result in impairment recorded as a specific allowance for loan losses or a charge-off to the allowance.

Impairment is calculated as the present value of the expected future cash flows on the PCI loan, discounted at the loan's effective interest rate implicit in the loan.

While we believe we use the best information available to determine the allowance for loan losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

A decline in local and national economic conditions, or significant changes in other assumptions, could result in a material increase in the allowance for loan losses and may adversely affect our financial condition and results of operations.

In addition, the determination of the amount of the allowance for loan losses is subject to review by bank regulators as part of their routine examination process, which may result in the establishment of additional allowance for loan losses based upon their judgment of information available to them at the time of their examination.

While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

Our ACL model is sensitive to changes in unemployment rate forecasts and certain other assumptions that could result in material fluctuations in the allowance for credit losses and adversely affect our financial condition and results of operations.

For further information regarding the allowance for loan losses, see Note 3, Loans and Allowance for Loan Losses.

Allowance for Losses on Off-Balance Sheet Commitments :

We make commitments to extend credit to meet the financing needs of our customers in the form of loans or standby letters of credit.

We are exposed to credit loss in the event that a decline in credit quality of the borrower leads to nonperformance.

We record an allowance for losses on these off-balance sheet commitments based on estimates of probability that these commitments will be drawn upon according to the historical utilization experience of different types of commitments and expected loss severity.

This allowance is included in interest payable and other liabilities on the consolidated statements of condition.

Transfers of Financial Assets :

We have entered into certain loan participation agreements with other organizations.

Allowance for Credit Losses on Unfunded Loan Commitments - We make commitments to extend credit to meet the financing needs of our customers in the form of loans or standby letters of credit.

We are exposed to credit losses over a loan's contractual period in the event that a decline in credit quality of the borrower leads to nonperformance.

We record an allowance for losses on unfunded loan commitments at the balance sheet date based on estimates of probability that these commitments will be drawn upon according to historical utilization experience of different types of commitments and expected loss severity and loss rates determined for pooled funded loans.

The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities on the consolidated statements of condition.

Adjustments to the allowance for unfunded commitments are included in non-interest expense as a provision for (or reversal of) the allowance for unfunded commitments.

Transfers of Financial Assets - We have entered into certain loan participation agreements with other organizations.

We account for these transfers of financial assets as sales when control over the transferred financial assets has been surrendered.

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No gain or loss has been recognized by us on the sale of these participation interests in 2020, 2019 and 2018.

Premises and Equipment :

Premises and equipment consist of leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation and amortization, which are calculated on a straight-line basis.

Premises and Equipment - Premises and equipment consist of leasehold improvements, furniture, fixtures, software and equipment and are stated at cost, less accumulated depreciation and amortization, which are calculated on a straight-line basis.

Furniture and fixtures are depreciated over eight years and equipment is generally depreciated over three to twenty years .

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The cost of maintenance and repairs is charged to expense as incurred.

Business Combinations :

Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations .

Leases - We acc ount for leases in accordance with ASC 842, Leases.

As a result of the adoption of ASU 2016-02 on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $ 13.4 million, net of deferred rent and unrecognized lease incentives, operating and finance lease liabilities totaling $ 15.4 million, and no cumulative-effect adjustments to retained earnings.

Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications under ASC 840, Leases (previous GAAP), and did not require us to reassess initial direct costs for any existing leases.

We elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease).

In addition, we made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications.

We lease certain premises under long-term non-cancelable operating leases, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses.

Only those renewal and termination options that management determines are reasonably certain of exercising are included in the calculation of the lease liability.

In addition, we lease certain equipment under finance leases.

The equipment finance lease terms do not contain renewal options, bargain purchase options or residual value guarantees.

We did not have any significant short-term leases during the reported periods.

Lease right-of-use assets represent the right to use the underlying asset while lease liabilities represent the present value of future lease obligations.

When calculating the lease liability, because most lease contracts do not contain an implicit interest rate, we discount lease payments over a lease's expected term based on the collateralized Federal Home Loan Bank borrowing rate that was commensurate with lease terms and minimum payments at the lease commencement date.

Right-of-use assets for operating leases are amortized over the lease term by amounts that represent the difference between periodic straight-line lease expense and periodic interest accretion on the related liability to make lease payments, whereas finance leases are amortized on a straight-line basis over the term of the lease.

Expense recognition for operating leases is recorded on a straight-line basis while expense recognition for finance leases represents the sum of periodic amortization of the associated right-of-use asset and the interest accretion on the lease liability.

Refer to Note 12, Commitments and Contingencies, for further information.

Business Combinations - Business combinations are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations .

A business is defined as a set of activities and assets that is both self-sustaining and managed to provide a return to investors and generally has three elements:

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If substantially all of an acquisition is made up of one asset or several similar assets, or without a substantive process that together contributes to the ability to create outputs, the acquisition is accounted for as an asset acquisition and acquisition costs will be capitalized as part of the assets acquired, rather than expensed in a business combinations.

Goodwill and Other Intangible Assets :

Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill and Other Intangible Assets - Goodwill is determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill that arises from a business combination is periodically evaluated for impairment at the reporting unit level, at least annually.

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At December 31, 2020, the future estimated amortization expense for the CDI arising from our past acquisitions is as follows:

(in thousands)

(in thousands) 2021 2022 2023 2024 2025 Thereafter Total

Core deposit intangible amortization $ 818 $ 782 $ 719 $ 422 $ 400 $ 690 $ 3,831

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The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Other Real Estate Owned ("OREO") :

OREO is comprised of property acquired through foreclosure, in substance repossession or acceptance of deeds-in-lieu of foreclosure when the related loan receivable is de-recognized.

OREO is recorded at fair value of the collateral less estimated costs to sell, establishing a new cost basis, and subsequently accounted for at the lower of cost or fair value less estimated costs to sell.

Any shortfall of collateral value from the recorded investment of the related loan is recognized as loss at the time of foreclosure and is charged against the allowance for loan losses.

Fair value of collateral is generally based on an independent appraisal of the property.

Revenues and expenses associated with OREO, and subsequent adjustments to the fair value of the property and to the estimated costs of disposal, are realized and reported as a component of non-interest income and expense when incurred.

Bank Owned Life Insurance ("BOLI") :

The Bank owns life insurance policies on certain key current and former officers.

Bank Owned Life Insurance ("BOLI") - The Bank owns life insurance policies on certain key current and former officers.

BOLI is recorded in interest receivable and other assets on the consolidated statements of condition at the amount that can be realized under the insurance contract at period-end, which is the cash surrender value adjusted for other charges or amounts due that are probable at settlement.

Federal Home Loan Bank of San Francisco ("FHLB") Stock :

The Bank is a member of the FHLB.

Federal Home Loan Bank of San Francisco ("FHLB") Stock - The Bank is a member of the FHLB.

Members are required to own a certain amount of stock based on the level of borrowings and other factors.

As of December 31, 2019, our investment in FHLB stock was carried 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 December 31, 2018, our investment in FHLB stock was carried at cost.

As of December 31, 2020 and 2019 our investment in FHLB stock was carried 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.

We periodically evaluate FHLB stock for impairment based on ultimate recovery of par value.

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Both cash and stock dividends are reported as non-interest income.

Investments in Low Income Housing Tax Credit Funds :

We have invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate-income tenants throughout California.

Investments in Low Income Housing Tax Credit Funds - We have invested in limited partnerships that were formed to develop and operate affordable housing projects for low or moderate-income tenants throughout

Our ownership percentage in each limited partnership ranges from 1.0 % to 3.5 %.

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We record an impairment charge if the value of the future tax credits and other tax benefits is less than the carrying value of the investments.

Employee Stock Ownership Plan (“ESOP”) :

We recognize compensation cost for ESOP contributions when funds become committed for the purchase of Bancorp's common shares into the ESOP in the year in which the employees render service entitling them to the contribution.

Employee Stock Ownership Plan (“ESOP”) - We recognize compensation cost for ESOP contributions when funds become committed for the purchase of Bancorp's common shares into the ESOP in the year in which the employees render service entitling them to the contribution.

If we contribute stock, the compensation cost is the fair value of the shares when they are committed to be released (i.e., when the number of shares becomes known and formally approved).

In 2020, 2019 and 2018, the Bank only made stock contributions to the ESOP.

Income Taxes :

Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach.

Income Taxes - Income taxes reported in the consolidated financial statements are computed based on an asset and liability approach.

We recognize the amount of taxes payable or refundable for the current year and we record deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the temporary differences are expected to reverse.

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Bancorp files consolidated federal and combined state income tax returns.

We recognize the financial statement effect of a tax position when it is more likely than not, based on the technical merits and all available evidence, that the position will be sustained upon examination, including the resolution through

protests, appeals or litigation processes.

For tax positions that meet the more likely than not threshold, we measure and record the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority.

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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 EPS are calculated by dividing net income by the weighted average number of common shares outstanding during each annual period, excluding unvested restricted stock awards.

Basic EPS are calculated by dividing net income by the weighted average number of common

shares outstanding during each annual period, excluding unvested restricted stock awards.

Diluted EPS are calculated using the weighted average number of potentially dilutive common shares.

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(in thousands, except per share data) 1

Weighted average basic shares outstanding

2020 2019 2018

Weighted average basic common shares outstanding 13,525 13,620 13,864

Potentially dilutive common shares related to:

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Unvested restricted stock awards 23 26 29

Weighted average diluted shares outstanding

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

Weighted average diluted common shares outstanding 13,617 13,794 14,029

Net income $ 30,242 $ 34,241 $ 32,622

Basic EPS $ 2.24 $ 2.51 $ 2.35

Diluted EPS $ 2.22 $ 2.48 $ 2.33

Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 148 35 44

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

Share-Based Compensation :

All share-based payments, including stock options and restricted stock, are recognized as stock-based compensation expense in the consolidated statements of comprehensive income based on the grant-date fair value of the award with a corresponding increase in common stock.

Share-Based Compensation - All share-based payments, including stock options and restricted stock, are recognized as stock-based compensation expense in the consolidated statements of comprehensive income based on the grant-date fair value of the award with a corresponding increase in common stock.

The grant-date fair value of the award is amortized on a straight-line basis over the requisite service period, which is generally the vesting period.

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The risk-free rate for periods within the expected life of the option is based on the U.S.

Treasury yield curve in effect at the

time of the grant.

Treasury yield curve in effect at the time of the grant.

Expected volatility is based on the historical volatility of the common stock over the most recent period that is generally commensurate with the expected life of the options.

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Cash paid for tax withholdings when shares are surrendered in a cashless stock option exchange is classified as a financing activity in the consolidated statements of cash flows.

In June 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.

2018-07, Compensation - Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting .

This update simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees, applying some of the same requirements as employee share-based payment transactions.

The ASU will not affect the accounting for share-based payment awards to nonemployee directors, which will continue to be treated as employee share-based transactions under the current standards.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

We adopted the requirements of this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as it is not our practice to issue stock-based awards to pay for goods and services from nonemployees, other than nonemployee directors.

Derivative Financial Instruments and Hedging Activities - Fair Value Hedges :

All of our interest rate swap contracts are designated and qualified as fair value hedges.

Derivative Financial Instruments and Hedging Activities - Fair Value Hedges - All of our interest rate swap contracts are designated and qualified as fair value hedges.

The terms of our interest rate swap contracts are closely aligned to the terms of the designated fixed-rate loans.

The hedging relationships are tested for effectiveness on a quarterly basis using a qualitative approach.

The hedging relationships are tested for

effectiveness on a quarterly basis using a qualitative approach.

The qualitative analysis includes verification that there are no changes to the derivative's or hedged item's key terms and conditions and no adverse developments regarding risk of counterparty default, and validation that we continue to have fair value hedge designation.

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For further detail, see Note 14, Derivative Financial Instruments and Hedging Activities.

In October 2018, the FASB issued ASU No.

2018-16, Derivatives and Hedging (Topic 815):

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes .

This update adds an alternative fifth permissible U.S.

benchmark rate to be used for hedge accounting purposes.

The amendments should be adopted for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption.

We adopted this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as we did not have new or re-designated hedging relationships since adoption.

Revenue Recognition:

We utilize the following five-step model for non-financial instrument related revenue that is in scope for Topic 606, Revenue from Contracts with Customers :

Revenue Recognition - We utilize the following five-step model for non-financial instrument related revenue that is in scope for ASC 606, Revenue from Contracts with Customers :

1) identify the contract, 2) identify the performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and, 5) recognize revenue when (or as) the entity satisfies the performance obligation.

Our main revenue streams in scope for Topic 606 include:

Our main revenue streams in scope for ASC 606 include:

• Wealth Management & Trust ("WM&T") fees - WM&T services include, but are not limited to:

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Advertising Costs - are expensed as incurred.

For the years ended December 31, 2019 and 2018 , advertising costs totaled $ 775 thousand and $ 666 thousand , respectively.

For the years ended December 31, 2020, 2019, and 2018, advertising costs totaled $ 769 thousand, $ 775 thousand, and $ 666 thousand, respectively.

Comprehensive Income (Loss) - includes net income, changes in the unrealized gains or losses on available-for-sale investment securities, and amortization of net unrealized gains or losses on securities transferred from available-for-sale to held-to-maturity, net of related taxes, reported on the consolidated statements of comprehensive income and as components of stockholders' equity.

Fair Value Measurements :

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

Fair Value Measurements - We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price notion) reflecting factors such as a liquidity premium.

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Class B common stock are carried at cost as of December 31, 2020 and 2019, as there was no impairment or changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

Additionally,

from time to time, we may be required to record certain assets and liabilities at fair value on a non-recurring basis, such as purchased loans and acquired deposits recorded at acquisition date, certain impaired loans, other real estate owned and securities held-to-maturity that are other-than-temporarily impaired.

Additionally, from time to time, we may be required to record certain assets and liabilities at fair value on a non-recurring basis, such as purchased loans and acquired deposits recorded at acquisition date, certain impaired loans, other real estate owned and securities held-to-maturity that are other-than-temporarily impaired.

These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting.

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As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements.

Use of Estimates :

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Significant accounting estimates reflected in the consolidated financial statements include ALLL, other-than-temporary impairment of investment securities, accrued liabilities, accounting for income taxes and fair value measurements (including fair values of acquired assets and assumed liabilities at acquisition dates) as discussed in the Notes herein.

Other Recently Adopted Accounting Standards

In February 2018, the FASB issued ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income .

This amendment helped organizations address certain stranded income tax effects in accumulated other comprehensive income ("AOCI") resulting from the enactment of the Tax Cuts and Jobs Act of 2017.

The ASU required financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether or not they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act of 2017, and information about the other income tax effects that are reclassified.

The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

Early adoption is permitted.

We early adopted this ASU in the first quarter of 2018 by reclassifying $ 638 thousand from AOCI to retained earnings.

This amount represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) (the "new lease accounting standard").

The amendments in this ASU intended to increase transparency and comparability among organizations by recognizing an operating lease or finance lease right-of-use asset for the lease term, and a lease liability, which is a lessee's obligation to make lease payments, recorded based on discounting future lease payments under the lease terms.

This ASU generally applies to leasing arrangements exceeding a twelve-month term.

ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method of adoption.

In July 2018, the FASB issued two amendments to ASU 2016-02:

2018-10, Codification Improvements to Topic 842, Leases , which provided various corrections and clarifications to ASU 2016-02;

2018-11, Leases (Topic 842):

Targeted Improvements , which permitted optional transition methods and provided lessors with a practical expedient for separating lease and non-lease components of a lease.

The ASU allowed entities to apply either a modified retrospective approach at the beginning of the earliest period presented or at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings.

We adopted the ASU under the latter approach.

As a result of the adoption of ASU 2016-02 on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $ 13.4 million , net of deferred rent and unaccreted lease incentives, operating and finance lease liabilities totaling $ 15.4 million , and no cumulative-effect adjustments to retained earnings.

Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications and did not require us to reassess initial direct costs for any existing leases.

In addition, we elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease).

We made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications.

See Note 12, Commitments and Contingencies for further information.

In March 2019, the FASB issued ASU No.

2019-01, Leases (Topic 842):

Codification Improvements .

This ASU addresses two lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with adopting ASU 2016-02.

The amendments related to the lessor implementation issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early application is permitted.

As the ASU's amendments applicable to us only relate to disclosures, the adoption of ASU 2019-01 did not impact our financial condition or results of operations.

Accounting Standards Not Yet Effective

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

The standard will replace today's "incurred loss" model with a "current expected credit loss" ("CECL") model.

The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.

The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt security.

In addition, CECL will modify the accounting for purchased loans and will require that an allowance for credit losses be established at the date of acquisition.

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 loan losses.

In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Early 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 considers the probability of default and loss given default.

Continuing implementation activities include model validation, drafting policies and disclosures, and evaluating, documenting and testing internal controls.

Parallel testing occurred throughout 2019 and we estimate that our adoption of the CECL standards will result in a 5 % to 15 % increase to our allowance for credit losses, which will be recorded as a cumulative-effect adjustment to retained earnings, net of tax as of January 1, 2020.

In April 2019, the FASB issued ASU No.

2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement.

The provisions of this ASU are effective January 1, 2020 and contain various methods of adoption.

We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.

At this time, we do not expect the ASU to have a material impact on our financial condition or results of operations.

In May 2019, the FASB issued ASU No.

2019-05, Financial Instruments - Credit Losses (Topic 326):

Targeted Transition Relief .

This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards.

This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets.

The fair value option does not apply to held-to-maturity debt securities.

This ASU is effective for us in fiscal year 2020, including interim periods within the fiscal year.

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.

We adopted the requirements of this ASU on January 1, 2020 and do not expect the ASU to have a material impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement (Topic 820):

2018-13, Fair Value Measurement (ASC Topic 820):

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement .

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ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

Entities should disclose and describe the range and weighted-average of significant observable inputs used to develop Level 3 fair value measurements prospectively.

We adopted the requirements of this ASU on January 1, 2020.

As the ASU’s requirements only relate to disclosures, the amendments will not impact our financial condition or results of operations.

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 9, 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):

2018-15, Intangibles - Goodwill and Other - Internal-Use Software (ASC Subtopic 350-40):

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract .

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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 the requirements of this ASU on January 1, 2020.

We do not expect that the ASU will have a material impact on our financial condition or results of operations.

We adopted this ASU prospectively on January 1, 2020, which did not impact 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 740):

2019-12, Income Taxes (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 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 intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in 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.

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In January 2020, the FASB issued ASU No.

2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 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 323, for the purposes of applying the measurement alternative in accordance with Topic 321.

2020-01, Investments - Equity Securities (ASC Topic 321), Investments - Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) - Clarifying the Interactions between ASC 321, ASC 323, and 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 ASC 323, for the purposes of applying the measurement alternative in accordance with ASC 321.

This ASU is effective for fiscal years beginning after December 15, 2020.

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We do not expect that the ASU will have a material impact on our financial condition or results of operations.

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 of accounting for, or recognizing the effects of reference rate reform.

The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued 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 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.

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.

This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, on a prospective basis.

Early adoption is not permitted.

As this ASU is narrow in scope and for clarification purposes, we do not expect this ASU will have a material 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 (and ASU 2020-04) 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.

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.

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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.

December 31, 2019

December 31, 2018

Gross Unrealized

(in thousands)

A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of December 31, 2020 and December 31, 2019 is presented below.

Held-to-maturity:

Amortized Cost 1

Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value

(in thousands) Gains (Losses)

December 31, 2020

Securities of U.S.

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MBS pass-through securities issued by FHLMC and FNMA $ 65,579 $ — $ 65,579 $ 3,924 $ — $ 69,503

SBA-backed securities

CMOs issued by FHLMC 27,201 — 27,201 1,441 — 28,642

CMOs issued by FNMA 8,042 — 8,042 363 — 8,405

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

Obligations of state and political subdivisions 1,667 — 1,667 21 1,688

Total held-to-maturity $ 109,036 $ — $ 109,036 $ 6,149 $ — $ 115,185

December 31, 2019

Securities of U.S.

government-sponsored enterprises:

MBS pass-through securities issued by FHLMC and FNMA 80,451 — 80,451 1,018 ( 144 ) 81,325

CMOs issued by FHLMC 31,477 — 31,477 685 ( 5 ) 32,157

CMOs issued by FNMA

10,210 — 10,210 282 — 10,492

CMOs issued by GNMA 3,763 — 3,763 53 — 3,816

Obligations of state and

political subdivisions

SBA-backed securities 7,999 — 7,999 265 — 8,264

Obligations of state and political subdivisions 3,513 — 3,513 75 — 3,588

Total held-to-maturity $ 137,413 $ — $ 137,413 $ 2,378 $ ( 149 ) $ 139,642

1 Amortized cost and fair values exclude accrued interest receivable of $ 366 thousand and $ 469 thousand at December 31, 2020 and 2019, 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.

Accordingly, no 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 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 Moody's and/or Standard & Poor's bond ratings for our portfolio of held-to-maturity securities issued by states and political subdivisions as of December 31, 2020.

(in thousands) Obligations of state and political subdivisions

Total $ 1,667

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of December 31, 2020 and December 31, 2019 is presented below.

Available-for-sale:

Amortized Cost 1

Gross Unrealized Allowance for Credit Losses Fair Value

(in thousands) Gains (Losses)

December 31, 2020

Securities of U.S.

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MBS pass-through securities issued by FHLMC and FNMA $ 50,686 $ 2,530 $ — $ — $ 53,216

SBA-backed securities

CMOs issued by FHLMC 143,267 7,925 ( 1 ) — 151,191

CMOs issued by FNMA 16,450 580 — — 17,030

CMOs issued by GNMA 6,863 351 — — 7,214

SBA-backed securities 30,941 1,976 ( 55 ) — 32,862

Debentures of government- sponsored agencies 19,944 266 ( 24 ) — 20,186

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

Total available-for-sale $ 373,038 $ 19,393 $ ( 80 ) $ — $ 392,351

December 31, 2019

Securities of U.S.

government-sponsored enterprises:

MBS pass-through securities issued by FHLMC and FNMA $ 98,502 $ 1,617 $ ( 48 ) $ — $ 100,071

CMOs issued by FHLMC 139,398 3,892 ( 64 ) — 143,226

CMOs issued by FNMA 22,702 390 — — 23,092

CMOs issued by GNMA 11,719 42 ( 6 ) — 11,755

SBA-backed securities 35,674 688 ( 76 ) — 36,286

Debentures of government- sponsored agencies 48,389 727 ( 70 ) — 49,046

Privately issued CMOs

Obligations of state and

political subdivisions

Obligations of state and political subdivisions 66,042 1,386 ( 146 ) — 67,282

Corporate bonds 1,497 6 ( 1 ) — 1,502

Total available-for-sale $ 423,923 $ 8,748 $ ( 411 ) $ — $ 432,260

Total investment securities

1 Amortized cost and fair value exclude accrued interest receivable of $ 1.9 million and $ 1.8 million at December 31, 2020 and 2019, respectively, 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 December 31, 2020 and 2019 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.

December 31, 2019

December 31, 2018

Held-to-Maturity

Available-for-Sale

Held-to-Maturity

Available-for-Sale

(in thousands)

Amortized Cost

December 31, 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 $ 246 $ 250 $ 11,530 $ 11,687 $ 1,807 $ 1,811 $ 6,699 $ 6,706

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After ten years 49,127 51,102 157,572 164,178 77,129 77,991 159,712 161,658

Total $ 109,036 $ 115,185 $ 373,038 $ 392,351 $ 137,413 $ 139,642 $ 423,923 $ 432,260

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies.

During 2018, we transferred $ 27.4 million, from available-for-sale to held-to-maturity at fair value.

We intend and have the ability to hold these securities to maturity.

The net unrealized pre-tax loss of $ 278 thousand, remained in accumulated other comprehensive income and is amortized over the remaining life of the securities along with amortization of any prior transfers.

Amortization of the net unrealized pre-tax loss totaled $ 524 thousand, $ 445 thousand and $ 516 thousand in 2020, 2019 and 2018, respectively.

There were no securities transferred from available-for-sale to held-to-maturity at fair value in 2020 or 2019.

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

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Pledged investment securities are shown in the following table.

(in thousands)

December 31, 2019

December 31, 2018

(in thousands) December 31, 2020 December 31, 2019

Pledged to the State of California:

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Collateral for Wealth Management and Trust Services ("WMTS") checking account $ 629 $ 622

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies.

During 2018 , we transferred $ 27.4 million , from available-for-sale to held-to-maturity at fair value.

We intend and have the ability to hold these securities to maturity.

The net unrealized pre-tax loss of $ 278 thousand , remained in accumulated other comprehensive income and is amortized over the remaining life of the securities along with amortization of any prior transfers.

Amortization of the net unrealized pre-tax loss totaled $ 445 thousand and $ 516 thousand in 2019 and 2018 , respectively.

There were no securities transferred from available-for-sale to held-to-maturity at fair value in 2019 .

Total pledged investment securities $ 132,431 $ 127,962

There were 10 and 40 securities in unrealized loss positions at December 31, 2020 and 2019, respectively.

Those securities are summarized and classified according to the duration of the loss period in the tables below.

December 31, 2019

< 12 continuous months

≥ 12 continuous months

Total securities

December 31, 2020 < 12 continuous months ≥ 12 continuous months Total securities

in a loss position

(in thousands)

Unrealized loss

Held-to-maturity:

MBS pass-through securities issued by FHLMC and FNMA

CMOs issued by FHLMC

Total held-to-maturity

(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss

Available-for-sale:

MBS pass-through securities issued by FHLMC and FNMA

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

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

CMOs issued by GNMA

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

Obligations of state and political subdivisions

Corporate bonds

Total available-for-sale

Total temporarily impaired securities

December 31, 2018

< 12 continuous months

> 12 continuous months

Total securities

Total $ 9,918 $ ( 25 ) $ 1,790 $ ( 55 ) $ 11,708 $ ( 80 )

December 31, 2019 < 12 continuous months > 12 continuous months Total securities

in a loss position

(in thousands)

Unrealized loss

(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 FNMA

CMOs issued by FHLMC — — 1,725 ( 5 ) 1,725 ( 5 )

Obligations of state and political subdivisions

Total held-to-maturity 14,203 ( 60 ) 7,798 ( 89 ) 22,001 ( 149 )

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SBA-backed securities 9,227 ( 14 ) 2,448 ( 62 ) 11,675 ( 76 )

CMOs issued by FNMA

CMOs issued by FHLMC 14,918 ( 58 ) 2,981 ( 6 ) 17,899 ( 64 )

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Total available-for-sale 81,958 ( 328 ) 10,552 ( 83 ) 92,510 ( 411 )

Total temporarily impaired securities

Total $ 96,161 $ ( 388 ) $ 18,350 $ ( 172 ) $ 114,511 $ ( 560 )

As of December 31, 2020, the investment portfolio included 5 investment securities that had been in a continuous loss position for twelve months or more and 5 investment securities had been in a loss position for less than twelve months.

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federal government, which protects us from credit losses on the contractual cash flows of the securities.

Other temporarily impaired securities, including obligations of state and political subdivisions and corporate bonds, were deemed credit worthy after our internal 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 these securities was primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase.

At December 31, 2019 , Management determined that it did not intend to sell investment securities with unrealized losses, and it is more than likely than not that we will not have to sell any of the securities with unrealized losses before recovery of their amortized cost.

Therefore, we do not consider these investment securities to be other-than-temporarily impaired at December 31, 2019 .

Our investment in obligations of state and political subdivisions 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.

At December 31, 2020, management determined that it did not intend to sell investment securities with unrealized losses, and it is not more than likely than not that w e will have to sell any of the securities with unrealized losses before recovery of their amortized cost.

Ther efore, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality at December 31, 2020.

Non-Marketable Securities

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.

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Cash dividends paid on FHLB capital stock are recorded as non-interest income.

Class B Common Stock

As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc.

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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 conversion rate of 1.6228 , as of December 31, 2019 and 1.6298 as of December 31, 2018 , and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.2 million and $ 2.2 million at December 31, 2019 and 2018 , respectively.

When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6228 , as of December 31, 2020 and 2019, 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 $ 3.7 million and $ 3.2 million at December 31, 2020 and 2019, respectively.

The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc.

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As such, the fair value of these Class B shares can differ significantly from their converted values.

For further information, refer to Note 12, Commitments and Contingencies.

In October 2018, we sold 6,500 shares of our holdings of Visa Inc.

Class B common stock to a member bank of Visa U.S.A.

The pre-tax gain from the sale, net of sales commission, was $ 956 thousand .

Class B common stock to a member bank of Visa U.S.A., resulting in a pre-tax gain, net of sales commission, of $ 956 thousand.

For further information, refer to Note 12, Commitments and Contingencies.

Low Income Housing Tax Credits

We invest in low income housing tax credit funds as a limited partner, which totaled $ 3.5 million and $ 4.1 million recorded in other assets as of December 31, 2020 and 2019, respectively.

In 2020, we recognized $ 654 thousand of low income housing tax credits and other tax benefits, net of $ 550 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense.

As of December 31, 2019 , our unfunded commitments for these low income housing tax credit funds totaled $ 2.2 million .

As of December 31, 2020, our

unfunded commitments for these low income housing tax credit funds totaled $ 821 thousand.

We did not recognize any impairment losses on these low income housing tax credit investments during 2020 or 2019, as the value of the future tax benefits exceeds the carrying value of the investments.

Loans and Allowance for Loan Losses

Credit Quality of Loans

Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco, Napa, and Contra Costa counties.

Approximately 88 % of total loans were secured by real estate at December 31, 2019 and 2018 .

At December 31, 2019 and 2018 , 68 % and 67 % , respectively, of our loans were for commercial real estate, 84 % and 85 % of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

The following table shows outstanding loans by class and payment aging as of December 31, 2019 and 2018 .

Loan Aging Analysis by Class

Loans and Allowance for Credit Losses

We adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of December 31, 2020.

Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current guidance and have not been included below.

Refer to Note 3, Loans and Allowance for Loan Losses, under Part II, Item 8 of our 2019 Form 10-K for additional prior period information.

Also refer to Note 1, Summary of Significant Accounting Policies, for additional information regarding the adoption of CECL.

The following table presents the amortized cost of loans by class as of December 31, 2020 and 2019.

(in thousands) 2020 2019

Commercial and industrial $ 498,408 $ 246,687

Commercial real estate, owner-occupied

Commercial real estate, investor

Commercial owner-occupied 304,963 308,824

Commercial investor-owned 961,208 946,317

Construction 73,046 61,095

Home equity 104,813 116,024

Other residential 123,395 136,657

Installment and other consumer

December 31, 2019

30-59 days past due

60-89 days past due

90 days or more past due

Total past due

Total loans 2

Non-accrual loans 1

December 31, 2018

30-59 days past due

60-89 days past due

90 days or more past due

Total past due

Total loans 2

Non-accrual loans 1

1 Includes no purchased credit impaired ("PCI") loans at December 31, 2019 or 2018 .

Amounts exclude accreting PCI loans of with carrying values totaling $ 2.0 million at December 31, 2019 and $ 2.1 million at December 31, 2018 , as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income.

There were no accruing loans past due more than ninety days at December 31, 2019 or 2018 .

2 Amounts include net deferred loan origination costs of $ 983 thousand and $ 635 thousand at December 31, 2019 and 2018 , respectively.

Amounts are also net of unaccreted purchase discounts on non-PCI loans of $ 589 thousand and $ 708 thousand at December 31, 2019 and 2018 , respectively.

We generally make commercial loans to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions.

Installment and other consumer loans 22,723 27,682

Total loans, at amortized cost 1

2,088,556 1,843,286

Allowance for credit losses on loans ( 22,874 ) ( 16,677 )

Total loans, net $ 2,065,682 $ 1,826,609

1 Amortized cost includes net deferred loan origination (fees) costs of $( 4.9 ) million and $ 983 thousand at December 31, 2020 and 2019, respectively.

Amounts are also net of unrecognized purchase discounts of $ 815 thousand and $ 958 thousand at December 31, 2020 and 2019, respectively.

Amortized cost excludes accrued interest, which totaled $ 8.8 million and $ 7.7 million at December 31, 2020 and 2019, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

Concentrations of Credit - Virtually all of our loans are from customers located in California, primarily in Marin, Alameda, Sonoma, San Francisco, Napa, and Contra Costa counties.

Approximate ly 77 % and 88 %, of total loans were secured by real estate at December 31, 2020 and 2019, respectively.

The decrease in the percentage secured by real estate from 2019 to 2020 was due to $ 291.6 million in unsecured loans guaranteed by the SBA under the PPP, which are included in commercial and industrial loans at December 31, 2020.

At December 31, 2020 and 2019, 61 % and 68 %, res pectively, of our loans were for commercial real est ate, 85 % and 84 % of which were secured by real estate located in Marin, Sonoma, Alameda, San Francisco and Napa counties (California).

Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions.

Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed.

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We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above.

A weakened economy, and resultant decreased consumer and/or business spending, will have an effect on the credit quality of commercial loans.

Pursuant to the CARES Act, the Bank funded over 1,800 loans to eligible small businesses and non-profit organizations who participated in the PPP administered by the SBA.

PPP loans have terms of two to five years and earn interest at 1%.

In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was

netted with loan origination costs and amortized into interest income using the effective yield method over the contractual life of each loan.

The recognition of fees and costs is accelerated when 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 to be forgiven by the SBA if they meet the requirements of the program.

At December 31, 2020, PPP loans totaling $ 291.6 million, net of $ 5.4 million in unearned fees, were included in commercial and industrial loan balances.

The Bank ended its origination of new PPP loans under the provisions of the CARES Act on June 30, 2020.

On June 5, 2020, the PPP Flexibility Act was signed into law that modified, among other things, rules governing the PPP payment deferral period.

In October 2020, due to the continued delay in the PPP forgiveness process, the Bank modified the first payment due dates for PPP loans that originated prior to June 5, 2020 and extended the payment deferral period from six to sixteen months .

The extended payment deferral period also extended the time over which the accretion of PPP net loan origination fees are recognized.

In addition, on January 19, 2021, the Bank launched the application process and began accepting loan requests for the second round of PPP loans as revised by the Economic Aid Act.

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.

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Furthermore, a large majority of our loans are guaranteed by the owners of the properties.

Conditions in the real estate markets or in the general economy may adversely affect our commercial real estate loans.

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.

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As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.

Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development.

Construction loan borrowers provide for interest reserves that are used for the payment of interest during the development and marketing periods and capitalized as part of the loan balance.

When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we

apply the interest funded by the interest reserve against the loan's principal balance.

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 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.

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Repayment of construction loans is largely dependent on the ultimate success of the project.

Consumer loans primarily consist of home equity lines of credit, other residential loans and floating homes along with a small number of installment loans.

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.

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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.

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Our internally assigned grades are as follows:

Pass and Watch :

Loans to borrowers of acceptable or better credit quality.

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.

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These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences.

Negative external industry factors are generally not present.

Negative external industry factors are generally

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.

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“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.

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.

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.

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Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.

Critical weaknesses that make collection or liquidation in full improbable.

Doubtful - Critical weaknesses that make collection or liquidation in full improbable.

There may be specific pending events that work to strengthen the asset;

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We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, including PCI loans, at December 31, 2019 and 2018 .

Credit Risk Profile by Internally Assigned Risk Grade

(in thousands)

The following table presents the loan portfolio by loan class, origination year and internal risk rating as of December 31, 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.

Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

(in thousands) 2020 2019 2018 2017 2016 Prior Total

Commercial and industrial:

Pass $ 308,237 $ 22,589 $ 12,596 $ 4,508 $ 5,915 $ 34,282 $ 85,889 $ 474,016

Special Mention — 2,034 1,318 141 11 49 19,092 22,645

Substandard 1,747 — — — — — — 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:

Commercial real estate, investor

Pass $ 31,029 $ 27,581 $ 32,603 $ 43,843 $ 12,768 $ 101,014 $ — $ 248,838

Special Mention — — 11,764 17,062 7,343 6,601 — 42,770

Substandard 7,147 — — — 6,208 — — 13,355

Total commercial real estate, owner-occupied $ 38,176 $ 27,581 $ 44,367 $ 60,905 $ 26,319 $ 107,615 $ — $ 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 — 10,695 — 1,819 — 8,124 — 20,638

Substandard — 2,716 4,435 — 1,553 1,428 — 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 $ — $ — $ — $ — $ 73,046

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total construction $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046

Pass $ — $ — $ — $ — $ 128 $ 694 $ 102,614 $ 103,436

Special Mention — — — — — — 799 799

Substandard — — — — — 391 187 578

Total home equity $ — $ — $ — $ — $ 128 $ 1,085 $ 103,600 $ 104,813

Other residential:

Pass $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total other residential $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395

Installment and other consumer:

Purchased credit-impaired

December 31, 2019

Pass $ 2,361 $ 4,382 $ 3,483 $ 1,543 $ 3,423 $ 4,921 $ 2,593 $ 22,706

Special Mention — — — — — — — —

Substandard — — — 17 — — — 17

Total installment and other consumer $ 2,361 $ 4,382 $ 3,483 $ 1,560 $ 3,423 $ 4,921 $ 2,593 $ 22,723

Pass $ 570,028 $ 260,532 $ 257,552 $ 161,310 $ 123,131 $ 412,109 $ 191,213 $ 1,975,875

Total Special Mention $ — $ 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 summarizes the amortized cost of loans by internally assigned risk grades and loan class at December 31, 2019.

(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

Pass $ 209,213 $ 264,766 $ 945,757 $ 61,095 $ 114,935 $ 136,657 $ 27,538 $ 1,759,961

Special Mention 37,065 35,016 560 — 750 — — 73,391

Troubled Debt Restructuring

Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties.

These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.

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

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

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

Performance on the loan is reasonably assured;

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.

After meeting all of the conditions above, there was one commercial loan with a recorded investment of $ 3 thousand removed from TDR designation during 2019 , and one TIC loan and one home equity loan with recorded investments totaling $ 247 thousand removed from TDR designation during 2018 .

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

(in thousands)

Recorded investment in Troubled Debt Restructurings 1

Substandard 409 9,042 — — 339 — 144 9,934

Total loans $ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286

The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of December 31, 2020 and 2019.

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

December 31, 2020

30-59 days past due $ — $ — $ 1,673 $ — $ 274 $ — $ 136 $ 2,083

60-89 days past due — — — — — — 622 622

90 days or more past due — — — — — — — —

Total past due — — 1,673 — 274 — 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

$ — $ 7,147 $ 1,610 $ — $ 459 $ — $ 17 $ 9,233

Non-accrual loans with no allowance $ — $ 7,147 $ 1,610 $ — $ 459 $ — $ 17 $ 9,233

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

Non-accrual loans with no allowance $ — $ — $ — $ — $ 168 $ — $ 58 $ 226

1 There were no loans past due more than ninety days accruing interest at December 31, 2020 or 2019.

2 None of the non-accrual loans as of December 31, 2020 or 2019 were earning interest on a cash basis.

We recognized no interest income on non-accrual loans for the years ended December 31, 2020, 2019 or 2018.

Accrued interest of $ 36 thousand was reversed from interest income for loans that were placed on non-accrual status during the year ended December 31, 2020.

Collateral Dependent Loans

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

Amortized Cost by Collateral Type

(in thousands) Commercial Real Estate Residential Real Estate Other Total Allowance for Credit Losses

Commercial real estate, owner-occupied $ 7,147 $ — $ — $ 7,147 $ —

Commercial real estate, investor-owned 1,610 — — 1,610 —

Home equity — 459 — 459 —

Installment and other consumer — — 17 17 —

Total $ 8,757 $ 459 $ 17 $ 9,233 $ —

No collateral-dependent loans were in process of foreclosure at December 31, 2020.

In addition, the weighted average loan-to-value of collateral dependent loans was approximately 56 %.

Troubled Debt Restructuring

The following table summarizes the amortized cost of TDR loans by loan class as of December 31, 2020 and 2019.

(in thousands) 2020 2019

Commercial and industrial $ 1,021 $ 1,223

Commercial real estate, owner-occupied 7,147 6,998

Commercial real estate, investor

Construction 2

Commercial real estate, investor-owned 3,305 1,770

Home equity 281 251

Other residential — 452

Installment and other consumer 752 639

1 There were no acquired TDR loans as of December 31, 2019 or December 31, 2018 .

TDR loans on non-accrual status totaled $ 58 thousand at December 31, 2019 and $ 65 thousand at December 31, 2018 .

2 The construction TDR loan outstanding as of December 31, 2018 paid off during 2019 .

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.

$ 12,506 $ 11,333

1 TDR loans on non-accrual status totaled $ 7.4 million at December 31, 2020 and $ 58 thousand at December 31, 2019.

Unfunded commitments for TDR loans totaled $ 704 thousand as of December 31, 2020.

There were no loans removed from TDR designation during 2020.

After meeting all of the conditions specified in Note 1, there was one commercial loan with an amortized cost of $ 3 thousand removed from TDR designation during 2019, and one TIC loan and one home equity loan with amortized costs totaling $ 247 thousand removed from TDR designation during 2018.

In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated as a TDR under existing GAAP.

Since the onset of the pandemic, the Bank granted payment relief for 269 loans that included full payment deferral or interest-only payments on loan balances exceeding $ 402.9 million.

Of these loans, 222 or $ 324.2 million have resumed normal payments and 18 loans or $ 7.7 million paid off.

As of December 31, 2020, 21 borrowing relationships with 29 loans totaling $ 71.0 million had requested additional payment relief.

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 generally be applied to accrued interest due until accrued interest is fully paid.

The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the amortized cost of the loans prior to modification, and the amortized cost of 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)

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 Amortized Cost Post-Modification Amortized Cost Post-Modification Amortized Cost at Period End

TDRs modified during 2020:

Commercial and industrial 1 $ 170 $ 162 $ 96

Commercial real estate, investor-owned 1 1,553 1,553 1,553

Home equity 1 276 276 271

Installment and other consumer 2 204 204 201

Total 5 $ 2,203 $ 2,195 $ 2,121

TDRs modified during 2019:

Commercial and industrial 1 $ 298 $ 298 $ 150

TDRs modified during 2018:

Commercial and industrial 2 $ 254 $ 245 $ 172

The loans modified during 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications that did not meet the criteria specified by the CARES Act for temporary relief from TDR accounting.

The loan modified during 2019 reflected a maturity extension and interest rate concession.

The two loans modified during 2018 were to the same borrower and included maturity extensions and other changes to loan terms.

During 2019 and 2018 , there were no defaults on loans that had been modified in a TDR within the prior twelve-month period.

The loans modified during 2018 were to the same borrower and included maturity extensions and other changes to loan terms.

One consumer loan for $ 7 thousand, which was designated as a TDR during 2020, was subsequently charged-off in the fourth quarter.

During 2020, 2019 and 2018, there were no other defaults on loans that had been modified in a TDR within the prior twelve-month period.

We report defaulted TDRs based on a payment default definition of more than ninety days past due.

Impaired Loans

The following tables summarize information by class on impaired loans and their related allowances.

Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.

(in thousands)

Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Other residential

Installment and other consumer

December 31, 2019

Recorded investment in impaired loans:

With no specific allowance recorded

With a specific allowance recorded

Total recorded investment in impaired loans

Unpaid principal balance of impaired loans

Specific allowance

Average recorded investment in impaired loans during 2019

Interest income recognized on impaired loans during 2019 1

December 31, 2018

Recorded investment in impaired loans:

With no specific allowance recorded

With a specific allowance recorded

Total recorded investment in impaired loans

Unpaid principal balance of impaired loans

Specific allowance

Average recorded investment in impaired loans during 2018

Interest income recognized on impaired loans during 2018 1

1 Interest income recognized on a cash basis of $ 417 thousand during 2019 was related to a principal payment applied to interest collected but unrecognized on a former non-accrual land development loan and the pay-off of four non-accruals.

Interest income recognized on a cash basis of $ 135 thousand during 2018 was primarily related to the pay-off of non-accrual commercial PCI loans.

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded Substandard or worse, loans on non-accrual status and loans modified in a TDR, to be evaluated individually for impairment testing.

Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible.

There were no charged-off amounts on impaired loans at December 31, 2019 or 2018 .

In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs.

At December 31, 2019 and 2018 , unused

commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $ 534 thousand and $ 1.1 million , respectively.

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

Allowance for Loan Losses Rollforward for the Year Ended

(in thousands)

Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Other residential

Installment and other consumer

The following tables disclose activity in the allowance for credit losses.

Allowance for Credit Losses Rollforward

(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

Year ended December 31, 2020

Beginning balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677

Provision (reversal)

Provision - incurred loss method 208 673 3,141 219 188 287 122 612 5,450

(Charge-offs) ( 30 ) — — — — — — — ( 30 )

Recoveries 13 — — 3 — — — — 16

Balance at September 30, 2020 2,525 3,135 11,624 860 1,038 1,260 406 1,265 22,113

Impact of CECL adoption ( 278 ) 138 1,755 201 ( 361 ) ( 212 ) ( 125 ) 486 1,604

Post adoption balance at October 1, 2020 2,247 3,273 13,379 1,061 677 1,048 281 1,751 23,717

Provision (reversal) - CECL method 269 ( 495 ) ( 697 ) 496 61 ( 50 ) 11 ( 451 ) ( 856 )

(Charge-offs) — — — — — — ( 1 ) — ( 1 )

Recoveries 14 — — — — — — — 14

Ending balance $ 2,530 $ 2,778 $ 12,682 $ 1,557 $ 738 $ 998 $ 291 $ 1,300 $ 22,874

1 unchanged sentence

Beginning balance $ 2,436 $ 2,407 $ 7,703 $ 756 $ 915 $ 800 $ 310 $ 494 $ 15,821

Provision (reversal)

Provision (reversal) - incurred loss method ( 49 ) 55 768 ( 118 ) ( 65 ) 173 ( 23 ) 159 900

(Charge-offs) ( 75 ) — — — — — ( 3 ) — ( 78 )

Recoveries 22 — 12 — — — — — 34

Ending balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677

Allowance for Loan Losses and Recorded Investment In Loans

(dollars in thousands)

Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Other residential

Installment and other consumer

December 31, 2019

Ending ALLL related to loans collectively evaluated for impairment

Ending ALLL related to loans individually evaluated for impairment

Ending ALLL related to purchased credit-impaired loans

Recorded Investment:

Collectively evaluated for impairment

Individually evaluated for impairment

Purchased credit-impaired

Ratio of allowance for loan losses to total loans

Allowance for loan losses to non-accrual loans

NM - Not Meaningful

Allowance for Loan Losses and Recorded Investment In Loans

(dollars in thousands)

Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Other residential

Installment and other consumer

December 31, 2018

Ending ALLL related to loans collectively evaluated for impairment

Ending ALLL related to loans individually evaluated for impairment

Ending ALLL related to purchased credit-impaired loans

Loans outstanding:

Collectively evaluated for impairment

Individually evaluated for impairment

Purchased credit-impaired

Ratio of allowance for loan losses to total loans

Allowance for loan losses to non-accrual loans

NM - Not Meaningful

Purchased Credit-Impaired Loans

Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable.

Management has determined certain loans purchased in our three bank acquisitions to be PCI loans based on credit indicators such as non-accrual status, past due status, loan risk grade, loan-to-value ratio, etc.

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

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

December 31, 2019

December 31, 2018

(in thousands)

Unpaid Principal Balance

Carrying Value

Unpaid Principal Balance

Carrying Value

Commercial and industrial

Commercial real estate, owner occupied

Commercial real estate, investor

Total purchased credit-impaired loans

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

Accretable Yield

(in thousands)

December 31, 2019

December 31, 2018

Balance at beginning of period

Balance at end of period

Year ended December 31, 2018

Beginning balance $ 3,654 $ 2,294 $ 6,475 $ 681 $ 1,031 $ 536 $ 378 $ 718 $ 15,767

Provision (reversal) - incurred loss method ( 1,232 ) 113 1,228 75 ( 116 ) 264 ( 108 ) ( 224 ) —

(Charge-offs) ( 3 ) — — — — — ( 2 ) — ( 5 )

Recoveries 17 — — — — — 42 — 59

Ending balance $ 2,436 $ 2,407 $ 7,703 $ 756 $ 915 $ 800 $ 310 $ 494 $ 15,821

We adopted the CECL accounting standard on December 31, 2020, which was 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 nine months of 2020, we applied the incurred loss method in determining the allowance for credit losses on loans ("ACL") and recorded a $ 5.5 million provision for credit losses.

Upon adoption of the CECL standard, we increased the ACL by $ 748 thousand, which represented the difference between allowances calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020.

Refer to Note 1, Summary of Significant Accounting Policies, for additional information on the adoption of CECL.

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 $ 1,133.4 million and $ 1,027.4 million at December 31, 2019 and 2018 , respectively.

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 $ 1.165 billion and $ 1.133 billion at December 31, 2020 and 2019, respectively.

In addition, we pledge eligible TIC loans, which totaled $ 113.6 million and $ 115.7 million at December 31, 2020 and 2019, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB").

Also, see Note 7, Borrowings.

For additional information , see Note 7, Borrowings.

Related Party Loans

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Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features.

The following table shows changes in net loans to related parties for each of the two years ended December 31, 2019 and 2018 :

The following table shows changes in net loans to related parties for each of the three years ended December 31, 2020, 2019 and 2018.

(in thousands) 2020 2019 2018

Balance at beginning of year $ 8,333 $ 10,635 $ 11,852

Additions — — 863

Repayments ( 1,910 ) ( 2,320 ) ( 2,080 )

Reclassified due to a change in borrower status — 18 —

2 unchanged sentences

Bank Premises and Equipment

A summary of Bank premises and equipment at December 31 follows:

A summary of Bank premises and equipment follows:

(in thousands) 2020 2019

1 unchanged sentence

Furniture and equipment 11,324 11,156

Subtotal 25,750 26,443

Accumulated depreciation and amortization ( 20,831 ) ( 20,373 )

Bank premises and equipment, net $ 4,919 $ 6,070

The amount of depreciation and amortization totaled $ 2.2 million and $ 2.1 million the years ended December 31, 2019 and 2018 , respectively.

The amount of depreciation and amortization totaled $ 2.1 million, $ 2.2 million and $ 2.1 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Bank Owned Life Insurance

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The cash surrender value includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees.

Income of $ 1.2 million and $ 913 thousand was recognized on these life insurance policies in 2019 and 2018 , respectively.

Income of $ 973 thousand, $ 1.2 million and $ 913 thousand was recognized on these life insurance policies in 2020, 2019 and 2018, respectively.

We regularly monitor the financial information and credit ratings of our insurance carriers to ensure that they are credit worthy and comply with our policy.

A stratification of time deposits at December 31, 2019 and 2018 is presented in the following table:

A stratification of time deposits is presented in the following table:

(in thousands) 2020 2019

December 31, 2019

December 31, 2018

Time deposits of less than $100 thousand $ 28,016 $ 29,931

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Total time deposits $ 97,433 $ 97,810

Interest on time deposits was $ 595 thousand and $ 542 thousand in 2019 and 2018 , respectively.

Interest on time deposits was $ 554 thousand, $ 595 thousand and $ 542 thousand in 2020, 2019 and 2018, respectively.

Scheduled maturities of time deposits at December 31, 2020 are presented as follows:

(in thousands)

Scheduled maturities of time deposits

(in thousands) 2021 2022 2023 2024 2025 Thereafter Total

Scheduled time deposit maturities $ 71,852 $ 9,552 $ 6,382 $ 4,045 $ 5,602 $ — $ 97,433

As of December 31, 2020, $ 131.1 million in securities were pledged as collateral for our local agency deposits.

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We consider the reciprocal deposits to be in-market deposits as distinguished from traditional out-of-market brokered deposits.

The following table shows the composition of our network deposits for 2019 and 2018 .

(in thousands)

December 31, 2019

December 31, 2018

The following table shows the composition of our network deposits at December 31, 2020 and 2019.

(in thousands) December 31, 2020 December 31, 2019

CDARS $ 7,622 $ 2,434 $ 5,011 $ 7,453

ICS — 110,929 56,681 27,220

DDM 30,544 60,000 41,636 —

Total network deposits $ 38,166 $ 173,363 $ 103,328 $ 34,673

1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet.

The aggregate amount of deposit overdrafts that have been reclassified as loan balances was $ 219 thousand and $ 155 thousand at December 31, 2020 and 2019, respectively.

Collectability of these overdrafts is subject to the same credit review process as other loans.

The Bank accepts deposits from shareholders, directors and employees in the normal course of business, and the terms are comparable to those with non-affiliated parties.

The total deposits from directors and their businesses, and executive officers were $ 39.6 million and $ 33.3 million at December 31, 2019 and 2018 , respectively.

The Bank accepts deposits from shareholders, board of directors and employees in the normal course of business, and the terms are comparable to those with non-affiliated parties.

The total deposits from board directors and their businesses, and executive officers were $ 28.1 million and $ 39.6 million at December 31, 2020 and 2019, respectively.

Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 92.0 million at December 31, 2019 and 2018 .

Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 135.0 million and $ 92.0 million at December 31, 2020 and 2019, respectively.

In general, interest rates on these lines approximate the federal funds target rate.

We had no overnight borrowings under these credit facilities at December 31, 2019 or December 31, 2018 .

We had no overnight borrowings under these credit facilities at December 31, 2020 and 2019.

Federal Home Loan Bank Borrowings – As of December 31, 2020 and 2019, the Bank had lines of credit with the FHLB totaling $ 642.5 million and $ 648.0 million, respectively, based on eligible collateral of certain loans.

There were no

FHLB overnight borrowings at December 31, 2019 .

FHLB overnight borrowings were $ 7.0 million at a rate of 2.56 % on December 31, 2018 .

There were no FHLB overnight borrowings at December 31, 2020 and 2019.

Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans.

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The trust preferred securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended.

On October 7, 2018, Bancorp redeemed in full the subordinated debenture due to NorCal Community Bancorp Trust I, resulting in $ 916 thousand of accelerated accretion.

On October 7, 2018, Bancorp redeemed in full the

subordinated debenture due to NorCal Community Bancorp Trust I, resulting in $ 916 thousand of accelerated accretion.

The Trust II subordinated debenture was recorded at fair value totaling $ 2.14 million at acquisition date with a contractual balance of $ 4.12 million.

The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the life of the debenture.

Accretion on the subordinated debentures totaled $ 68 thousand (Trust II) and $ 1.0 million (Trusts I and II) for the years ended December 31, 2019 and 2018 , respectively.

Bancorp has the option to defer payment of 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.

Accretion on the subordinated debentures totaled $ 69 thousand, $ 68 thousand (Trust II) and $ 1.0 million (Trusts I and II) for the years ended December 31, 2020, 2019 and 2018, respectively.

Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $ 4.0 million issued by Trust II, 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 3.30 % as of December 31, 2019) is redeemable in whole or in part on any interest payment date.

The subordinated debenture due to Trust II on March 15, 2036 with interest payable quarterly (repricing quarterly, based on 3-month LIBOR plus 1.40 %, or 1.62 % as of December 31, 2020) is redeemable in whole or in part on any interest payment date.

On March 15, 2021, we early redeemed the $ 2.8 million subordinated debenture due to Trust II, which carried an average interest rate of 5.68 % in 2020.

The redemption consisted of $ 4.1 million principal balance, accrued interest, and $ 1.3 million in accelerated purchase discount accretion.

Other Obligations - The Bank leases certain equipment under finance leases, which are included in borrowings and other obligations in the consolidated statements of condition.

See Note 12, Commitments and Contingencies, for additional information.

Borrowings and other obligations at December 31, 2019 and 2018 are summarized as follows:

(dollars in thousands)

Carrying Value

Average Balance

Carrying Value

Average Balance

Refer to Note 12, Commitments and Contingencies, for additional information.

Borrowings and other obligations at and for the years ended December 31, 2020, 2019 and 2018 are summarized as follows:

2020 2019 2018

(dollars in thousands) Carrying Value Average Balance Average Rate Carrying Value Average Balance Average Rate Carrying Value Average Balance Average Rate

FHLB overnight borrowings $ — $ 42 0.75 % $ — $ 2,656 2.55 % $ 7,000 $ 105 2.03 %

Other obligations

Other obligations (finance leases) $ 58 $ 132 2.62 % $ 212 $ 279 2.85 % $ — $ — — %

Subordinated debentures 1

1 Subordinated debentures average rate in 2018 included the impact of the $ 916 thousand accelerated accretion due to early redemption of subordinated debentures due to NorCal Community Bancorp Trust I.

$ 2,777 $ 2,741 5.68 % $ 2,708 $ 2,673 8.44 %

$ 2,640 $ 5,025 26.29 %

1 Subordinated debentures average rate in 2018 included the impact of the $ 916 thousand accelerated accretion due to early redemption of the subordinated debenture due to NorCal Community Bancorp Trust I.

Stockholders' Equity and Stock Plans

2 unchanged sentences

Share-Based Awards

On May 11, 2010, our shareholders approved the 2010 Director Stock Plan to pay director fees in shares of Bancorp common stock up to 300,000 shares.

In addition to cash compensation, we issued 5,544 and 5,470 shares of common stock under the 2010 Director Stock Plan to directors in 2019 and 2018 , respectively.

As of December 31, 2019 , 208,263 shares were available for future grants through the 2010 Director Stock Plan's May 12, 2020 expiration date.

On September 27, 2017, the Board of Directors adopted the 2017 Employee Stock Purchase Plan, effective July 1, 2017.

Under the plan, our employees may purchase up to 385,370 of Bancorp's common shares through payroll deductions of between one percent and fifteen percent of pay in each pay period.

Shares are purchased quarterly at

a five percent discount from the closing market price on the last day of the quarter.

As of December 31, 2019 , 382,515 shares were available for future purchases under the plan.

On March 17, 2017, the Board of Directors approved the 2017 Equity Plan, which was affirmed by Bancorp's shareholders on May 16, 2017 and replaced the 2007 Equity Plan.

The Compensation Committee of the Board of Directors has the discretion to determine which employees, advisors and non-employee directors will receive an award, the timing of awards, the vesting schedule for each award, the type of award to be granted, the number of shares of Bancorp stock to be subject to each option and restricted stock award, and any other terms and conditions.

On May 12, 2020, our shareholders approved the 2020 Director Stock Plan, replacing and superseding the 2010 Director Stock Plan (collectively "the Plan").

The Plan provides for the payment of director fees in common shares of Bancorp's common stock and a way for directors to purchase shares at fair market value.

Common shares issued under the Plan shall not exceed an aggregate of 250,000 shares, which includes 205,253 shares rolled over from the 2010 Plan.

During 2020, 2019 and 2018 we issued 5,723 , 5,544 and 5,470 shares of common stock, respectively, for director fees.

As of December 31, 2020, 246,141 shares were available for future director fees and purchases.

The 2017 Employee Stock Purchase Plan ("ESPP") gives our employees an opportunity to purchase Bancorp's common shares through payroll deductions of between one percent and fifteen percent of their pay in each pay period.

Shares are purchased quarterly at a five percent discount from the closing market price on the last day of the quarter.

As of December 31, 2020 , 380,123 shares were available for future purchases under the ESPP.

Under the 2017 Equity Plan, the Compensation Committee of the Board of Directors has the discretion to determine, among other things, which employees, advisors and non-employee directors will receive share-based awards, the number and timing of awards, the vesting schedule for each award, and the type of award to be

As of December 31, 2020, there were 940,918 shares available for future grants to employees, advisors and non-employee directors.

Options are issued at an exercise price equal to the fair value of the stock at the date of grant.

Options and restricted stock awarded to officers and employees during 2007 through 2014 vest 20 % on each anniversary of the grant date for five years and expire ten years from the grant date.

In general, option awards granted after 2014 for employees generally vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date.

Options granted to non-employee directors prior to 2016 vest 20 % immediately and 20 % on each anniversary of the grant date for four years and expire seven years from the grant date.

Options granted to non-employee directors in 2016 vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date.

Options granted to non-employee directors after 2016 vest immediately and expire ten years from the grant date.

Options granted to officers and employees generally vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date.

Options granted to non-employee directors vest immediately and expire ten years from the grant date.

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 2019, we withheld 7,795 shares totaling $ 326 thousand at a weighted-average price of $ 41.84 for cashless exercises.

During 2018, we withheld 46,794 shares totaling $ 1.7 million at a weighted-average price of $ 36.28 for cashless exercises.

Shares withheld under net settlement arrangements are available for future grants.

Performance-based stock awards (restricted stock) are issued to a selected group of employees.

The table below depicts the total number of shares, amount, and weighted average price withheld for cashless exercises in each of the respective years.

2020 2019 2018

Number of shares withheld 10,001 7,795 46,794

Total amount withheld (in thousands) $ 398 $ 326 $ 1,698

Weighted-average price $ 39.83 $ 41.84 $ 36.28

Performance-based stock awards (restricted stock) are issued to a selected group of employees under the 2017 Equity Plan.

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.

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The intrinsic value of options outstanding and exercisable is calculated as the number of in-the-money options times the difference between the market price of our stock and the exercise prices of the in-the-money options as of each year-end period presented.

Number of Shares

Weighted Average Exercise Price

Aggregate Intrinsic Value

(in thousands)

Weighted Average Grant-Date Fair Value

Weighted Average Remaining Contractual Term

Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value

(in thousands) Weighted Average Grant-Date Fair Value Weighted Average Remaining Contractual Term

Options outstanding at December 31, 2017 517,936 $ 20.42 $ 7,075 5.34

Granted 74,096 33.97 $ 7.17

Cancelled, expired or forfeited ( 9,140 ) 28.25

Exercised ( 157,192 ) 13.93 3,462

Options outstanding at December 31, 2018 425,700 25.01 6,910 5.85

1 unchanged sentence

Options outstanding at December 31, 2018 425,700 25.01 6,910 5.85

Granted 53,370 44.01 9.37

Cancelled, expired or forfeited ( 13,580 ) 38.88

Exercised ( 48,108 ) 16.11 1,247

Options outstanding at December 31, 2019 417,382 28.01 7,112 5.50

Exercisable (vested) at December 31, 2019 333,870 25.34 6,581 4.76

Options outstanding at December 31, 2019 417,382 28.01 7,112 5.50

Granted 44,632 39.18 6.84

Cancelled, expired or forfeited ( 17,222 ) 40.31

Exercised ( 73,208 ) 22.26 1,370

Options outstanding at December 31, 2020 371,584 29.92 2,262 5.12

Exercisable (vested) at December 31, 2020 315,377 28.05 2,254 4.53

The following table summarizes non-vested restricted stock awards and changes during the years ended December 31, 2020, 2019, and 2018.

Number of Shares

Weighted Average Grant-Date Fair Value

Number of Shares Weighted Average Grant-Date Fair Value

Non-vested awards at December 31, 2017 91,216 $ 28.16

Granted 37,040 33.58

Vested ( 28,812 ) 26.06

Cancelled or forfeited ( 12,056 ) 27.32

Non-vested awards at December 31, 2018 87,388 31.26

Granted 29,110 44.45

Vested ( 28,099 ) 27.88

Cancelled or forfeited ( 18,333 ) 32.34

Non-vested awards at December 31, 2019 70,066 37.81

Granted 29,100 40.10

Vested ( 23,524 ) 36.35

Cancelled or forfeited ( 14,314 ) 37.63

Non-vested awards at December 31, 2020 61,328 39.50

A summary of the options outstanding and exercisable by price range as of December 31, 2020 is presented in the following table:

Stock Options Outstanding as of December 31, 2019

Stock Options Exercisable as of December 31, 2019

Range of Exercise Prices

Stock Options Outstanding

Remaining Contractual Life (in years)

Weighted Average Exercise Price

Stock Options Exercisable

Weighted Average Exercise Price

Stock Options Outstanding as of December 31, 2020 Stock Options Exercisable as of December 31, 2020

Range of Exercise Prices Stock Options Outstanding Remaining Contractual Life (in years) Weighted Average Exercise Price Stock Options Exercisable Weighted Average Exercise Price

$ 10.01 - $ 20.00

2 unchanged sentences

138,394 3.6 $ 23.92 138,394 $ 23.92

$ 30.01 - $ 40.00

108,818 6.5 $ 33.75 97,960 $ 33.77

$ 40.01 - $ 50.00

75,410 8.4 $ 42.33 30,061 $ 42.84

371,584 315,377

We determine the fair value of stock options at the grant date using the Black-Scholes pricing model that takes into account the stock price at the grant date, exercise price, and the following assumptions (weighted-average shown).

Years ended December 31,

2020 2019 2018

Risk-free interest rate 0.91 % 2.51 % 2.60 %

2 unchanged sentences

Expected price volatility 24.43 % 22.71 % 22.47 %

The fair value of stock options as of the grant date is recorded as a 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.

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.

2 unchanged sentences

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 the restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.

Total compensation expense for stock options and restricted stock awards was $ 1.5 million and $ 1.7 million during 2019 and 2018 , respectively, and the total recognized deferred tax benefits related thereto were $ 389 thousand and $ 404 thousand , respectively.

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.

Total compensation expense for stock options and restricted stock awards was $ 1.2 million, $ 1.5 million, and $ 1.7 million during 2020, 2019, and 2018, respectively, and the total recognized deferred tax benefits related thereto were $ 341 thousand, $ 389 thousand, and $ 404 thousand, respectively.

As of December 31, 2020, there was $ 652 thousand of total unrecognized compensation expense related to non-vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 1.7 years.

The total grant-date fair value of stock options vested during the years ended December 31, 2019 and 2018 was $ 473 thousand and $ 543 thousand , respectively.

The total grant-date fair value of restricted stock awards vested during 2019 and 2018 was $ 1.2 million and $ 967 thousand , respectively.

The total grant-date fair value of stock options vested during the years ended December 31, 2020, 2019, and 2018 was $ 484 thousand, $ 473 thousand, and $ 543 thousand, respectively.

The total grant-date fair value of restricted stock awards vested was $ 1.2 million during both 2020 and 2019, and $ 967 thousand during 2018.

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.

In 2019 and 2018 , we recognized $ 145 thousand and $ 484 thousand , respectively, in excess tax benefits recorded as a reduction to income tax expense related to these types of transactions.

In 2020, 2019, and 2018 we recognized $ 120 thousand, $ 145 thousand, and $ 484 thousand, respectively, in excess tax benefits recorded as a reduction to income tax expense related to these types of transactions.

The tax benefits realized from disqualifying dispositions of incentive stock options were recognized in tax expense to the extent of the book compensation cost recorded.

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This cash, combined with the $ 30.6 million dividends available to be distributed from the Bank, is considered adequate to cover Bancorp's estimated operational needs, cash dividends to shareholders in 2021, and the Share Repurchase Program discussed below.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We adopted ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $ 638 thousand from AOCI to retained earnings.

This amount represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017.

Preferred Stock and Shareholder Rights Plan

1 unchanged sentence

The Rights Agreement, which expires on July 23, 2022, is designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders.

The Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10 % of the outstanding common shares.

Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10 % of the outstanding common shares.

Currently, each right entitles the registered holder to purchase from Bancorp one two-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, of Bancorp at an initial price of $90 per one one-hundredth of a preferred share, subject to adjustment upon the occurrence of certain events.

3 unchanged sentences

The Board of Directors has no present plans or understandings for the issuance of any common or preferred stock in connection with the Rights Agreement.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We early adopted ASU No.

2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $ 638 thousand from AOCI to retained earnings.

This amount represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017.

For more information on ASU No.

2018-02, refer to Note 1, Summary of Significant Accounting Policies.

Share Repurchase Program

1 unchanged sentence

Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.

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.

After expiration of this Share Repurchase Program, our new Share Repurchase Program began on March 1, 2020.

The 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 new share repurchase program, which began on March 1, 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.

Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions.

5 unchanged sentences

The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

During 2019 and 2018 , Bancorp repurchased 356,000 and 171,217 shares totaling $ 15.0 million and $ 7.0 million , respectively, for a cumulative 527,217 shares totaling $ 22.0 million repurchased from May 1, 2018 through December 31, 2019 .

Shares repurchased pursuant to our common stock share repurchase programs during 2020, 2019, and 2018, were as follows.

(dollars in millions) 2020 1

2019 2018 Cumulative Totals

Total number of common shares repurchased 203,709 356,000 171,217 730,926

Total purchase price of common shares repurchased 2

$ 7.2 $ 15.0 $ 7.0 $ 29.2

1 On February 28, 2020, the 2018 Share Repurchase Program expired with approximately $ 1.5 million remaining from the $ 25.0 million authorized for repurchases.

2 Total purchase price includes commission costs.

Fair Value of Assets and Liabilities

10 unchanged sentences

(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:

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 In 1

2 unchanged sentences

Mortgage-backed securities and collateralized mortgage obligations issued by U.S.

government-sponsored agencies

SBA-backed securities

Debentures of government sponsored agencies

Obligations of state and political subdivisions

Corporate bonds

Derivative financial assets (interest rate contracts)

Derivative financial liabilities (interest rate contracts)

government-sponsored agencies $ 228,651 $ — $ 228,651 $ — OCI

SBA-backed securities $ 32,862 $ — $ 36,286 $ — OCI

Debentures of government sponsored agencies $ 20,186 $ — $ 20,186 $ — OCI

Obligations of state and political subdivisions $ 110,652 $ — $ 110,652 $ — OCI

Derivative financial liabilities (interest rate contracts) $ 1,912 $ — $ 1,912 $ — NI

December 31, 2019

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Mortgage-backed securities and collateralized mortgage obligations issued by U.S.

government-sponsored agencies

SBA-backed securities

Debentures of government sponsored agencies

Privately-issued collateralized mortgage obligations

Obligations of state and political subdivisions

Corporate bonds

Derivative financial assets (interest rate contracts)

Derivative financial liabilities (interest rate contracts)

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

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

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As of December 31, 2020 and 2019, there were no Level 1 or Level 3 securities.

Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of an other-than-temporary impairment, and we did not record any write-downs during 2019 or 2018 .

Held-to-maturity securities may be written down to fair value as a result of an other-than-temporary impairment, and we did not record any write-downs during 2020 or 2019.

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.

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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.

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.

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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.

Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as BOLI and non-maturity deposit liabilities.

Additionally, we held shares of FHLB stock and Visa Inc.

1 unchanged sentence

See further discussion on values within Note 2, Investment Securities , above.

December 31, 2019

December 31, 2018

(in thousands)

Carrying Amounts

Fair Value Hierarchy

Carrying Amounts

Fair Value Hierarchy

December 31, 2020 December 31, 2019

(in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy

Financial assets (recorded at amortized cost)

Cash and cash equivalents

Investment securities held-to-maturity

Interest receivable

Cash and cash equivalents $ 200,320 $ 200,320 Level 1 $ 183,388 $ 183,388 Level 1

Investment securities held-to-maturity 109,036 115,185 Level 2 137,413 139,642 Level 2

Loans, net 2,065,682 2,089,192 Level 3 1,826,609 1,839,666 Level 3

Interest receivable 10,922 10,922 Level 2 7,732 7,732 Level 2

Financial liabilities (recorded at amortized cost)

Time deposits

Federal Home Loan Bank borrowing

Subordinated debentures

Interest payable

Time deposits 97,433 97,769 Level 2 97,810 97,859 Level 2

Subordinated debenture 2,777 3,115 Level 3 2,708 3,182 Level 3

Interest payable 97 97 Level 2 134 134 Level 2

Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value.

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Benefit Plans

In 2003, we established a Deferred Compensation Plan that allows certain key Management personnel designated by the Board of Directors of the Bank to defer up to 80 % of their salary and 100 % of their annual bonus.

The plan was amended in 2007 in order to comply with changes to Internal Revenue Code Section 409A.

Under the amended plan, amounts deferred earn interest that is equal to the prime rate as published in the Wall Street Journal, on the first business day of the year, which was 5.50 % on January 1, 2019 and 4.50 % on January 1, 2018.

Deferred Compensation Plan

We established a Deferred Compensation Plan which allows certain key management personnel designated by the Board of Directors of the Bank to defer up to 80 % of their salary and 100 % of their annual bonus.

Amounts deferred earn interest that is equal to the prime rate as published in the Wall Street Journal, on the first business day of the year, which was 4.75 % on January 1, 2020 and 5.50 % on January 1, 2019.

Our deferred compensation obligation totaled $ 4.7 million and $ 4.4 million at December 31, 2020 and 2019, respectively, and is included in interest payable and other liabilities.

Our 401(k) Defined Contribution Plan (the “401(k) Plan”) commenced in May 1990 and is available to all regular employees at least eighteen years of age who complete ninety days of service, and enter the plan during one of the

four open enrollment dates (January 1, April 1, July 1, and October 1) of each year.

A similar Deferred Director Fee Plan, which allows members of the Board of Directors to defer the cash portion of their director compensation, went into effect on January 1, 2021, and the first deferral of their fees will be in July 2021.

401(k) Defined Contribution Plan

Our 401(k) Defined Contribution Plan, which includes a Roth 401(k) option (the “401(k) Plan”), is available to all regular employees at least eighteen years of age who complete ninety days of service, and enter the plan during one of the four open enrollment dates (January 1, April 1, July 1, and October 1) of each year.

Under the 401(k) Plan, employees can defer between 1 % and 50 % of their eligible compensation, up to the maximum amount allowed by the Internal Revenue Code.

Contributions to the 401(k) Plan for the employer match vest at a rate of 20 % per year over five years , per plan provisions.

Starting 2017, the Bank increased the employer match to 70 % of each participant's contribution, with a maximum of $ 5 thousand of matching contribution per participant per year.

Employer contributions totaled $ 874 thousand and $ 851 thousand for the years ended December 31, 2019 and 2018 , respectively.

In 1999, the 401(k) Plan was amended to include an employee stock ownership component and was renamed the Bank of Marin Employee Stock Ownership and Savings Plan (the “Plan”).

Under the terms of the Plan, as amended, the Board of Directors determines a specific portion of the Bank's profits to be contributed to the employee stock ownership each year either in common stock or in cash for the purchase of Bancorp stock to be allocated to all eligible employees based on a percentage of their salaries, regardless of whether an employee is participating in the 401(k) plan or not.

In January 2010, the Bank of Marin Employee Stock Ownership and Savings Plan was split into two plans:

Bank of Marin 401(k) Plan and Bank of Marin Employee Stock Ownership Plan ("ESOP").

The same eligibility criteria apply under the ESOP, while employees' contributions are not permitted.

The Bank provides employer-match of 70 % of each participant's contribution, with a maximum of $ 5 thousand of matching contribution per participant per year.

Employer matching contributions to the 401(k) Plan vest at a rate of 20 % per year over five years , per plan provisions.

Employer contributions totaled $ 929 thousand, $ 874 thousand and $ 851 thousand for the years ended December 31, 2020, 2019 and 2018, respectively and are recorded as part of salaries and benefits expense.

Employee Stock Ownership Plan

Our Employee Stock Ownership Plan (the “Plan”) is also available to all employees under the same eligibility criteria of the 401(k) Plan, while employee contribution is not permitted.

The Board of Directors determines a specific portion of the Bank's profits to be contributed to the employee stock ownership each year either in common stock or in cash for the purchase of Bancorp stock to be allocated to all eligible employees based on a percentage of their salaries, regardless of whether an employee is participating in the 401(k) plan or not.

For all participants, employer contributions vest over a five year service period, per plan provisions.

After five years of service, all employer contributions vest immediately.

The Bank of Marin 401(k) Plan was amended in early 2016 to incorporate recent changes in the pension laws, and was amended again in November 2016 to include a Roth 401(k) option.

Starting 2017, Bancorp issued shares of common stock and contributed them to the ESOP and recognized $ 1.2 million in expense in both 2019 and 2018 , based on the quoted market price on the date of contribution.

Bancorp issued shares of common stock, contributed them to the ESOP and recognized expenses of $ 1.3 million in 2020 and $ 1.2 million in both 2019 and 2018, based on the quoted market price on the date of contribution.

Cash dividends paid on Bancorp stock held by the ESOP are used to purchase additional shares in the open market.

All shares of Bancorp stock held by the ESOP are included in the calculations of basic and diluted earnings per share.

The employer contributions to the ESOP and the 401(k) Plan are included in salaries and benefits expense.

On January 1, 2011, we established a Salary Continuation Plan for a select group of Executive Management, who, upon retirement, will receive twenty-five percent of their estimated salary at retirement as salary continuation benefit payments that are fixed and will be made between seven to fifteen years , depending on the executives' service period at the Bank.

The employer contributions to the ESOP are included in salaries and benefits expense.

Salary Continuation Plan

A Salary Continuation Plan was established for a select group of executive management, who, upon retirement, will receive twenty-five percent of their estimated salary at retirement as salary continuation benefit payments that are fixed and will be made between seven to fifteen years , depending on the executives' service period at the Bank.

Each participant will need to participate in this plan for five years before vesting begins.

3 unchanged sentences

At December 31, 2020 and 2019, respectively, our liability under the Salary Continuation Plan was $ 3.2 million and $ 3.0 million recorded in interest payable and other liabilities.

The current and deferred components of the income tax provision for each of the two years ended December 31 are as follows:

The current and deferred components of the income tax provision for each of the three years ended December 31 are as follows:

(in thousands) 2020 2019 2018

Current tax provision

Total current

Federal $ 7,108 $ 7,838 $ 7,289

State 4,895 5,183 4,722

Total current tax provision 12,003 13,021 12,011

Deferred tax benefit

Total deferred

Federal ( 964 ) ( 907 ) ( 898 )

State ( 694 ) ( 461 ) ( 318 )

Total deferred tax provision ( 1,658 ) ( 1,368 ) ( 1,216 )

Total income tax provision $ 10,345 $ 11,653 $ 10,795

2 unchanged sentences

Deferred tax assets:

Allowance for loan losses and off-balance sheet credit commitments

Operating and finance lease liabilities $ 8,018 $ 3,792

Allowance for credit losses on loans and unfunded loan commitments 7,584 5,252

Deferred compensation plan and salary continuation plan 2,343 2,188

Net operating loss carryforwards 1,660 1,914

Net unrealized losses on securities available-for-sale

Accrued but unpaid expenses 1,103 1,067

3 unchanged sentences

Fair value adjustment on acquired loans 254 299

Deferred rent and lease incentives

Interest received on non-accrual loans 23 12

Other 100 154

Total gross deferred tax assets 23,395 16,878

4 unchanged sentences

Core deposit intangible assets ( 1,133 ) ( 1,385 )

Unaccreted discount on subordinated debentures

Unaccreted discount on subordinated debenture ( 398 ) ( 418 )

Accretion on investment securities ( 33 ) ( 70 )

Other ( 132 ) ( 172 )

Total gross deferred tax liabilities ( 16,467 ) ( 8,716 )

5 unchanged sentences

The effective tax rate for 2020, 2019 and 2018 differs from the current federal statutory income tax rate as follows:

2020 2019 2018

Federal statutory income tax rate 21.0 % 21.0 % 21.0 %

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Stock-based compensation and excess tax benefits ( 0.2 ) % ( 0.1 ) % ( 0.6 ) %

Other — % ( 0.9 ) % ( 0.2 ) %

Effective Tax Rate 25.5 % 25.4 % 24.9 %

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Commitments and Contingencies

We lease premises under long-term non-cancelable operating leases with remaining terms of 5 months to 12 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.

We lease premises under long-term non-cancelable operating leases with remaining terms of approximately 6 months to 12 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.

1 unchanged sentence

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 December 31, 2019 .

(in thousands)

December 31, 2019

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of December 31, 2020 and 2019.

(in thousands) December 31, 2020 December 31, 2019

Operating leases:

8 unchanged sentences

2 Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the year ended December 31, 2019 .

The following table shows supplemental disclosures of noncash investing and financing activities for the years ended December 31, 2020 and 2019.

(in thousands) 2020 2019

3 unchanged sentences

There were no lease-related noncash investing and financing activities for the year ended December 31, 2018.

The following table shows components of operating and finance lease cost for the year ended December 31, 2019 .

The following table shows components of operating and finance lease cost for the years ended December 31, 2020 and 2019.

(in thousands) 2020 2019

Operating lease cost 1

$ 4,498 $ 4,144

Variable lease cost 5 —

Total operating lease cost $ 4,503 $ 4,144

Finance lease cost:

6 unchanged sentences

3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

Operating lease rent expense totaled $ 4.6 million for the year ended December 31, 2018 .

Operating lease rent expense totaled $ 4.6 million for the year ended December 31, 2018, as disclosed prior to the adoption of ASC 842 in 2019.

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 December 31, 2020.

Total minimum lease payments do not include obligations of approximately $ 13.6 million for operating lease modifications related to our existing headquarter offices and an operating lease agreement for a retail branch location that commenced subsequent to December 31, 2019 .

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)

December 31, 2019

Operating Leases

Finance Leases

(in thousands) December 31, 2020

Year Operating Leases Finance Leases

2021 $ 4,612 $ 42

2022 4,424 13

Thereafter 9,869 —

Total minimum lease payments 29,088 59

5 unchanged sentences

Bancorp may be party to legal actions that arise from time to time in the normal course of business.

Bancorp's 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.

Bancorp's 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.

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In 2012, Visa had reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S.

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 $ 1.6 billion as of December 31, 2019, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The escrow balance of $ 894 thousand as of December 31, 2020, 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 2, Investment Securities.

The final conversion rate might change depending on the final settlement payments, and the full effect on member banks is still uncertain.

Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as

contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement.

The final conversion rate 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 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.

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government and GSEs, which accounted for $ 389.1 million, or 78 % of our total investment portfolio at December 31, 2020 and $ 497.4 million, or 87 % at December 31, 2019.

Our largest investment security issued by a non-GSE issuer accounted for approximately 1 % of our total investment portfolio at December 31, 2019.

Our largest investment security issued by a non-GSE issuer accounted for approximately 3 % of our total investment portfolio at December 31, 2020, and 1 % at December 31, 2019.

We also manage our credit exposure related to our loan portfolio to avoid the risk of undue concentration of credits in a particular industry by reducing significant exposure to highly leveraged transactions or to any individual customer or counterparty, and by obtaining collateral as appropriate.

No individual borrower accounts for more than 3 % of loans held in the portfolio.

The largest loan concentration group by industry of the borrowers is real estate, which accounts for 83 % of our loan portfolio at both December 31, 2019 and 2018 .

The largest loan concentration group by industry of the borrowers is real estate, which accounts for 76 % and 83 % of our loan portfolio at December 31, 2020 and 2019, respectively.

Derivative Financial Instruments and Hedging Activities

1 unchanged sentence

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.

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.

2 unchanged sentences

Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of December 31, 2019 , we had five interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, August 2037 and October 2037.

As of December 31, 2020, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032 and October 2037.

In December 2020, one interest rate swap, scheduled to mature in August 2037, was terminated as the hedged loan was paid off.

All of our derivatives are accounted for as fair value hedges.

3 unchanged sentences

Information on our derivatives follows:

Asset derivatives

Liability derivatives

(in thousands)

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Asset derivatives Liability derivatives

(in thousands) December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Fair value hedges:

1 unchanged sentence

Interest rate contracts fair value 1

1 See Note 9, Fair Value of Assets and Liabilities for valuation methodology.

$ — $ — $ 1,912 $ 1,178

1 Refer to Note 9, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount 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 December 31, 2020 and 2019:

Carrying Amounts of Hedged Assets

Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans

(in thousands)

December 31, 2019

December 31, 2018

December 31, 2019

December 31, 2018

Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans

(in thousands) December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019

Loans $ 15,745 $ 17,900 $ 1,753 $ 944

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

2 unchanged sentences

Interest and fees on loans 1

$ 84,674 $ 84,331 $ 79,527

(Decrease) increase in value of designated interest rate swaps due to LIBOR interest rate movements $ ( 734 ) $ ( 964 ) $ 452

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1 Represents the income line item in the statements of comprehensive income in which the effects of fair value hedges are recorded.

2 Includes hedge ineffectiveness loss of $ 39 thousand and gain of $ 13 thousand for the years ended December 31, 2019 , and 2018 , respectively.

Changes in value of swaps were included in the assessment of hedge effectiveness.

Hedge ineffectiveness is the measure of the extent to which the change in the fair value of the hedging instruments does not exactly offset the change in the fair value of the hedged items from period to period.

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

2 unchanged sentences

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 Not Offset in the Statements of Condition

Gross Amounts

Offset in the

of Assets Presented

of Recognized

Statements of

in the Statements

Cash Collateral

(in thousands)

of Condition 1

December 31, 2019

Derivatives by Counterparty:

Counterparty A

December 31, 2018

Derivatives by Counterparty:

Counterparty A

1 Amounts exclude accrued interest totaling less than $ 1 thousand at December 31, 2018 .

Offsetting of Financial Liabilities and Derivative Liabilities

Gross Amounts Not Offset in the Statements of Condition

Gross Amounts

Net Amounts of

Gross Amounts

Offset in the

Liabilities Presented

of Recognized

Statements of

in the Statements of

Cash Collateral

(in thousands)

Liabilities 2

Gross Amounts Net Amounts of

Gross Amounts Offset in the Liabilities Presented

of Recognized Statements of in the Statements of Financial Cash Collateral

(in thousands) Liabilities 1

Condition Condition 1

Instruments Pledged Net Amount

December 31, 2020

4 unchanged sentences

Counterparty A $ 1,178 $ — $ 1,178 $ — ( 1,178 ) $ —

2 Amounts exclude accrued interest totaling $ 6 thousand and $ 3 thousand at December 31, 2019 and 2018 , respectively.

1 Amounts exclude accrued interest on swaps.

Regulatory Matters

7 unchanged sentences

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 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 is no longer subject to separate minimum capital requirements.

However, we disclose comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements.

As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, 2020 and 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 December 31, 2020 and 2019 are presented in the following tables.

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

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

Capital Ratios for Bancorp

(dollars in thousands)

Adequately Capitalized Threshold 1

Actual Ratio Adequately Capitalized Threshold 1

Ratio to be a Well Capitalized Bank Holding Company

December 31, 2019

December 31, 2020 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 339,544 16.03 % ≥ $ 222,393 ≥ 10.50 % ≥ $ 211,802 ≥ 10.00 %

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Capital Ratios for the Bank (dollars in thousands)

Adequately Capitalized Threshold 1

Actual Ratio Adequately Capitalized Threshold 1

Ratio to be Well Capitalized under Prompt Corrective Action Provisions

December 31, 2019

December 31, 2020 Amount Ratio Amount Ratio Amount Ratio

Total Capital (to risk-weighted assets) $ 334,686 15.80 % ≥ $ 222,391 ≥ 10.50 % ≥ $ 211,801 ≥ 10.00 %

18 unchanged sentences

Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

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

(in thousands)

December 31, 2019

December 31, 2018

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

(in thousands) December 31, 2020 December 31, 2019

Commercial lines of credit $ 297,898 $ 287,533

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Standby letters of credit 2,657 1,964

Total commitments and standby letters of credit

We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of the utilization of these commitments according to our historical experience on different types of commitments and expected loss.

The allowance for losses on off-balance sheet commitments totaled $ 1.1 million as of December 31, 2019 and $ 958 thousand as of December 31, 2018 , which is recorded in interest payable and other liabilities in the consolidated statements of condition.

Approximately 33 % of the commitments expire in 2020, approximately 55 % expire between 2021 and 2027 and approximately 12 % expire thereafter.

Total unfunded loan commitments and standby letters of credit $ 604,442 $ 529,132

As of December 31, 2020, approximately 35 % of the commitments expire in 2021, 54 % expire between 2022 and 2028 and 11 % expire thereafter.

We adopted the CECL accounting standard on December 31, 2020, which was previously postponed under the optional accounting relief provisions of the CARES Act (refer to Note 1, Summary of Significant Accounting Policies and Note 3, Loans and Allowance for Credit Losses for additional information).

During the first nine months of 2020, we increased the allowance for credit losses on unfunded loan commitments under the incurred loss method ("previous GAAP") by $ 610 thousand.

Upon adoption of the CECL standard, we increased the allowance for unfunded loan commitments by $ 1.1 million, which represented the difference between the allowance calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30, 2020.

The $ 1.1 million increase in the allowance for unfunded loan commitments included approximately $ 550 thousand related to a $ 36.9 million increase in available commitments during the fourth quarter of 2020.

The remaining increase was due to changes in credit loss assumptions between the CECL and incurred loss methods.

The prior period allowance is reported in accordance with previous GAAP and was $ 1.1 million as of December 31, 2019.

Condensed Bank of Marin Bancorp Parent Only Financial Statements

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Investment in bank subsidiary 356,172 330,053

Other assets 336 332

Total assets $ 361,837 $ 339,924

Liabilities and Stockholders' Equity

Subordinated debentures

Subordinated debenture $ 2,777 $ 2,708

Accrued expenses payable 74 71

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Miscellaneous Income 3 5 9

Total income 16,203 17,605 36,709

Interest expense 158 229 1,339

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Income before equity in undistributed net income of subsidiary

15,157 16,457 34,865

Earnings of bank subsidiary greater (less) than dividends received from bank subsidiary

15,085 17,784 ( 2,243 )

Net income $ 30,242 $ 34,241 $ 32,622

CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS

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Cash Flows from Operating Activities:

Net income $ 30,242 $ 34,241 $ 32,622

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Earnings of bank subsidiary (greater) less than dividends received from bank subsidiary ( 15,085 ) ( 17,784 ) 2,243

Net change in operating assets and liabilities:

Accretion of discount on subordinated debentures 69 68 1,025

Noncash director compensation expense 31 30 23

Net changes in:

Other assets ( 4 ) — 36

Other liabilities 59 80 ( 86 )

Noncash director compensation expense - common stock

Net cash provided by operating activities

15,312 16,635 35,863

Cash Flows from Investing Activities:

Capital contribution to subsidiary

Capital contribution to bank subsidiary ( 1,464 ) ( 747 ) ( 667 )

Net cash used in investing activities

( 1,464 ) ( 747 ) ( 667 )

Cash Flows from Financing Activities:

Proceeds from stock options exercised and stock issued under employee and director stock purchase plans and ESPP

Repayment of subordinate debenture including execution costs

Payment of tax withholdings for stock options exercised

Proceeds from stock options exercised and stock issued under employee and director stock purchase plans 1,419 747 613

Repayment of subordinated debenture including execution costs — — ( 4,137 )

Payment of tax withholdings for vesting of restricted stock ( 73 ) ( 220 ) ( 45 )

Dividends paid on common stock ( 12,506 ) ( 10,958 ) ( 8,860 )

Stock repurchased, net of commissions ( 6,898 ) ( 15,062 ) ( 6,869 )

Net cash used by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Net cash used in financing activities ( 18,058 ) ( 25,493 ) ( 19,298 )

Net (decrease) increase in cash and cash equivalents ( 4,210 ) ( 9,605 ) 15,898

Cash and cash equivalents at beginning of year 9,539 19,144 3,246

Cash and cash equivalents at end of year $ 5,329 $ 9,539 $ 19,144

Supplemental schedule of non-cash investing and financing activities:

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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-K

Item 8. Financial Statements and Supplementary Data