What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2021-11-09 compared with 2021-08-05 · 352 added, 226 removed, 886 unchanged (39% of the section changed)

3 unchanged sentences

(in thousands, except share data;

unaudited) June 30, 2021 December 31, 2020

unaudited) September 30, 2021 December 31, 2020

Cash, cash equivalents and restricted cash $ 584,739 $ 200,320

Investment securities

Held-to-maturity, at amortized cost (net of zero allowance for credit losses at June 30, 2021 and December 31, 2020 )

Held-to-maturity, at amortized cost (net of zero allowance for credit losses at September 30, 2021 and December 31, 2020 )

196,801 109,036

Available-for-sale, at fair value (net of zero allowance for credit losses at June 30, 2021 and December 31, 2020 )

Available-for-sale, at fair value (net of zero allowance for credit losses at September 30, 2021 and December 31, 2020 )

963,033 392,351

4 unchanged sentences

2,294,605 2,065,682

Bank premises and equipment, net 5,248 4,919

Goodwill 72,754 30,140

Core deposit intangible 3,423 3,831

Bank-owned life insurance 61,171 43,552

Operating lease right-of-use assets 24,776 25,612

Bank premises and equipment, net 7,807 4,919

Core deposit intangible 6,998 3,831

Other real estate owned 800 —

Interest receivable and other assets 47,578 36,483

18 unchanged sentences

Authorized - 30,000,000 shares;

issued and outstanding - 13,055,105 and 13,500,453 at June 30, 2021 and December 31, 2020, respectively

issued and outstanding - 16,066,889 and 13,500,453 at September 30, 2021 and December 31, 2020, respectively

217,680 125,905

6 unchanged sentences

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended Six months ended

Three months ended Nine months ended

(in thousands, except per share amounts;

unaudited) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

unaudited) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Interest income

12 unchanged sentences

Net interest income 27,753 24,566 74,318 73,060

(Reversal of) provision for credit losses on loans ( 920 ) 2,000 ( 3,849 ) 4,200

(Reversal of) provision for credit losses on unfunded loan commitments ( 612 ) 260 ( 1,202 ) 362

Net interest income after (reversal of) provision for credit losses 26,066 22,115 51,616 43,932

Provision for (reversal of) credit losses on loans 1,800 1,250 ( 2,049 ) 5,450

Provision for (reversal of) credit losses on unfunded loan commitments — 248 ( 1,202 ) 610

Net interest income after provision for (reversal of) credit losses 25,953 23,068 77,569 67,000

Non-interest income

Earnings on bank-owned life insurance, net 1,402 232 1,892 741

Wealth Management and Trust Services 597 450 1,615 1,375

1 unchanged sentence

Service charges on deposit accounts 464 284 1,062 1,028

Earnings on bank-owned life insurance, net 233 234 490 509

Dividends on Federal Home Loan Bank stock 179 149 505 503

8 unchanged sentences

Data processing 1,613 822 3,252 2,437

Charitable contributions 462 273 493 440

Depreciation and amortization 431 539 1,279 1,591

Information technology 496 256 1,105 758

Directors' expense 230 175 405 349

Amortization of core deposit intangible 334 213 742 639

Directors' expense 255 184 660 533

Federal Deposit Insurance Corporation insurance 236 181 597 299

Charitable contributions 4 481 497 921

Other expense 1,847 1,245 4,605 4,232

12 unchanged sentences

Other comprehensive income (loss):

Change in net unrealized gains on available-for-sale securities 2,798 1,494 ( 6,284 ) 11,306

Change in net unrealized (losses) gains on available-for-sale securities ( 2,274 ) 299 ( 8,558 ) 11,605

Reclassification adjustment for gains on available-for-sale securities included in net income ( 1 ) — ( 1 ) ( 915 )

1 unchanged sentence

Other comprehensive income (loss), before tax ( 2,171 ) 448 ( 8,174 ) 11,084

Deferred tax expense (benefit) 864 448 ( 1,780 ) 3,145

Deferred tax (benefit) expense ( 641 ) 132 ( 2,421 ) 3,277

Other comprehensive income (loss), net of tax ( 1,530 ) 316 ( 5,753 ) 7,807

3 unchanged sentences

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the three months ended June 30, 2021 and 2020

For the three months ended September 30, 2021 and 2020

(in thousands, except share data;

4 unchanged sentences

Shares Amount

Three months ended June 30, 2021

Balance at April 1, 2021 13,326,509 $ 118,386 $ 225,600 $ 6,306 $ 350,292

Three months ended September 30, 2021

Balance at July 1, 2021 13,055,105 $ 108,430 $ 231,841 $ 8,378 $ 348,649

Net income — — 5,282 — 5,282

3 unchanged sentences

Stock issued under employee stock ownership plan 9,100 332 — — 332

Restricted stock granted 2,400 — — — —

Stock-based compensation - stock options — 115 — — 115

2 unchanged sentences

— — ( 3,126 ) — ( 3,126 )

Stock purchased by directors under director stock plan 515 17 — — 17

Stock issued in payment of director fees 3,063 99 — — 99

Stock issued to American River Bankshares shareholders 3,441,235 124,401 — — 124,401

Stock repurchased, net of commissions ( 445,735 ) ( 15,902 ) — — ( 15,902 )

Balance at June 30, 2021 13,055,105 $ 108,430 $ 231,841 $ 8,378 $ 348,649

Three months ended June 30, 2020

Balance at April 1, 2020 13,565,969 $ 127,684 $ 207,328 $ 10,928 $ 345,940

Balance at September 30, 2021 16,066,889 $ 217,680 $ 233,997 $ 6,848 $ 458,525

Three months ended September 30, 2020

Balance at July 1, 2020 13,591,835 $ 128,633 $ 211,613 $ 11,994 $ 352,240

Net income — — 7,491 — 7,491

8 unchanged sentences

— — ( 3,128 ) — ( 3,128 )

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

Stock purchased by directors under director stock plan 746 25 — — 25

Stock issued in payment of director fees 3,113 100 — — 100

Balance at September 30, 2020 13,605,363 $ 129,284 $ 215,976 $ 12,310 $ 357,570

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the six months ended June 30, 2021 and 2020

For the nine months ended September 30, 2021 and 2020

(in thousands, except share data;

4 unchanged sentences

Shares Amount

Six months ended June 30, 2021

Nine months ended September 30, 2021

Balance at January 1, 2021 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253

13 unchanged sentences

Stock issued in payment of director fees 6,410 216 — — 216

Stock issued to American River Bankshares shareholders 3,441,235 124,401 — — 124,401

Stock repurchased, net of commissions ( 967,683 ) ( 35,165 ) — — ( 35,165 )

Balance at June 30, 2021 13,055,105 $ 108,430 $ 231,841 $ 8,378 $ 348,649

Six months ended June 30, 2020

Balance at September 30, 2021 16,066,889 $ 217,680 $ 233,997 $ 6,848 $ 458,525

Nine months ended September 30, 2020

Balance at January 1, 2020 13,577,008 $ 129,058 $ 203,227 $ 4,503 $ 336,788

14 unchanged sentences

Stock repurchased, net of commissions ( 92,664 ) ( 3,230 ) — — ( 3,230 )

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

Balance at September 30, 2020 13,605,363 $ 129,284 $ 215,976 $ 12,310 $ 357,570

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

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2021 and 2020

For the nine months ended September 30, 2021 and 2020

(in thousands;

unaudited) June 30, 2021 June 30, 2020

unaudited) September 30, 2021 September 30, 2020

Cash Flows from Operating Activities:

14 unchanged sentences

Earnings on bank-owned life insurance policies ( 1,892 ) ( 741 )

Net changes in:

Interest receivable and other assets 952 ( 2,174 )

Interest payable and other liabilities ( 866 ) 2,816

Net changes in Interest receivable and other assets 5,615 ( 5,347 )

Net changes in Interest payable and other liabilities 790 ( 1,207 )

Total adjustments 8,812 9,192

8 unchanged sentences

Purchase of bank-owned life insurance policies ( 1,943 ) ( 941 )

Cash receipts from bank-owned life insurance policies 2,478 —

Purchase of premises and equipment ( 833 ) ( 769 )

Cash acquired from American River Bankshares 140,577 —

Cash paid for low income housing tax credit investment ( 396 ) ( 1,289 )

7 unchanged sentences

Repayment of subordinated debenture including execution costs ( 4,126 ) —

Repayment of Federal Home Loan Bank borrowings ( 13,885 ) —

Repayment of finance lease obligations ( 55 ) ( 131 )

10 unchanged sentences

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 385 $ 394

Purchase of investment security not yet settled $ 19,972 $ —

Stock issued to employee stock ownership plan $ 999 $ 967

Stock issued for director compensation expense $ 347 $ 226

Repurchase of stock not yet settled $ 127 $ —

Fair value of assets acquired, excluding cash acquired $ 757,844 $ —

Fair value of liabilities assumed $ 816,558 $ —

Restricted cash 1

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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.

The consolidated financial statements include the accounts of Bancorp, a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin, a California state-chartered commercial bank.

Effective August 6, 2021 (the "merger date"), American River Bankshares ("AMRB") merged with and into Bank of Marin Bancorp ("Bancorp"), with Bank of Marin Bancorp surviving, followed thereafter at 12:05 AM on August 7, 2021, by the merger of American River Bank ("ARB") with and into Bank of Marin, with Bank of Marin (the "Bank") surviving, (collectively the "Merger").

The Merger was accounted for under ASC 805, Business Combinations .

See Note 10, Merger, for further detail.

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

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Certain items in prior financial statements were reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

This reclassification had no impact to net income or stockholders' equity.

Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K.

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Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings.

Under the two-class method, the difference in EPS is nominal for these participating securities.

Three months ended Six months ended

(in thousands, except per share data) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Under the two-class method, there is no difference in EPS when considering these participating securities.

Three months ended Nine months ended

(in thousands, except per share data) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Weighted average basic common shares outstanding 14,922 13,539 13,798 13,526

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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.

We have not elected to apply amendments at this time and 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 January 2021, the FASB issued ASU No.

3 unchanged sentences

Amendments may be elected through December 31, 2022.

We have not elected to apply amendments at this time and 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.

Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

We group our assets and liabilities that are measured at fair value in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

These levels are:

10 unchanged sentences

Changes in Fair Value Recorded In 1

June 30, 2021

September 30, 2021

Securities available-for-sale:

3 unchanged sentences

Debentures of government sponsored agencies $ 70,214 $ — $ 70,214 $ — OCI

Treasury securities $ 11,777 $ 11,777 $ — $ — OCI

Obligations of state and political subdivisions $ 137,215 $ — $ 137,215 $ — OCI

Corporate bonds $ 13,777 $ — $ 13,777 $ — OCI

Asset-backed securities $ 1,909 $ — $ 1,909 $ — OCI

Derivative financial liabilities (interest rate contracts) $ 1,266 $ — $ 1,266 $ — NI

10 unchanged sentences

When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities.

Level 1 securities include U.S.

Treasury securities.

If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).

Level 2 securities include obligations of state and political subdivisions, U.S.

agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, and corporate bonds.

As of June 30, 2021 and December 31, 2020, there were no Level 1 or Level 3 securities.

Level 2 securities include

asset-backed securities, obligations of state and political subdivisions, U.S.

agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, and corporate bonds.

As of September 30, 2021 and December 31, 2020, there were no Level 3 securities.

Held-to-maturity securities may be written down to fair value as a result of impairment through a provision for credit losses in investments securities.

We did no t record any write-downs during the six months ended June 30, 2021 or June 30, 2020.

We did no t record any write-downs during the nine months ended September 30, 2021 or September 30, 2020.

Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.

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These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO").

As of June 30, 2021 and December 31, 2020, we did no t carry any assets measured at fair value on a non-recurring basis.

OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal of the collateral.

Subsequent to foreclosure, OREO is carried at the lower of cost or fair value, less estimated costs to sell.

OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period.

The value of OREO is classified as Level 3.

Our current OREO resulted from the ARB Merger.

The following table presents the carrying value of assets measured at fair value on a non-recurring basis and that were held in the consolidated statements of condition at each respective period end, by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020.

(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

September 30, 2021

Other real estate owned $ 800 $ — $ — $ 800

December 31, 2020

Other real estate owned $ — $ — $ — $ —

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of June 30, 2021 and December 31, 2020, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).

The table below is a summary of fair value estimates for financial instruments as of September 30, 2021 and December 31, 2020, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).

The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions.

Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities.

Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc.

Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, 2021 or December 31, 2020.

Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco

stock and Visa Inc.

The values are discussed in Note 4, Investment Securities.

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy

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

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

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

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

1 unchanged sentence

The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value.

The fair value of commitment fees was not material as of June 30, 2021 or December 31, 2020.

The fair value of commitment fees was not material as of September 30, 2021 or December 31, 2020.

Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, U.S.

Our investment securities portfolio consists of U.S.

Treasury securities, obligations of state and political subdivisions, U.S.

Corporations, U.S.

2 unchanged sentences

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.

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

In addition, we hold an asset-backed security collateralized by student loan pools through the ARB acquisition.

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

Held-to-maturity:

2 unchanged sentences

(in thousands) Gains (Losses)

June 30, 2021

September 30, 2021

Securities of U.S.

8 unchanged sentences

December 31, 2020

Corporate bonds $ — $ — $ — $ — $ — $ —

Securities of U.S.

6 unchanged sentences

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

1 Amortized cost and fair values exclude accrued interest receivable of $ 550 thousand and $ 366 thousand at June 30, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

1 Amortized cost and fair values exclude accrued interest receivable of $ 451 thousand and $ 366 thousand at September 30, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

1 unchanged sentence

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.

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

Obligations of state and political subdivisions

(in thousands) June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020

AAA $ 7,455 $ —

AA 14,975 1,461

Total $ 22,532 $ 1,667

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

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

Available-for-sale:

2 unchanged sentences

(in thousands) Gains (Losses)

June 30, 2021

September 30, 2021

Securities of U.S.

government-sponsored enterprises:

MBS pass-through securities issued by FHLMC and FNMA $ 57,653 $ 1,867 $ — $ — $ 59,520

MBS pass-through securities issued by FHLMC, FNMA and GNMA $ 207,557 $ 1,925 $ ( 243 ) $ — $ 209,239

CMOs issued by FHLMC 363,708 5,045 ( 1,065 ) — 367,688

3 unchanged sentences

Debentures of government- sponsored agencies 71,328 63 ( 1,177 ) — 70,214

Treasury securities 11,881 — ( 104 ) — 11,777

Obligations of state and political subdivisions 131,865 5,519 ( 169 ) — 137,215

Corporate bonds 14,014 — ( 237 ) — 13,777

Asset-backed securities 1,914 — ( 5 ) — 1,909

Total available-for-sale $ 952,278 $ 14,351 $ ( 3,596 ) $ — $ 963,033

10 unchanged sentences

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

1 Amortized cost and fair value exclude accrued interest receivable of $ 2.4 million and $ 1.9 million June 30, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.

The amortized cost a nd fair value of investment debt securities by contractual maturity at June 30, 2021 and December 31, 2020 are shown below.

1 Amortized cost and fair value exclude accrued interest receivable of $ 2.9 million and $ 1.9 million September 30, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.

The amortized cost a nd fair value of investment debt securities by contractual maturity at September 30, 2021 and December 31, 2020 are shown below.

Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale

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

Three months ended Six months ended

(in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Three months ended Nine months ended

(in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Available-for-sale:

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Pledged investment securities are shown in the following table:

(in thousands) June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020

Pledged to the State of California:

1 unchanged sentence

Collateral for trust deposits 738 751

Total investment securities pledged to the State of California 145,870 131,802

Collateral for Wealth Management and Trust Services checking account 622 629

Total investment securities pledged to the State of California 235,750 132,431

Bankruptcy trustee deposits pledged with Federal Reserve Bank 2,845 —

Total pledged investment securities $ 238,595 $ 132,431

There were 23 and 10 securities in unrealized loss positions at June 30, 2021 and December 31, 2020, respectively.

There were 165 and 10 securities in unrealized loss positions at September 30, 2021 and December 31, 2020, respectively.

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

June 30, 2021 < 12 continuous months ≥ 12 continuous months Total securities

September 30, 2021 < 12 continuous months ≥ 12 continuous months Total securities

in a loss position

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Held-to-maturity:

MBS pass-through securities issued by FHLMC and FNMA $ 17,074 $ ( 38 ) $ — $ — $ 17,074 $ ( 38 )

CMOs issued by FHLMC 9,320 ( 95 ) — — 9,320 ( 95 )

Obligations of state and political subdivisions 10,194 ( 31 ) — — 10,194 ( 31 )

Total held-to-maturity 36,588 ( 164 ) — — 36,588 ( 164 )

Available-for-sale:

MBS pass-through securities issued by FHLMC and FNMA — — — — — —

SBA-backed securities — — 1,417 ( 46 ) 1,417 ( 46 )

CMOs issued by FNMA — — — — — —

MBS pass-through securities issued by FHLMC, FNMA and GNMA 63,171 ( 243 ) — — 63,171 ( 243 )

CMOs issued by FHLMC 142,557 ( 1,065 ) — — 142,557 ( 1,065 )

CMOs issued by FNMA 25,256 ( 211 ) — — 25,256 ( 211 )

CMOs issued by GNMA 25,879 ( 249 ) — — 25,879 ( 249 )

SBA-backed securities 8,115 ( 93 ) 1,307 ( 43 ) 9,422 ( 136 )

Debentures of government- sponsored agencies 50,344 ( 1,021 ) 3,812 ( 156 ) 54,156 ( 1,177 )

Treasury securities 11,777 ( 104 ) — — 11,777 ( 104 )

Obligations of state and political subdivisions 16,494 ( 169 ) — — 16,494 ( 169 )

Corporate bonds 13,778 ( 237 ) — — 13,778 ( 237 )

Asset-backed securities 1,909 ( 5 ) — — 1,909 ( 5 )

Total available-for-sale 359,280 ( 3,397 ) 5,119 ( 199 ) 364,399 ( 3,596 )

Total temporarily impaired securities $ 110,041 $ ( 2,479 ) $ 1,417 $ ( 46 ) $ 111,458 $ ( 2,525 )

Total securities at loss position $ 395,868 $ ( 3,561 ) $ 5,119 $ ( 199 ) $ 400,987 $ ( 3,760 )

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

2 unchanged sentences

Available-for-sale:

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

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

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

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

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

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

As of June 30, 2021, the investment portfolio included 4 investment securities that had been in a continuous loss position for twelve months or more and 19 investment securities that had been in a loss position for less than twelve months.

Total securities at loss position $ 9,918 $ ( 25 ) $ 1,790 $ ( 55 ) $ 11,708 $ ( 80 )

As of September 30, 2021, the investment portfolio included 6 investment securities that had been in a continuous loss position for twelve months or more and 159 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S.

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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 June 30, 2021, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost.

Therefore, no allowances 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 June 30, 2021.

At September 30, 2021, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost.

No allowances for credit losses have 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 September 30, 2021.

Non-Marketable Securities Included in Other Assets

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Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value.

We held $ 11.9 million of FHLB stock included in other assets on the consolidated statements of condition at both June 30, 2021 and December 31, 2020.

We held $ 16.7 million and $ 11.9 million of FHLB stock included in other assets on the consolidated statements of condition at September 30, 2021 and December 31, 2020, respectively.

The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value.

Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, 2021 and December 31, 2020.

On July 29, 2021, FHLB announced a cash dividend for the second quarter of 2021 at an annualized dividend rate of 6.00 % to be distributed in mid-August 2021.

Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at September 30, 2021 and December 31, 2020.

On October 28, 2021, FHLB announced a cash dividend for the third quarter of 2021 at an annualized dividend rate of 6.00 % to be distributed in mid-November 2021.

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

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

Class B common stock at June 30, 2021 and December 31, 2020.

Class B common stock at September 30, 2021 and December 31, 2020.

These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A.

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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 estimated conversion rate of 1.6228 both at June 30, 2021 and December 31, 2020, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 4.0 million and $ 3.7 million at June 30, 2021 and December 31, 2020, respectively.

The conversion rate is subject to further adjustment upon the final settlement of the covered litigation

against Visa Inc.

When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6228 both at September 30, 2021 and December 31, 2020, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.8 million and $ 3.7 million at September 30, 2021 and December 31, 2020, respectively.

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

and its member banks.

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Low Income Housing Tax Credits

We invest in low-income housing tax credit funds as a limited partner, which totaled $ 3.3 million and $ 3.5 million recorded in other assets as of June 30, 2021 and December 31, 2020, respectively.

In the first six months of 2021, we recognized $ 323 thousand of low-income housing tax credits and other tax benefits, offset by $ 271 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense.

As of June 30, 2021, our unfunded commitments for these low-income housing tax credit funds totaled $ 474 thousand.

We did no t recognize any impairment losses on these low-income housing tax credit investments during the first six months of 2021 or 2020, as the value of the future tax benefits exceeds the carrying value of the investments.

We invest in low-income housing tax credit funds as a limited partner, which totaled $ 3.2 million and $ 3.5 million recorded in other assets as of September 30, 2021 and December 31, 2020, respectively.

In the first nine months of 2021, we recognized $ 484 thousand of low-income housing tax credits and other tax benefits, offset by $ 406 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense.

As of September 30, 2021, our unfunded commitments for these low-income housing tax credit funds totaled $ 425 thousand.

We did no t recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2021 or 2020, as the value of the future tax benefits exceeds the carrying value of the investments.

Loans and Allowance for Credit Losses on Loans

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Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the adoption of CECL.

In addition, refer to Note 5 under Part I, Item 1, of our June 30, 2020 Form 10-Q for prior period information.

The following table presents the amortized cost of loans by class as of June 30, 2021 and December 31, 2020.

(in thousands) June 30, 2021 December 31, 2020

In addition, refer to Note 5 under Part I, Item 1, of our September 30, 2020 Form 10-Q for prior period information.

The following table presents the amortized cost of loans by class as of September 30, 2021 and December 31, 2020.

(in thousands) September 30, 2021 December 31, 2020

Commercial and industrial $ 377,965 $ 498,408

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Total loans, net $ 2,294,605 $ 2,065,682

1 Amortized cost includes net deferred loan origination fees of $( 5.2 ) million and $( 4.9 ) million at June 30, 2021 and December 31, 2020, respectively.

Amounts are also net of unrecognized purchase discounts of $ 737 thousand and $ 815 thousand at June 30, 2021 and December 31, 2020, respectively.

Amortized cost excludes accrued interest, which totaled $ 7.3 million and $ 8.8 million at June 30, 2021 and December 31, 2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

1 Amortized cost includes net deferred loan origination fees of $( 2.9 ) million and $( 4.9 ) million at September 30, 2021 and December 31, 2020, respectively.

Amounts are also net of unrecognized purchase discounts of $ 2,834 thousand and $ 815 thousand at September 30, 2021 and December 31, 2020, respectively.

Amortized cost excludes accrued interest, which totaled $ 7.7 million and $ 8.8 million at September 30, 2021 and December 31, 2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.

Lending Risks

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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.

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

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

In April 2020, the Bank began participating in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP").

As of June 30, 2021, there were 1,532 PPP loans outstanding.

PPP loans totaling $ 248.3 million (net of $ 6.5 million in unrecognized fees and costs) and $ 291.6 million (net of $ 5.4 million in unrecognized fees and costs) as of June 30, 2021 and December 31, 2020, respectively, were included in commercial and industrial loan balances.

Of the 1,532 PPP loans outstanding as of June 30, 2021, 1,060 loans totaling $ 136.0 million were funded during the first half of 2021 under the second round of the PPP stimulus plan.

As of September 30, 2021, there were 871 PPP loans outstanding, including 31 loans totaling $ 9.6 million that ARB financed prior to the merger date.

PPP loans totaling $ 164.8 million (net of $ 4.2 million in unrecognized fees and costs) and $ 291.6 million (net of $ 5.4 million in unrecognized fees and costs) as of September 30, 2021 and December 31, 2020, respectively, were included in commercial and industrial loan balances.

Of the 871 PPP loans outstanding as of September 30, 2021, 790 loans totaling $ 123.9 million were funded by Bank of Marin and ARB during the first half of 2021 under the second round of the PPP stimulus plan.

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

In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/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 SBA forgives the loan and/or the loan is paid off prior to maturity.

The recognition of fees and

costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity.

PPP loans are fully guaranteed by the SBA and have virtually no risk of loss.

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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.

We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral.

Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios.

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

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

Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect auto loans, 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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These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences.

Negative external industry factors are generally

Negative external industry factors are generally not present.

The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain.

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

The following tables present the loan portfolio by loan class, origination year and internal risk rating as of June 30, 2021 and December 31, 2020.

The following tables present the loan portfolio by loan class, origination year and internal risk rating as of September 30, 2021 and December 31, 2020.

Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal.

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(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

June 30, 2021 2021 2020 2019 2018 2017 Prior Total

September 30, 2021 2021 2020 2019 2018 2017 Prior Total

Commercial and industrial:

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Substandard — 7,155 289 — — 6,838 — 14,282

Doubtful — 118 — — — — — 118

Total commercial real estate, owner-occupied $ 40,399 $ 51,055 $ 51,265 $ 61,028 $ 58,828 $ 135,968 $ — $ 398,543

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Pass $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total construction $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060

Pass $ — $ — $ — $ — $ — $ 259 $ 91,333 $ 91,592

Special Mention — — — — — — — —

Substandard — — — — — 384 420 804

Total home equity $ — $ — $ — $ — $ — $ 643 $ 91,753 $ 92,396

(in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost

June 30, 2021 2021 2020 2019 2018 2017 Prior Total

Other residential:

Pass $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total other residential $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778

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Pass $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933

Special Mention — — — — — — — —

Substandard — — — — — — — —

Total installment and other consumer $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933

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Total Substandard $ — $ 7,155 $ 289 $ 709 $ — $ 8,756 $ 1,961 $ 18,870

Total Doubtful $ — $ 118 $ — $ — $ — $ — $ — $ 118

Totals $ 377,821 $ 401,306 $ 335,705 $ 267,686 $ 157,066 $ 577,221 $ 200,214 $ 2,317,019

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Pass $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046

Special Mention — — — — — — — —

Substandard — — — — — — — —

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

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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

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

Special Mention — — — — — — — —

Substandard — — — 17 — — — 17

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Totals $ 578,922 $ 275,977 $ 275,069 $ 180,349 $ 138,246 $ 428,702 $ 211,291 $ 2,088,556

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

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

Loan Aging Analysis by Class

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

June 30, 2021

September 30, 2021

30-59 days past due $ 181 $ — $ — $ — $ 143 $ — $ 73 $ 397

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

1 There were no loans past due more than ninety days accruing interest at June 30, 2021 or December 31, 2020.

2 None of the non-accrual loans as of June 30, 2021 or December 31, 2020 were earning interest on a cash basis.

We recognized no interest income on non-accrual loans for the three and six months ended June 30, 2021 and 2020.

There were no new loans placed on non-accrual status during the six months ended June 30, 2021.

Accrued interest of $ 20 thousand was reversed from interest income for loans that were placed on non-accrual status during the six months ended June 30, 2020.

1 There were no loans past due more than ninety days accruing interest at September 30, 2021 or December 31, 2020.

2 None of the non-accrual loans as of September 30, 2021 or December 31, 2020 were earning interest on a cash basis.

We recognized no interest income on non-accrual loans for the three and nine months ended September 30, 2021 and 2020.

Other than a $ 118 thousand owner-occupied commercial real estate loan assumed in the ARB acquisition, there were no new loans placed on non-accrual status during the nine months ended September 30, 2021.

Accrued interest of $ 20 thousand was reversed from interest income for loans that were placed on non-accrual status during the nine months ended September 30, 2020.

Collateral Dependent Loans

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

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

Amortized Cost by Collateral Type

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

June 30, 2021

September 30, 2021

Commercial real estate, owner-occupied $ 7,273 $ — $ — $ 7,273 $ —

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Total $ 8,757 $ 459 $ 17 $ 9,233 $ —

No collateral-dependent loans were in process of foreclosure at June 30, 2021 or December 31, 2020.

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

No collateral-dependent loans were in process of foreclosure at September 30, 2021 or December 31, 2020.

In addition, the weighted average loan-to-value of collateral dependent loans was approximately 61.7 % at September 30, 2021 and 59.2 % at December 31, 2020.

Troubled Debt Restructuring

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

There were no loans removed from TDR designation during the six months ended June 30, 2021 and 2020.

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 TDRs under existing GAAP.

As of June 30, 2021, 7 borrowing relationships with 12 loans totaling $ 49.8 million were continuing to benefit from payment relief.

Subsequent to quarter end and prior to the filing of this report, one relationship with three loans totaling $ 6.4 million transitioned out of the payment relief program and resumed normal contractual payments.

We removed one commercial loan with a remaining amortized cost of $ 2 thousand and an unfunded commitment of $ 600 thousand from TDR designation during the nine months ended September 30, 2021 after meeting all of the conditions above.

There were no loans removed from TDR designation during the nine months ended September 30, 2020.

As of September 30, 2021, 2 borrowing relationships with 5 loans totaling $ 23.6 million were continuing to benefit from payment relief.

The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 33 %.

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

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

(in thousands)

Recorded Investment in Troubled Debt Restructurings 1

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Commercial and industrial $ 1,394 $ 1,021

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Total $ 11,246 $ 12,506

1 TDR loans on non-accrual status totaled $ 7.4 million at both June 30, 2021 and December 31, 2020.

Unfunded commitments for TDR loans totaled $ 845 thousand as of June 30, 2021

1 TDR loans on non-accrual status totaled $ 7.4 million at both September 30, 2021 and December 31, 2020.

Unfunded commitments for TDR loans totaled $ 242 thousand as of September 30, 2021.

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

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(dollars in thousands) Number of Contracts Modified Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment at Period End

TDRs during the three months ended June 30, 2021:

None — $ — $ — $ —

TDRs during the three months ended June 30, 2020:

Home equity 1 $ 276 $ 276 $ 276

Installment and other consumer 1 108 108 108

Total 2 $ 384 $ 384 $ 384

TDRs during the six months ended June 30, 2021:

None — $ — $ — $ —

TDRs during the six months ended June 30, 2020:

TDRs during the three months ended September 30, 2021:

Commercial and industrial 1 $ 1,101 $ 1,101 $ 1,101

TDRs during the three months ended September 30, 2020:

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

TDRs during the nine months ended September 30, 2021:

Commercial and industrial 1 $ 1,101 $ 1,101 $ 1,101

TDRs during the nine months ended September 30, 2020:

Commercial and industrial 1 $ 170 $ 162 $ 144

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

Home equity 1 276 276 276

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Total 6 $ 2,210 $ 2,202 $ 2,183

The loan modified in 2021 reflected a maturity date extension and other loan term and payment modifications.

The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications.

During the six months ended June 30, 2021 and 2020, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period.

During the nine months ended September 30, 2021 and 2020, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period.

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

Purchased Loans with Credit Deterioration

For purchased loans with a more-than-insignificant amount of credit deterioration since origination ("PCD loans") the initial allowance for credit losses at the date of acquisition was added to the purchase price (or fair value) to determine the initial amortized cost basis.

Subsequent changes in expected credit losses (favorable or unfavorable) are recognized through net income as adjustments to the allowance for credit losses on loans.

Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the accounting for PCD and non-PCD loans.

A reconciliation of the unpaid principal balance (or par value) to the purchase price (or fair value) for PCD loans as of the August 6, 2021 merger date is presented below.

(in thousands)

Unpaid principal balance (par value) $ 92,029

Non-credit discount ( 1,662 )

Amortized cost basis 90,367

Initial allowance for credit losses on PCD loans ( 1,505 )

Purchase price (PCD loans at fair value) $ 88,862

Allowance for Credit Losses on Loans Rollforward

The following table discloses activity in the allowance for credit losses on loans for the periods presented.

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

Three months ended June 30, 2021

Three months ended September 30, 2021

Beginning balance $ 1,590 $ 2,037 $ 10,761 $ 1,142 $ 412 $ 613 $ 238 $ 2,307 $ 19,100

Provision (reversal) - CECL 126 ( 30 ) 1,011 77 247 4 384 ( 19 ) 1,800

Initial allowance for PCD loans 405 559 533 — — 6 2 — 1,505

Charge-offs — — — — — — ( 2 ) — ( 2 )

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Ending balance $ 2,124 $ 2,566 $ 12,305 $ 1,227 $ 659 $ 623 $ 622 $ 2,288 $ 22,414

Three months ended June 30, 2020

Three months ended September 30, 2020

Beginning balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868

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

Six months ended June 30, 2021

Nine months ended September 30, 2021

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

Provision (reversal) - CECL ( 821 ) ( 771 ) ( 910 ) ( 356 ) ( 129 ) ( 381 ) 331 988 ( 2,049 )

Initial allowance for PCD loans 405 559 533 — — 6 2 — 1,505

Charge-offs — — — — — — ( 2 ) — ( 2 )

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Ending balance $ 2,124 $ 2,566 $ 12,305 $ 1,227 $ 659 $ 623 $ 622 $ 2,288 $ 22,414

Six months ended June 30, 2020

Nine months ended September 30, 2020

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

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We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020.

During the first six months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.

During the first nine months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.092 billion and $ 1.165 billion at June 30, 2021 and December 31, 2020, respectively.

In addition, we pledge eligible TIC loans, which totaled $ 113.0 million and $ 113.6 million at June 30, 2021 and December 31, 2020, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB").

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 $ 1.091 billion and $ 1.165 billion at September 30, 2021 and December 31,

2020, respectively.

In addition, we pledge eligible TIC loans, which totaled $ 109.2 million and $ 113.6 million at September 30, 2021 and December 31, 2020, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB").

Also, see Note 6, Borrowings.

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

Related party loans totaled $ 5.3 million at

June 30, 2021 and $ 6.4 million at December 31, 2020.

In addition, undisbursed commitments to related parties totaled $ 9.1 million at June 30, 2021 and December 31, 2020.

Related party loans totaled $ 8.6 million at September 30, 2021 and $ 6.4 million at December 31, 2020.

In addition, undisbursed commitments to related parties totaled $ 8.6 million at September 30, 2021 and $ 9.1 million at December 31, 2020.

Borrowings and Other Obligations

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $ 115.0 million at June 30, 2021 and $ 135.0 million at December 31, 2020.

Federal Funds Purchased – The Bank had unsecured available lines of credit with correspondent banks for overnight borrowings totaling $ 115.0 million at September 30, 2021 and $ 135.0 million at December 31, 2020.

In general, interest rates on these lines approximate the federal funds target rate.

We had no overnight borrowings under these credit facilities at June 30, 2021 or December 31, 2020 .

Federal Home Loan Bank Borrowings – As of June 30, 2021 and December 31, 2020, the Bank had available lines of credit with the FHLB totaling $ 629.9 million and $ 642.5 million, respectively, based on eligible collateral of certain loans.

There were no FHLB overnight borrowings at June 30, 2021 or December 31, 2020.

We had no overnight borrowings under these credit facilities at September 30, 2021 or December 31, 2020 .

Federal Home Loan Bank Borrowings – As of September 30, 2021 and December 31, 2020, the Bank had available lines of credit with the FHLB totaling $ 651.4 million and $ 642.5 million, respectively, based on eligible collateral of certain loans.

There were no FHLB overnight borrowings at September 30, 2021 or December 31, 2020.

As part of our acquisition of ARB, we assumed FHLB advances in the amount of $ 13.8 million that we paid off on August 25, 2021.

Federal Reserve Line of Credit – The Bank has an available line of credit with the FRBSF secured by certain residential loans.

At June 30, 2021 and December 31, 2020, the Bank had borrowing capacity under this line totaling $ 77.6 million and $ 78.7 million, respectively, and had no outstanding borrowings with the FRBSF.

At September 30, 2021 and December 31, 2020, the Bank had borrowing capacity under this line totaling $ 72.7 million and $ 78.7 million, respectively, and had no outstanding borrowings with the FRBSF.

Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $ 4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities.

On March 15, 2021, Bancorp redeemed in full the $ 2.8 million (book value) subordinated debenture due to the Trust, which had an effective interest rate of 6.5 % for the first six months of 2020.

The higher effective rate for the first six months of 2021 included accelerated accretion of the $ 1.3 million remaining purchase discount due to the early redemption.

Accretion was $ 17 thousand and $ 35 thousand for the three and six months ended June 30, 2020, respectively.

Other Obligations – Finance lease liabilities totaling $ 438 thousand and $ 58 thousand at June 30, 2021 and December 31, 2020, respectively, are included in borrowings and other obligations in the consolidated statements of condition.

On March 15, 2021, Bancorp redeemed in full the $ 2.8 million (book value) subordinated debenture due to the Trust, which had an effective interest rate of 6.0 % for the first nine months of 2020.

The 251.5 % effective rate for the first nine months of 2021 included accelerated accretion of the $ 1.3 million remaining purchase discount due to the early redemption.

Accretion was $ 17 thousand and $ 52 thousand for the three and nine months ended September 30, 2020, respectively.

Other Obligations – Finance lease liabilities totaling $ 451 thousand and $ 58 thousand at September 30, 2021 and December 31, 2020, respectively, are included in borrowings and other obligations in the consolidated statements of condition.

See Note 8, Commitments and Contingencies, for additional information.

Stockholders' Equity

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

On October 22, 2021, Bancorp declared a $ 0.24 per share cash dividend, payable on November 12, 2021 to shareholders of record at the close of business on November 5, 2021.

Share-Based Payments

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The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest.

Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date.

Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the

retirement eligibility date.

For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire.

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Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements.

During the six months ended June 30, 2021, we withheld 27,547 shares totaling $ 1.1 million at a weighted-average price of $ 38.87 for cashless exercises.

During the six months ended June 30, 2020, we withheld 8,409 shares totaling $ 346 thousand at a weighted-average price of $ 41.17 for cashless exercises.

During the nine months ended September 30, 2021, we withheld 27,679 shares totaling $ 1.1 million at a weighted-average price of $ 38.86 for cashless exercises.

During the nine months ended September 30, 2020, we withheld 9,214 shares totaling $ 369 thousand at a weighted-average price of $ 40.01 for cashless exercises.

Shares withheld under net settlement arrangements are available for future grants.

7 unchanged sentences

A new share repurchase program was approved by Bancorp Board of Directors on July 16, 2021 under which Bancorp may repurchase up to $ 25.0 million of its outstanding common stock through July 31, 2023.

On October 22, 2021, Bancorp's Board of Directors approved an amendment to the current share repurchase program, which increased the total authorization from $ 25.0 million to $ 57.0 million and left the expiration date unchanged.

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 the six months ended June 30, 2021, Bancorp repurchased 521,948 shares totaling $ 19.3 million for a cumulative 691,519 shares amounting to $ 25.0 million under the $ 25.0 million share repurchase program that was approved by the Board of Directors on January 24, 2020.

Bancorp repurchased 445,735 shares totaling $ 15.9 million in the third quarter of 2021 for a cumulative total of 967,683 shares and $ 35.2 million in the first nine months of 2021.

Commitments and Contingencies

10 unchanged sentences

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) June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020

Commercial lines of credit $ 300,308 $ 297,898

5 unchanged sentences

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

The allowance for credit losses on unfunded commitments totaled $ 1.6 million and $ 2.8 million as of June 30, 2021 and December 31, 2020, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition.

The allowance for credit losses on unfunded commitments totaled $ 1.6 million and $ 2.8 million as of September 30, 2021 and December 31, 2020, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition.

We adopted the CECL accounting standard on December 31, 2020.

We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020.

We recorded reversals of the allowance for credit losses on unfunded commitments totaling $ 612 thousand and $ 1.2 million for the three and six month periods ended June 30, 2021, respectively.

This compares to provisions for credit losses on unfunded commitments for the three and six month periods ended June 30, 2020 totaling $ 260 thousand and $ 362 thousand, respectively.

In the current period, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three and nine month periods ended September 30, 2020.

We recorded no provision for credit losses on unfunded commitments for the three months ended September 30, 2021 and a reversal of the allowance for credit losses on unfunded commitments totaling $ 1.2 million for the nine month period ended September 30, 2021.

This compares to provisions for credit losses on unfunded commitments for the three and nine month periods ended September 30, 2020 totaling $ 248 thousand and $ 610 thousand, respectively.

In the second quarter of 2021, we reclassified the provision for credit losses on unfunded commitments from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income.

We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 11 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.

3 unchanged sentences

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.

(in thousands) June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020

Operating leases:

9 unchanged sentences

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

Six months ended

(in thousands) June 30, 2021 June 30, 2020

Nine months ended

(in thousands) September 30, 2021 September 30, 2020

Right-of-use assets obtained in exchange for operating lease liabilities $ 2,376 $ 18,021

1 unchanged sentence

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

Three months ended Six months ended

(in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Three months ended Nine months ended

(in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Operating lease cost $ 1,216 $ 1,165 $ 3,543 $ 3,334

11 unchanged sentences

3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2021.

The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.

(in thousands) June 30, 2021

(in thousands) September 30, 2021

Year Operating Leases Finance Leases

18 unchanged sentences

Under the terms of the U.S.

retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock

to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.

In 2012, Visa had reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S.

The escrow balance of $ 894 million as of June 30, 2021, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The escrow balance of $ 894 million as of June 30, 2021 (latest information available), combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities.

9 unchanged sentences

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty.

Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements.

Conversely, when an interest rate swap is

in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements.

Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of June 30, 2021, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037.

As of September 30, 2021, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037.

All of our derivatives are accounted for as fair value hedges.

1 unchanged sentence

Our interest rate swap payments are settled monthly with counterparties.

Accrued interest on the swaps totaled $ 10 thousand at June 30, 2021 and $ 11 thousand at December 31, 2020.

Accrued interest on the swaps totaled $ 10 thousand at September 30, 2021 and $ 11 thousand at December 31, 2020.

Information on our derivatives follows:

Asset Derivatives Liability Derivatives

(in thousands) June 30,

2021 December 31, 2020 June 30,

(in thousands) September 30,

2021 December 31, 2020 September 30,

2021 December 31, 2020

4 unchanged sentences

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

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of June 30, 2021 and December 31, 2020.

Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans

(in thousands) June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020

(in thousands) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020

Loans $ 14,401 $ 15,745 $ 1,122 $ 1,753

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

Three months ended Six months ended

(in thousands) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

Three months ended Nine months ended

(in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Interest and fees on loans 1

$ 24,027 $ 21,776 $ 66,117 $ 63,880

(Decrease) increase in fair value of designated interest rate swaps due to LIBOR interest rate movements $ ( 170 ) $ ( 63 ) $ 549 $ ( 1,504 )

Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements $ 97 $ 152 $ 646 $ ( 1,351 )

Payment on interest rate swaps ( 93 ) ( 108 ) ( 278 ) ( 255 )

Increase (decrease) in fair value hedging adjustment of hedged loans 177 59 ( 537 ) 1,529

Decrease (increase) in fair value hedging adjustment of hedged loans ( 94 ) ( 155 ) ( 631 ) 1,374

Decrease in value of yield maintenance agreement ( 3 ) ( 3 ) ( 9 ) ( 9 )

5 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 Net Amounts of Gross Amounts Not Offset in

Gross Amounts Offset in the Assets Presented the Statements of Condition

of Recognized Statements of in the Statements Financial Cash Collateral

( in thousands)

Assets Condition of Condition Instruments Received Net Amount

June 30, 2021

Derivatives by Counterparty:

Counterparty A $ — $ — $ — $ — $ — $ —

December 31, 2020

Derivatives by Counterparty:

Counterparty A $ — $ — $ — $ — $ — $ —

Offsetting of Financial Liabilities and Derivative Liabilities

5 unchanged sentences

Instruments Pledged Net Amount

June 30, 2021

September 30, 2021

Derivatives by Counterparty:

5 unchanged sentences

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

Merger Agreement

On April 16, 2021, Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company of American River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and into Bank of Marin (collectively, the "Merger").

The acquisition will expand Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB has ten branches.

Under the terms of the merger agreement, AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp's common stock for each share of AMRB's common stock outstanding upon consummation of the Merger.

AMRB had total assets of $ 906.1 million, total deposits of $ 787.7 million, and total loans of $ 434.2 million as of June 30, 2021.

These amounts are subject to fair value adjustments upon the close of the Merger.

The merger has been approved by the Boards of Directors of each company, all applicable regulatory agencies and shareholders of AMRB and BMRC.

The Merger is expected to close on August 6, 2021 .

Bancorp completed its merger with American River Bankshares ("AMRB") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m.

on August 7, 2021 by the merger of American River Bank ("ARB") with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving.

On August 6, 2021, each share of AMRB's common stock issued and outstanding immediately prior to the Merger was converted into 0.575 shares of Bancorp's common stock resulting in the issuance of 3,441,235 shares of Bancorp common stock.

In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.

(in thousands) Merger Consideration

Value of common stock consideration paid to shareholders ( 0.575 fixed exchange ratio, stock price $ 36.15 )

Cash consideration for stock options 63

Cash paid in lieu of fractional shares 13

Total merger consideration $ 124,477

Bancorp accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations .

We recorded the estimated fair values of acquired assets and liabilities based on initial valuations as of August 6, 2021.

Under ASC 805, during the measurement period of up to one year, the acquirer is allowed to adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date.

Measurement period adjustments are recognized in the reporting period in which they are determined.

As such, the estimated fair values are considered preliminary as of September 30, 2021 and subject to adjustment for up to one year after August 6, 2021.

Fair value amounts subject to change include, but are not limited to, loans, certain deposits, deferred tax assets and liabilities and certain other assets and other liabilities.

The following table presents the preliminary fair values of the assets acquired and liabilities assumed, and the resulting goodwill as of August 6, 2021.

(in thousands)

Total merger consideration $ 124,477

Assets acquired:

Cash and cash equivalents 140,577

Investment securities 297,797

Loans 419,435

Bank-owned life insurance 16,259

Operating lease right-of-use assets 2,376

Bank premises and equipment, net 2,891

Core deposit intangible 3,909

Other real estate owned 800

Interest receivable and other assets 14,377

Total assets acquired 898,421

Liabilities assumed:

Non-interest bearing 331,459

Interest bearing 458,563

Total deposits 790,022

FHLB borrowings 13,885

Operating lease liabilities 2,798

Interest payable and other liabilities 9,853

Total liabilities assumed 816,558

Fair value of net assets acquired 81,863

Goodwill $ 42,614

We recorded $ 42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed.

Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp.

It is evaluated for impairment annually.

The following are descriptions of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and cash equivalents - The carrying amount of cash and cash equivalents is a reasonable estimate of fair value based on the short-term nature of these assets.

Investment securities - Fair values for securities are based on quoted market prices, where available.

If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market.

In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.

Loans - The loan valuation methodology was based on a discounted cash flow approach that considered factors including the type of loan, risk classification status, fixed or variable interest rates, term, amortization status and current discount rates.

Loans were grouped according to similar credit risk characteristics when applying various valuation techniques.

The discount rates applied were based on current market rates for new originations of comparable loans and included adjustments for interest rate risk, equity return, servicing, credit and liquidity risk.

ARB's allowance for credit losses and any existing deferred fees or costs and premiums and discounts were not carried over at the merger date.

Bank-owned life insurance - The cash surrender values of bank-owned life insurance policies approximated fair value.

Operating lease right-of-use assets and lease liabilities - Operating lease right-of-use assets were measured at the present value of the remaining lease payments, as if the acquired leases commenced on the merger date, and

adjusted to reflect favorable and unfavorable terms of the leases when compared to current market terms.

Lease liabilities were measured at the present value of the remaining lease payments.

Bank premises and equipment - The value of the land and buildings acquired were based on independent third-party appraisals.

The fair values of other premises and equipment, such as tenant improvements, furniture and fixtures and equipment, approximated their carrying values.

Core deposit Intangible - The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits.

The value of the core deposit intangible asset was calculated using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources.

It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source.

The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and is evaluated periodically for impairment.

We recorded a core deposit intangible asset of $ 3.9 million at acquisition, of wh ich $ 129 thousand was amortized from the merger date to September 30, 2021.

The future amortization expense for the CDI arising from the Merger is as follows:

(in thousands) 2021 2022 2023 2024 2025 Thereafter Total

Core deposit intangible amortization $ 189 $ 707 $ 630 $ 552 $ 475 $ 1,227 $ 3,780

Other real estate owned - The value of other real estate owned was based on an independent third-party appraisal.

Deposits - The fair values for the demand and savings deposits equaled the amount payable on demand at the merger date.

The fair values for time deposits were estimated using a discounted cash flow calculation that applied interest rates currently being offered to the contractual interest rates on such time deposits.

FHLB borrowings - The carrying value of Federal Home Loan Bank borrowings was adjusted to reflect prepayment fees, which approximated fair value.

Pro Forma Results of Operations

AMRB's unaudited contributions to net interest income and net income from the August 6, 2021 merger date to September 30, 2021 included in the consolidated statements of comprehensive income are presented in the following table.

(in thousands)

Net interest income 1

1 AMRB's net interest income and net loss include merger-related costs incurred from the merger date to September 30, 2021, accretion of the net purchase discount on acquired loans, premises fair value adjustment depreciation, CDI amortization and time deposit premium amortization, as applicable.

The pro forma net loss does not include allowance for credit losses adjustments related to acquired loans.

The following table presents certain unaudited pro forma net interest income and net income for illustrative purposes only for the three and nine months ended September 30, 2021 and 2020 as if AMRB was acquired on January 1, 2020.

This unaudited pro forma information combines Bancorp's and AMRB's historical results and includes adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods.

The pro forma information is not indicative of what would have occurred had the acquisition consummated as of the beginning of the year prior to the acquisition.

The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loans at fair value, cost savings, or business synergies.

As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.

Three months ended Nine months ended

(in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Net interest income - Pro forma $ 30,488 $ 31,386 $ 91,240 $ 92,791

Net interest income - Actual $ 27,753 $ 24,566 $ 74,318 $ 73,060

Net income - Pro forma 1

$ 9,953 $ 9,182 $ 33,422 $ 19,638

Net income - Actual $ 5,282 $ 7,491 $ 23,514 $ 22,125

1 The 2021 pro forma combined net income was adjusted to exclude merger-related costs of $ 5.4 million incurred by Bancorp and $ 3.6 million incurred by AMRB.

These merger-related costs were included in the combined net income for the nine months ended September 30, 2020 as if the merger occurred on January 1, 2020.

Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated.

Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.

Three months ended Nine months ended

(in thousand, unaudited) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

Personnel and severance $ 2,668 $ — $ 2,668 $ —

Professional services 1,778 — 1,979 —

Data processing 433 — 433 —

Other expense 263 — 279 —

Total merger-related one-time and conversion costs $ 5,142 $ — $ 5,359 $ —

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

What changed 10-Q

Item 1. Financial Statements