Bank of Marin Bancorp 10-Q

ITEM 1. Financial Statements BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data; unaudited) September 30, 2021 December 31, 2020 Assets 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 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 September 30, 2021 and December 31, 2020 ) 963,033 392,351 Total investment securities 1,159,834 501,387 Loans, at amortized cost 2,317,019 2,088,556 Allowance for credit losses on loans ( 22,414 ) ( 22,874 ) Loans, net of allowance for credit losses on loans 2,294,605 2,065,682 Goodwill 72,754 30,140 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 Total assets $ 4,261,062 $ 2,911,926 Liabilities and Stockholders' Equity Liabilities Deposits Non-interest bearing $ 1,837,595 $ 1,354,650 Interest bearing Transaction accounts 288,401 183,552 Savings accounts 336,867 201,507 Money market accounts 1,124,660 667,107 Time accounts 140,173 97,433 Total deposits 3,727,696 2,504,249 Borrowings and other obligations 451 58 Subordinated debenture — 2,777 Operating lease liabilities 26,637 27,062 Interest payable and other liabilities 47,753 19,527 Total liabilities 3,802,537 2,553,673 Stockholders' Equity Preferred stock, no par value, Authorized - 5,000,000 shares, none issued — — Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 16,066,889 and 13,500,453 at September 30, 2021 and December 31, 2020, respectively 217,680 125,905 Retained earnings 233,997 219,747 Accumulated other comprehensive income, net of taxes 6,848 12,601 Total stockholders' equity 458,525 358,253 Total liabilities and stockholders' equity $ 4,261,062 $ 2,911,926 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-3 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three months ended Nine months ended (in thousands, except per share amounts; unaudited) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Interest income Interest and fees on loans $ 24,027 $ 21,776 $ 66,117 $ 63,880 Interest on investment securities 4,084 3,343 10,717 11,249 Interest on federal funds sold and due from banks 178 50 274 421 Total interest income 28,289 25,169 77,108 75,550 Interest expense Interest on interest-bearing transaction accounts 41 41 119 146 Interest on savings accounts 26 17 66 50 Interest on money market accounts 417 377 1,015 1,731 Interest on time accounts 44 133 221 436 Interest on borrowings and other obligations 8 — 8 3 Interest on subordinated debenture — 35 1,361 124 Total interest expense 536 603 2,790 2,490 Net interest income 27,753 24,566 74,318 73,060 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 Debit card interchange fees 483 383 1,268 1,051 Service charges on deposit accounts 464 284 1,062 1,028 Dividends on Federal Home Loan Bank stock 179 149 505 503 Merchant interchange fees 129 63 247 183 Gains on sale of investment securities, net 1 — 1 915 Other income 310 229 823 927 Total non-interest income 3,565 1,790 7,413 6,723 Non-interest expense Salaries and related benefits 13,127 8,638 31,223 25,979 Occupancy and equipment 1,871 1,776 5,373 5,100 Professional services 2,472 655 4,321 1,749 Data processing 1,613 822 3,252 2,437 Depreciation and amortization 431 539 1,279 1,591 Information technology 496 256 1,105 758 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 Total non-interest expense 22,686 14,990 53,654 44,238 Income before provision for income taxes 6,832 9,868 31,328 29,485 Provision for income taxes 1,550 2,377 7,814 7,360 Net income $ 5,282 $ 7,491 $ 23,514 $ 22,125 Net income per common share: Basic $ 0.35 $ 0.55 $ 1.70 $ 1.64 Diluted $ 0.35 $ 0.55 $ 1.69 $ 1.62 Weighted average shares: Basic 14,922 13,539 13,798 13,526 Diluted 14,993 13,610 13,881 13,617 Comprehensive income (loss): Net income $ 5,282 $ 7,491 $ 23,514 $ 22,125 Other comprehensive income (loss): 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 ) Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity 104 149 385 394 Other comprehensive income (loss), before tax ( 2,171 ) 448 ( 8,174 ) 11,084 Deferred tax (benefit) expense ( 641 ) 132 ( 2,421 ) 3,277 Other comprehensive income (loss), net of tax ( 1,530 ) 316 ( 5,753 ) 7,807 Total comprehensive income $ 3,752 $ 7,807 $ 17,761 $ 29,932 The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-4 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the three months ended September 30, 2021 and 2020 (in thousands, except share data; unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive Income, Net of Taxes Total Shares Amount 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 Other comprehensive income — — — ( 1,530 ) ( 1,530 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 3,098 72 — — 72 Stock issued under employee stock purchase plan 508 18 — — 18 Stock issued under employee stock ownership plan 9,100 332 — — 332 Stock-based compensation - stock options — 115 — — 115 Stock-based compensation - restricted stock — 98 — — 98 Cash dividends paid on common stock ($ 0.24 per share) — — ( 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 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 Other comprehensive income — — — 316 316 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 207 — — — — Stock issued under employee stock purchase plan 728 20 — — 20 Stock issued under employee stock ownership plan 10,200 319 — — 319 Restricted stock forfeited / cancelled ( 1,466 ) — — — — Stock-based compensation - stock options — 88 — — 88 Stock-based compensation - restricted stock — 99 — — 99 Cash dividends paid on common stock ($ 0.23 per share) — — ( 3,128 ) — ( 3,128 ) 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). BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the nine months ended September 30, 2021 and 2020 (in thousands, except share data; unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income, Net of Taxes Total Shares Amount Nine months ended September 30, 2021 Balance at January 1, 2021 13,500,453 $ 125,905 $ 219,747 $ 12,601 $ 358,253 Net income — — 23,514 — 23,514 Other comprehensive (loss) — — — ( 5,753 ) ( 5,753 ) Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 34,278 423 423 Stock issued under employee stock purchase plan 2,117 72 — — 72 Stock issued under employee stock ownership plan 27,400 999 — — 999 Restricted stock granted 29,454 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 3,961 ) ( 156 ) — — ( 156 ) Restricted stock forfeited / cancelled ( 3,848 ) — — — — Stock-based compensation - stock options — 315 — — 315 Stock-based compensation - restricted stock — 636 — — 636 Cash dividends paid on common stock ($ 0.70 per share) — — ( 9,264 ) — ( 9,264 ) Stock purchased by directors under director stock plan 1,034 34 — — 34 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 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 Net income — — 22,125 — 22,125 Other comprehensive income — — — 7,807 7,807 Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 64,022 1,277 — — 1,277 Stock issued under employee stock purchase plan 1,812 53 — — 53 Stock issued under employee stock ownership plan 29,600 967 — — 967 Restricted stock granted 29,100 — — — — Restricted stock surrendered for tax withholdings upon vesting ( 2,200 ) ( 73 ) — — ( 73 ) Restricted stock forfeited / cancelled ( 8,184 ) — — — — Stock-based compensation - stock options — 299 — — 299 Stock-based compensation - restricted stock — 673 — — 673 Cash dividends paid on common stock ($ 0.69 per share) — — ( 9,376 ) — ( 9,376 ) 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 ( 92,664 ) ( 3,230 ) — — ( 3,230 ) 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). Page-5 BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2021 and 2020 (in thousands; unaudited) September 30, 2021 September 30, 2020 Cash Flows from Operating Activities: Net income $ 23,514 $ 22,125 Adjustments to reconcile net income to net cash provided by operating activities: (Reversal of) provision for credit losses on loans ( 2,049 ) 5,450 (Reversal of) provision for credit losses on unfunded loan commitments ( 1,202 ) 610 Noncash contribution expense to employee stock ownership plan 999 967 Noncash director compensation expense 347 226 Stock-based compensation expense 951 972 Amortization of core deposit intangible 742 639 Amortization of investment security premiums, net of accretion of discounts 3,222 864 Accretion of discounts on acquired loans ( 201 ) ( 101 ) Accretion of discount on subordinated debenture 1,347 52 Net change in deferred loan origination costs/fees ( 1,135 ) 6,132 Gain on sale of investment securities ( 1 ) ( 915 ) Depreciation and amortization 1,279 1,591 Earnings on bank-owned life insurance policies ( 1,892 ) ( 741 ) 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 Net cash provided by operating activities 32,326 31,317 Cash Flows from Investing Activities: Purchase of held-to-maturity securities ( 133,493 ) — Purchase of available-for-sale securities ( 355,156 ) ( 71,744 ) Proceeds from sale of available-for-sale securities 4,099 33,756 Proceeds from paydowns/maturities of held-to-maturity securities 65,497 19,880 Proceeds from paydowns/maturities of available-for-sale securities 66,981 68,102 Loans originated and principal collected, net 193,265 ( 269,376 ) 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 ) Net cash used in investing activities ( 18,924 ) ( 222,381 ) Cash Flows from Financing Activities: Net increase in deposits 433,425 232,800 Proceeds from stock options exercised 423 1,277 Payment of tax withholdings for vesting of restricted stock ( 156 ) ( 73 ) Proceeds from stock issued under employee and director stock purchase plans 106 96 Stock repurchased, net of commissions ( 35,451 ) ( 3,333 ) 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 ) Cash dividends paid on common stock ( 9,264 ) ( 9,376 ) Net cash provided by financing activities 371,017 221,260 Net increase in cash, cash equivalents and restricted cash 384,419 30,196 Cash, cash equivalents and restricted cash at beginning of period 200,320 183,388 Cash, cash equivalents and restricted cash at end of period $ 584,739 $ 213,584 Supplemental disclosure of cash flow information: Cash paid in interest $ 1,492 $ 2,450 Cash paid in income taxes $ 9,000 $ 9,765 Supplemental disclosure of noncash investing and financing activities: Change in net unrealized gains on available-for-sale securities $ ( 8,558 ) $ 11,605 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 $ — Acquisition: Fair value of assets acquired, excluding cash acquired $ 757,844 $ — Fair value of liabilities assumed $ 816,558 $ — Restricted cash 1 $ — $ — 1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020. The accompanying notes are an integral part of these consolidated financial statements (unaudited). Page-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation The consolidated financial statements include the accounts of 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. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Certain items in prior financial statements were reclassified to conform to the current presentation, including the reclassification of the provision for credit losses on unfunded commitments in the second quarter of 2021 from non-interest expense to a separate line item under the provision for credit losses on loans in the consolidated statements of comprehensive income. 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. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period. The NorCal Community Bancorp Trust II (the "Trust") was formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trust (a variable interest entity), therefore the Trust is not consolidated in our consolidated financial statements, but rather the subordinated debenture is shown as a liability on our consolidated statements of condition. Bancorp's investment in the securities of the Trust is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for additional information on the subordinated debenture due to NorCal Community Bancorp Trust II and the early redemption that occurred on March 15, 2021. The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, there is no difference in EPS when considering these participating securities. Page-7 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 Potentially dilutive common shares related to: Stock options 51 53 62 71 Unvested restricted stock awards 20 18 21 20 Weighted average diluted shares outstanding 14,993 13,610 13,881 13,617 Net income $ 5,282 $ 7,491 $ 23,514 $ 22,125 Basic EPS $ 0.35 $ 0.55 $ 1.70 $ 1.64 Diluted EPS $ 0.35 $ 0.55 $ 1.69 $ 1.62 Weighted average anti-dilutive common shares not included in the calculation of diluted EPS 97 202 91 152 Note 2: Recently Adopted and Issued Accounting Standards Accounting Standards Adopted in 2021 In December 2019, the FASB issued ASU No. 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 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. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations. In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (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. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations. In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs . This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application. This ASU adds clarification to ASU 2017-08, which the Bank early-adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should amortize the amount above that which is repayable, to the next call date. We adopted this ASU prospectively on January 1, 2021. Because this ASU was narrow in scope and for clarification purposes, it did not have a material impact on our financial condition and results of operations. Accounting Standards Not Yet Effective In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden 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 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. 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 and will assess the applicability of this Page-8 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. Note 3: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement We group our assets and liabilities that are measured at fair value 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: Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data. Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation. The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis. (in thousands) Description of Financial Instruments Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In 1 September 30, 2021 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 693,532 $ — $ 693,532 $ — OCI SBA-backed securities $ 34,609 $ — $ 34,609 $ — OCI Debentures of government sponsored agencies $ 70,214 $ — $ 70,214 $ — OCI U.S. 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 December 31, 2020 Securities available-for-sale: Mortgage-backed securities and collateralized mortgage obligations issued by U.S. 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 1 Other comprehensive income ("OCI") or net income ("NI"). Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. 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 Page-9 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 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. On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). 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 (Level 3) 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 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 Page-10 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 September 30, 2021 or December 31, 2020. The values are discussed in Note 4, Investment Securities. September 30, 2021 December 31, 2020 (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 $ 584,739 $ 584,739 Level 1 $ 200,320 $ 200,320 Level 1 Investment securities held-to-maturity 196,801 201,052 Level 2 109,036 115,185 Level 2 Loans, net 2,294,605 2,305,003 Level 3 2,065,682 2,089,192 Level 3 Interest receivable 10,898 10,898 Level 2 10,922 10,922 Level 2 Financial liabilities (recorded at amortized cost): Time deposits 140,173 140,385 Level 2 97,433 97,769 Level 2 Subordinated debenture — — Level 3 2,777 3,115 Level 3 Interest payable 82 82 Level 2 97 97 Level 2 Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The discounted cash flow valuation approach reflects key inputs and assumptions such as loan probability of default, loss given default, prepayment speed, and market discount rates. Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current market rates offered for time deposits of similar remaining maturities. Fair value of the subordinated debenture is estimated using a discounted cash flow approach based on current interest rates for similar financial instruments adjusted for credit and liquidity spreads. The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of September 30, 2021 or December 31, 2020. Note 4: Investment Securities Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. Corporations, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table. In addition, we hold an asset-backed security collateralized by student loan pools through the ARB acquisition. Page-11 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: Amortized Cost 1 Allowance for Credit Losses Net Carrying Amount Gross Unrealized Fair Value (in thousands) Gains (Losses) September 30, 2021 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC and FNMA $ 70,085 $ — $ 70,085 $ 2,828 $ ( 38 ) $ 72,875 CMOs issued by FHLMC 42,275 — 42,275 1,114 ( 95 ) 43,294 CMOs issued by FNMA 5,598 — 5,598 163 — 5,761 SBA-backed securities 4,841 — 4,841 290 — 5,131 Debentures of government-sponsored agencies 51,470 — 51,470 — — 51,470 Obligations of state and political subdivisions 22,532 — 22,532 20 ( 31 ) 22,521 Total held-to-maturity $ 196,801 $ — $ 196,801 $ 4,415 $ ( 164 ) $ 201,052 December 31, 2020 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC and FNMA $ 65,579 $ — $ 65,579 $ 3,924 $ — $ 69,503 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 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. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, 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 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 September 30, 2021. Obligations of state and political subdivisions (in thousands) September 30, 2021 December 31, 2020 AAA $ 7,455 $ — AA 14,975 1,461 A 102 206 Total $ 22,532 $ 1,667 Page-12 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: Amortized Cost 1 Gross Unrealized Allowance for Credit Losses Fair Value (in thousands) Gains (Losses) September 30, 2021 Securities of U.S. government-sponsored enterprises: 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 CMOs issued by FNMA 55,178 244 ( 211 ) — 55,211 CMOs issued by GNMA 61,411 232 ( 249 ) — 61,394 SBA-backed securities 33,422 1,323 ( 136 ) — 34,609 Debentures of government- sponsored agencies 71,328 63 ( 1,177 ) — 70,214 U.S. 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 December 31, 2020 Securities of U.S. government-sponsored enterprises: MBS pass-through securities issued by FHLMC and FNMA $ 50,686 $ 2,530 $ — $ — $ 53,216 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 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. September 30, 2021 December 31, 2020 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale (in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 102 $ 104 $ 11,700 $ 11,818 $ 246 $ 250 $ 11,530 $ 11,687 After one but within five years 23,536 24,725 75,784 77,755 7,550 7,961 59,028 62,397 After five years through ten years 51,125 53,105 314,110 318,801 52,113 55,872 144,908 154,089 After ten years 122,038 123,118 550,684 554,659 49,127 51,102 157,572 164,178 Total $ 196,801 $ 201,052 $ 952,278 $ 963,033 $ 109,036 $ 115,185 $ 373,038 $ 392,351 Sales of investment securities and gross gains and losses are shown in the following table: Three months ended Nine months ended (in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Available-for-sale: Sales proceeds $ 4,099 $ — $ 4,099 $ 33,756 Gross realized gains 1 — 1 916 Gross realized losses — — — ( 1 ) Page-13 Pledged investment securities are shown in the following table: (in thousands) September 30, 2021 December 31, 2020 Pledged to the State of California: Secure public deposits in compliance with the Local Agency Security Program $ 234,390 $ 131,051 Collateral for trust deposits 738 751 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 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: September 30, 2021 < 12 continuous months ≥ 12 continuous months Total securities in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Held-to-maturity: MBS pass-through securities issued by FHLMC and FNMA $ 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, 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 ) U.S. 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 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 in a loss position (in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss Available-for-sale: 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 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. Page-14 Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities. 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 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 FHLB Capital Stock As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. We held $ 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 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. VISA Inc. Class B Common Stock As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at 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. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6228 both at 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. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies. Low Income Housing Tax Credits We invest in low-income housing tax credit funds as a limited partner, which totaled $ 3.2 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. Page-15 Note 5: Loans and Allowance for Credit Losses on Loans Under 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 from January 1, 2020 to December 31, 2020. Upon adoption we used a modified retrospective method effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings. The cumulative adjustment to retained earnings was recorded, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019. Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the CECL accounting standards and have not been included below. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the adoption of CECL. In addition, refer to Note 5 under Part I, Item 1, of our 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 Real estate: Commercial owner-occupied 398,543 304,963 Commercial investor-owned 1,157,344 961,208 Construction 125,060 73,046 Home equity 92,396 104,813 Other residential 117,778 123,395 Installment and other consumer loans 47,933 22,723 Total loans, at amortized cost 1 2,317,019 2,088,556 Allowance for credit losses on loans ( 22,414 ) ( 22,874 ) Total loans, net $ 2,294,605 $ 2,065,682 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 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. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened 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 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 Page-16 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. We expect the vast majority of the PPP loans to be fully forgiven by the SBA. Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow 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. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio. Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project. Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, 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. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios. Credit Quality Indicators We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows: Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period. Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification. Page-17 Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies. Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent. We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly. The following 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. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination. (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost September 30, 2021 2021 2020 2019 2018 2017 Prior Total Commercial and industrial: Pass $ 130,037 $ 54,621 $ 28,941 $ 18,245 $ 3,044 $ 33,707 $ 101,044 $ 369,639 Special Mention — 1,787 613 346 — 2 4,037 6,785 Substandard — — — — — — 1,541 1,541 Total commercial and industrial $ 130,037 $ 56,408 $ 29,554 $ 18,591 $ 3,044 $ 33,709 $ 106,622 $ 377,965 Commercial real estate, owner-occupied: Pass $ 40,399 $ 43,782 $ 50,976 $ 53,139 $ 42,410 $ 109,020 $ — $ 339,726 Special Mention — — — 7,889 16,418 20,110 — 44,417 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 Commercial real estate, investor-owned: Pass $ 153,943 $ 188,064 $ 188,508 $ 135,653 $ 83,895 $ 352,715 $ 90 $ 1,102,868 Special Mention — 1,210 2,715 19,345 1,796 27,167 — 52,233 Substandard — — — 709 — 1,534 — 2,243 Total commercial real estate, investor-owned $ 153,943 $ 189,274 $ 191,223 $ 155,707 $ 85,691 $ 381,416 $ 90 $ 1,157,344 Construction: Pass $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060 Total construction $ 26,902 $ 63,355 $ 25,696 $ 9,107 $ — $ — $ — $ 125,060 Home equity: Pass $ — $ — $ — $ — $ — $ 259 $ 91,333 $ 91,592 Substandard — — — — — 384 420 804 Total home equity $ — $ — $ — $ — $ — $ 643 $ 91,753 $ 92,396 Other residential: Pass $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778 Total other residential $ 14,229 $ 32,700 $ 26,347 $ 17,476 $ 8,374 $ 18,652 $ — $ 117,778 Installment and other consumer: Pass $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933 Total installment and other consumer $ 12,311 $ 8,514 $ 11,620 $ 5,777 $ 1,129 $ 6,833 $ 1,749 $ 47,933 Total loans: Pass $ 377,821 $ 391,036 $ 332,088 $ 239,397 $ 138,852 $ 521,186 $ 194,216 $ 2,194,596 Total Special Mention $ — $ 2,997 $ 3,328 $ 27,580 $ 18,214 $ 47,279 $ 4,037 $ 103,435 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 Page-18 (in thousands) Term Loans - Amortized Cost by Origination Year Revolving Loans Amortized Cost December 31, 2020 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: 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 Total construction $ 31,654 $ 30,150 $ 11,242 $ — $ — $ — $ — $ 73,046 Home equity: 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 Total other residential $ 34,447 $ 31,079 $ 23,673 $ 10,574 $ 6,035 $ 17,587 $ — $ 123,395 Installment and other consumer: Pass $ 2,361 $ 4,382 $ 3,483 $ 1,543 $ 3,423 $ 4,921 $ 2,593 $ 22,706 Substandard — — — 17 — — — 17 Total installment and other consumer $ 2,361 $ 4,382 $ 3,483 $ 1,560 $ 3,423 $ 4,921 $ 2,593 $ 22,723 Total loans: Pass $ 570,028 $ 260,532 $ 257,552 $ 161,310 $ 123,131 $ 412,109 $ 191,213 $ 1,975,875 Total Special Mention $ — $ 12,729 $ 13,082 $ 19,022 $ 7,354 $ 14,774 $ 19,891 $ 86,852 Total Substandard $ 8,894 $ 2,716 $ 4,435 $ 17 $ 7,761 $ 1,819 $ 187 $ 25,829 Totals $ 578,922 $ 275,977 $ 275,069 $ 180,349 $ 138,246 $ 428,702 $ 211,291 $ 2,088,556 The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of 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 September 30, 2021 30-59 days past due $ 181 $ — $ — $ — $ 143 $ — $ 73 $ 397 60-89 days past due 924 — — — 121 — 1 1,046 90 days or more past due — — — — — — — Total past due 1,105 — — — 264 — 74 1,443 Current 376,860 398,543 1,157,344 125,060 92,132 117,778 47,859 2,315,576 Total loans 1 $ 377,965 $ 398,543 $ 1,157,344 $ 125,060 $ 92,396 $ 117,778 $ 47,933 $ 2,317,019 Non-accrual loans 2 $ — $ 7,273 $ 709 $ — $ 441 $ — $ — $ 8,423 Non-accrual loans with no allowance $ — $ 7,273 $ 709 $ — $ 441 $ — $ — $ 8,423 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 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. Page-19 Collateral Dependent Loans 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 September 30, 2021 Commercial real estate, owner-occupied $ 7,273 $ — $ — $ 7,273 $ — Commercial real estate, investor-owned 709 — — 709 — Home equity — 441 — 441 — Total $ 7,982 $ 441 $ — $ 8,423 $ — December 31, 2020 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 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 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 nine months, and obtains reasonable assurance of repayment and performance. We may remove a loan from TDR designation if it meets all of the following conditions: • The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards; • The borrower is no longer considered to be in financial difficulty; • Performance on the loan is reasonably assured; and • Existing loan did not have any forgiveness of principal or interest. 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. 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 G AAP. 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 %. 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. Page-20 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 September 30, 2021 December 31, 2020 Commercial and industrial $ 1,394 $ 1,021 Commercial real estate, owner-occupied 7,155 7,147 Commercial real estate, investor-owned 1,718 3,305 Home equity 273 281 Installment and other consumer 706 752 Total $ 11,246 $ 12,506 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. 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 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 Installment and other consumer 3 211 211 210 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 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. Page-21 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. Allowance for Credit Losses on Loans 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 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 ) Recoveries 3 — — 8 — — — — 11 Ending balance $ 2,124 $ 2,566 $ 12,305 $ 1,227 $ 659 $ 623 $ 622 $ 2,288 $ 22,414 Three months ended September 30, 2020 Beginning balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868 Provision - incurred loss ( 79 ) 225 1,221 24 ( 6 ) ( 6 ) ( 20 ) ( 109 ) 1,250 Charge-offs ( 10 ) — — — — — — — ( 10 ) Recoveries 5 — — — — — — — 5 Ending balance $ 2,525 $ 3,135 $ 11,624 $ 860 $ 1,038 $ 1,260 $ 406 $ 1,265 $ 22,113 Allowance for Credit Losses on Loans Rollforward (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 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 ) Recoveries 10 — — 26 50 — — — 86 Ending balance $ 2,124 $ 2,566 $ 12,305 $ 1,227 $ 659 $ 623 $ 622 $ 2,288 $ 22,414 Nine months ended September 30, 2020 Beginning balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677 Provision - incurred loss 208 673 3,141 219 188 287 122 612 5,450 Charge-offs ( 30 ) — — — — — — — ( 30 ) Recoveries 13 — — 3 — — — — 16 Ending balance $ 2,525 $ 3,135 $ 11,624 $ 860 $ 1,038 $ 1,260 $ 406 $ 1,265 $ 22,113 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 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 $ 1.091 billion and $ 1.165 billion at September 30, 2021 and December 31, Page-22 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. Related Party Loans The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $ 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. Note 6: 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 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 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 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 6.0 % 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. Note 7: Stockholders' Equity Dividends 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 The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the Page-23 retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period. Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0 % to 200 % of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period. We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable. The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense. Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the 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. Share Repurchase Program On April 23, 2018, Bancorp announced that its Board of Directors approved a share repurchase program under which Bancorp may repurchase up to $ 25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended the share repurchase program through February 28, 2020. After expiration of this share repurchase program, a new share repurchase program began on March 5, 2020. This new program was approved on January 24, 2020 by Bancorp Board of Directors, allowing Bancorp to repurchase up to $ 25.0 million of its outstanding common stock through February 28, 2022. The share repurchase program, which began on March 5, 2020, was suspended by the Board of Directors on March 20, 2020 in response to the COVID-19 pandemic. The program was reactivated by the Board of Directors on October 23, 2020 and completed in May 2021 upon depletion of repurchase funds. A new share repurchase program was approved 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. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock. As part of the share repurchase program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions. Page-24 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. Note 8: Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements. Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property. The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows: (in thousands) September 30, 2021 December 31, 2020 Commercial lines of credit $ 300,308 $ 297,898 Revolving home equity lines 204,846 191,969 Undisbursed construction loans 82,782 101,307 Personal and other lines of credit 10,981 10,611 Standby letters of credit 3,658 2,657 Total commitments and standby letters of credit $ 602,575 $ 604,442 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 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 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. Leases 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. Lease terms may include certain renewal options that were considered reasonably certain to be exercised. We lease certain equipment under finance leases with initial terms of 3 years to 4 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees. Page-25 The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities. (in thousands) September 30, 2021 December 31, 2020 Operating leases: Operating lease right-of-use assets $ 24,776 $ 3,831 Operating lease liabilities $ 26,637 $ 27,062 Finance leases: Finance lease right-of-use assets $ 499 $ 365 Accumulated amortization ( 62 ) ( 307 ) Finance lease right-of-use assets, net 1 $ 437 $ 58 Finance lease liabilities 2 $ 451 $ 58 1 Included in premises and equipment in the consolidated statements of condition. 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 period presented. 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 Right-of-use assets obtained in exchange for finance lease liabilities $ 444 $ 18 The following table shows components of operating and finance lease cost. 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 Variable lease cost — 1 — 4 Total operating lease cost 1 $ 1,216 $ 1,166 $ 3,543 $ 3,338 Finance lease cost: Amortization of right-of-use assets 2 $ 31 $ 41 $ 65 $ 129 Interest on finance lease liabilities 3 1 1 1 $ 3 Total finance lease cost 32 42 $ 66 $ 132 Total lease cost $ 1,248 $ 1,208 $ 3,609 $ 3,470 1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. 2 Included in depreciation and amortization in the consolidated statements of comprehensive income. 3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of September 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. Page-26 (in thousands) September 30, 2021 Year Operating Leases Finance Leases 2021 $ 1,315 $ 32 2022 5,203 127 2023 4,377 117 2024 3,667 114 2025 3,152 66 Thereafter 10,684 — Total minimum lease payments 28,398 456 Amounts representing interest (present value discount) ( 1,761 ) ( 5 ) Present value of net minimum lease payments (lease liability) $ 26,637 $ 451 Weighted average remaining term (in years) 7.1 3.7 Weighted average discount rate 1.68 % 0.64 % Litigation Matters 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. The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us. In 2012, Visa had reached a $ 4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. 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. 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. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote. Note 9: Derivative Financial Instruments and Hedging Activities We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates. Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is Page-27 in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. As of September 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. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $ 10 thousand at September 30, 2021 and $ 11 thousand at December 31, 2020. Information on our derivatives follows: Asset Derivatives Liability Derivatives (in thousands) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Fair value hedges: Interest rate contracts notional amount $ — $ — $ 13,280 $ 13,991 Interest rate contracts fair value 1 $ — $ — $ 1,266 $ 1,912 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 September 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) 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 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 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 ) 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 ) Net losses on fair value hedging relationships recognized in interest income $ ( 93 ) $ ( 114 ) $ ( 272 ) $ ( 241 ) 1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded. Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes. Information on financial instruments that are eligible for offset in the consolidated statements of condition follows: Page-28 Offsetting of Financial Liabilities and Derivative Liabilities Gross Amounts Net Amounts of Gross Amounts Not Offset in Gross Amounts Offset in the Liabilities Presented the Statements of Condition of Recognized Statements of in the Statements Financial Cash Collateral (in thousands) Liabilities 1 Condition of Condition 1 Instruments Pledged Net Amount September 30, 2021 Derivatives by Counterparty: Counterparty A $ 1,266 $ — $ 1,266 $ — $ ( 1,266 ) $ — December 31, 2020 Derivatives by Counterparty: Counterparty A $ 1,912 $ — $ 1,912 $ — $ ( 1,912 ) $ — 1 Amounts exclude accrued interest on swaps. For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021. Note 10: Merger 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 ) $ 124,401 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. Page-29 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: Deposits: 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 Page-30 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 $ 3,427 Net loss 1 $ ( 2,993 ) 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. Page-31 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 $ — Page-32