BMRC 10-Q Quarterly Report June 30, 2020 | Alphaminr
Bank of Marin Bancorp
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BMRC 10-Q Quarter ended June 30, 2020

Balance Sheet
Cash Flow
Income Statement
Debt
BANK OF MARIN BANCORP
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bmrc-20200630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________
Commission File Number 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
California 20-8859754
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
504 Redwood Blvd. Suite 100 Novato CA 94947
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code: ( 415 ) 763-4520

Not Applicable
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common stock, no par value and attached Share Purchase Rights BMRC The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

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


TABLE OF CONTENTS
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.



Page-2

PART I       FINANCIAL INFORMATION
ITEM 1.  Financial Statements
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 2020 and December 31, 2019
(in thousands, except share data; unaudited) June 30, 2020 December 31, 2019
Assets
Cash, cash equivalents and restricted cash $ 397,699 $ 183,388
Investment securities
Held-to-maturity, at amortized cost 125,781 137,413
Available-for-sale, at fair value 429,775 432,260
Total investment securities 555,556 569,673
Loans, net of allowance for loan losses of $ 20,868 and $ 16,677 at
June 30, 2020 and December 31, 2019, respectively
2,089,333 1,826,609
Bank premises and equipment, net 5,278 6,070
Goodwill 30,140 30,140
Core deposit intangible 4,258 4,684
Operating lease right-of-use assets 23,090 11,002
Interest receivable and other assets 76,186 75,714
Total assets $ 3,181,540 $ 2,707,280
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest bearing $ 1,442,849 $ 1,128,823
Interest bearing
Transaction accounts 146,811 142,329
Savings accounts 190,561 162,817
Money market accounts 904,163 804,710
Time accounts 95,482 97,810
Total deposits 2,779,866 2,336,489
Borrowings and other obligations 140 212
Subordinated debenture 2,743 2,708
Operating lease liabilities 24,574 12,615
Interest payable and other liabilities 21,977 18,468
Total liabilities 2,829,300 2,370,492
Stockholders' Equity
Preferred stock, no par value,
Authorized - 5,000,000 shares, none issued
— —
Common stock, no par value,
Authorized - 30,000,000 shares;
Issued and outstanding - 13,591,835 and 13,577,008 at
June 30, 2020 and December 31, 2019, respectively
128,633 129,058
Retained earnings 211,613 203,227
Accumulated other comprehensive income, net of taxes 11,994 4,503
Total stockholders' equity 352,240 336,788
Total liabilities and stockholders' equity $ 3,181,540 $ 2,707,280

The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-3

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

The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-4

BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended June 30, 2020 and 2019
(in thousands, except share data; unaudited) Common Stock Retained
Earnings 		Accumulated Other
Comprehensive Income (Loss),
Net of Taxes 		Total
Shares Amount
Three months ended June 30, 2020
Balance at April 1, 2020 13,565,969 $ 127,684 $ 207,328 $ 10,928 $ 345,940
Net income — — 7,406 — 7,406
Other comprehensive income — — — 1,066 1,066
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 14,760 453 — — 453
Stock issued under employee stock purchase plan 537 17 — — 17
Stock issued under employee stock ownership plan 11,500 324 — — 324
Restricted stock forfeited / cancelled ( 931 ) — — — —
Stock-based compensation - stock options — 42 — — 42
Stock-based compensation - restricted stock — 113 — — 113
Cash dividends paid on common stock ($ 0.23 per share)
— — ( 3,121 ) — ( 3,121 )
Balance at June 30, 2020 13,591,835 $ 128,633 $ 211,613 $ 11,994 $ 352,240
Three months ended June 30, 2019
Balance at April 1, 2019 13,786,808 $ 137,125 $ 184,793 $ ( 1,254 ) $ 320,664
Net income — — 8,235 — 8,235
Other comprehensive income — — — 6,354 6,354
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 9,333 211 — — 211
Stock issued under employee stock purchase plan 374 15 — — 15
Stock issued under employee stock ownership plan 7,600 312 — — 312
Restricted stock surrendered for tax withholdings upon vesting ( 420 ) ( 18 ) — — ( 18 )
Restricted stock forfeited / cancelled ( 9,932 ) — — — —
Stock-based compensation - stock options — 55 — — 55
Stock-based compensation - restricted stock — 95 — — 95
Cash dividends paid on common stock ($ 0.19 per share)
— — ( 2,612 ) — ( 2,612 )
Stock repurchased, net of commissions ( 134,620 ) ( 5,644 ) — — ( 5,644 )
Balance at June 30, 2019 13,659,143 $ 132,151 $ 190,416 $ 5,100 $ 327,667

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















BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 2020 and 2019
(in thousands, except share data; unaudited) Common Stock Retained
Earnings 		Accumulated Other
Comprehensive Income (Loss),
Net of Taxes 		Total
Shares Amount
Six months ended June 30, 2020
Balance at January 1, 2020 13,577,008 $ 129,058 $ 203,227 $ 4,503 $ 336,788
Net income — — 14,634 — 14,634
Other comprehensive income — — — 7,491 7,491
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 63,815 1,277 — — 1,277
Stock issued under employee stock purchase plan 1,084 33 — — 33
Stock issued under employee stock ownership plan 19,400 648 — — 648
Restricted stock granted 29,100 — — — —
Restricted stock surrendered for tax withholdings upon vesting ( 2,200 ) ( 73 ) — — ( 73 )
Restricted stock forfeited / cancelled ( 6,718 ) — — — —
Stock-based compensation - stock options — 211 — — 211
Stock-based compensation - restricted stock — 574 — — 574
Cash dividends paid on common stock ($ 0.46 per share)
— — ( 6,248 ) — ( 6,248 )
Stock purchased by directors under director stock plan 400 18 — — 18
Stock issued in payment of director fees 2,610 117 — — 117
Stock repurchased, net of commissions ( 92,664 ) ( 3,230 ) — — ( 3,230 )
Balance at June 30, 2020 13,591,835 $ 128,633 $ 211,613 $ 11,994 $ 352,240
Six months ended June 30, 2019
Balance at January 1, 2019 13,844,353 $ 140,565 $ 179,944 $ ( 4,102 ) $ 316,407
Net income — — 15,714 — 15,714
Other comprehensive income — — — 9,202 9,202
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings 37,475 470 — — 470
Stock issued under employee stock purchase plan 751 29 — — 29
Stock issued under employee stock ownership plan 15,600 625 — — 625
Restricted stock granted 29,110 — — — —
Restricted stock surrendered for tax withholdings upon vesting ( 5,240 ) ( 220 ) — — ( 220 )
Restricted stock forfeited / cancelled ( 17,325 ) — — — —
Stock-based compensation - stock options — 340 — — 340
Stock-based compensation - restricted stock — 664 — — 664
Cash dividends paid on common stock ($ 0.38 per share)
— — ( 5,242 ) — ( 5,242 )
Stock purchased by directors under director stock plan 199 8 — — 8
Stock issued in payment of director fees 2,744 114 — — 114
Stock repurchased, net of commissions ( 248,524 ) ( 10,444 ) — — ( 10,444 )
Balance at June 30, 2019 13,659,143 $ 132,151 $ 190,416 $ 5,100 $ 327,667

The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-5

BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2020 and 2019
(in thousands; unaudited) June 30, 2020 June 30, 2019
Cash Flows from Operating Activities:
Net income $ 14,634 $ 15,714
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 4,200 —
Provision for losses on off-balance sheet commitments 362 129
Noncash contribution expense to employee stock ownership plan 648 625
Noncash director compensation expense 150 151
Stock-based compensation expense 785 1,004
Amortization of core deposit intangible 426 443
Amortization of investment security premiums (discounts), net 344 924
Amortization of acquired loan (discounts) premiums, net ( 55 ) ( 154 )
Accretion of discount on subordinated debenture 35 34
Net change in deferred loan origination costs/fees 7,829 ( 146 )
Gain on sale of investment securities ( 915 ) ( 55 )
Depreciation and amortization 1,052 1,128
Earnings on bank-owned life insurance policies ( 509 ) ( 175 )
Net change in operating assets and liabilities:
Interest receivable and other assets ( 2,174 ) ( 583 )
Interest payable and other liabilities 2,816 ( 2,131 )
Total adjustments 14,994 1,194
Net cash provided by operating activities 29,628 16,908
Cash Flows from Investing Activities:
Purchase of available-for-sale securities ( 56,912 ) ( 11,282 )
Proceeds from sale of available-for-sale securities 33,756 66,081
Proceeds from paydowns/maturities of held-to-maturity securities 11,530 8,157
Proceeds from paydowns/maturities of available-for-sale securities 36,951 41,905
Loans originated and principal collected, net ( 273,169 ) 234
Purchase of bank-owned life insurance policies ( 941 ) ( 1,892 )
Purchase of premises and equipment ( 242 ) ( 244 )
Cash paid for low income housing tax credit investment ( 1,251 ) ( 38 )
Net cash (used in) provided by investing activities ( 250,278 ) 102,921
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 443,377 ( 72,800 )
Proceeds from stock options exercised 1,277 470
Payment of tax withholdings for stock options exercised and vesting of restricted stock ( 73 ) ( 220 )
Proceeds from stock issued under employee and director stock purchase plans 51 37
Stock repurchased, net of commissions ( 3,333 ) ( 10,455 )
Repayment of Federal Home Loan Bank borrowings — ( 7,000 )
Repayment of finance lease obligations ( 90 ) ( 83 )
Cash dividends paid on common stock ( 6,248 ) ( 5,242 )
Net cash provided by (used in) financing activities 434,961 ( 95,293 )
Net increase in cash, cash equivalents and restricted cash 214,311 24,536
Cash, cash equivalents and restricted cash at beginning of period 183,388 34,221
Cash, cash equivalents and restricted cash at end of period $ 397,699 $ 58,757
Supplemental disclosure of cash flow information:
Cash paid in interest $ 1,871 $ 2,191
Cash paid in income taxes $ — $ 6,925
Supplemental disclosure of noncash investing and financing activities:
Change in net unrealized gain or loss on available-for-sale securities $ 11,306 $ 12,921
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity $ 245 $ 205
Stock issued to employee stock ownership plan $ 648 $ 625
Stock issued in payment of director fees $ 117 $ 114
Repurchase of stock not yet settled $ — $ 132
Restricted cash 1
$ — $ 9,709
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).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Bank of Marin Bancorp (“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2019 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.
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.
Three months ended Six months ended
(in thousands, except per share data) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Weighted average basic shares outstanding 13,514 13,655 13,519 13,696
Potentially dilutive common shares related to:
Stock options 54 142 80 149
Unvested restricted stock awards 17 21 22 26
Weighted average diluted shares outstanding 13,585 13,818 13,621 13,871
Net income $ 7,406 $ 8,235 $ 14,634 $ 15,714
Basic EPS $ 0.55 $ 0.60 $ 1.08 $ 1.15
Diluted EPS $ 0.55 $ 0.60 $ 1.07 $ 1.13
Weighted average anti-dilutive shares not included in the calculation of diluted EPS 207 44 109 30

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Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in 2020

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement . The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities should disclose and describe the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this ASU prospectively effective January 1, 2020. As the ASU’s requirements only relate to disclosures, the amendments did not impact our financial condition or results of operations. Refer to Note 3, Fair Value of Assets and Liabilities, for additional disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract . This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software regardless of whether they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity has the option to apply amendments in the ASU either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted this ASU prospectively on January 1, 2020, which did not impact our financial condition and results of operations.

Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The standard will replace today's "incurred loss" model with a "current expected credit loss" ("CECL") model. The CECL model applies to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt security. In addition, the CECL standard modifies the accounting for purchased loans and requires that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through credit loss expense.

Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for credit losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, in accordance with the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard. Implementation may be delayed until the end of the national emergency or December 31, 2020, whichever occurs first. Had we adopted the CECL standard as of January 1, 2020, the increase to our allowance for loan losses would have ranged from 5 % to 15 % of the amount recorded at December 31, 2019, which were based on economic forecasts at that time and did not include the subsequent COVID-19 pandemic related impact.

Early CECL implementation activities focused on, among other things, capturing and validating data, segmenting the loan portfolio, evaluating various credit loss estimation methodologies, sourcing tools to forecast future economic conditions, running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors, and evaluating the qualitative factor framework and assumptions. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that
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considers the probability of default and loss given default. Ongoing implementation activities include developing forecasts, running parallel calculations, evaluating results, and continuing model validation.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards. The provisions of this ASU under Topic 326 will be evaluated in conjunction with the adoption of ASU 2016-13, however, we do not expect it to have a material impact on our financial condition and results of operations. All other provisions under this ASU were adopted as of January 1, 2020 and did not impact our financial condition and results of operations.

In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief . This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with the adoption of ASU 2016-13 to determine its impact on our financial condition and results of operations. However, at this time we do not expect to elect the fair value option for our financial assets.

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

Accounting Standards Not Yet Effective
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This ASU is intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. As this ASU is narrow in scope and applicability to us will likely be minimal, we do not expect that the ASU will have a material impact on our financial condition or results of operations.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 . Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, for the purposes of applying the measurement alternative in accordance with Topic 321. This ASU is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. ASU No. 2020-01 should be applied prospectively at the beginning of the interim period that includes adoption. We do not expect that the ASU will have a material impact on our financial condition or results of operations.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) . The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued
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because of reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have not elected to apply these amendments. However, we will assess the applicability of the ASU to us and 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 in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant Management 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
June 30, 2020
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 255,709 $ — $ 255,709 $ — OCI
SBA-backed securities 33,993 — 33,993 — OCI
Debentures of government sponsored agencies 42,018 — 42,018 — OCI
Obligations of state and political subdivisions 98,055 — 98,055 — OCI
Derivative financial liabilities (interest rate contracts) 2,682 — 2,682 — NI
December 31, 2019
Securities available-for-sale:
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies $ 278,144 $ — $ 278,144 $ — OCI
SBA-backed securities 36,286 — 36,286 — OCI
Debentures of government sponsored agencies 49,046 — 49,046 — OCI
Obligations of state and political subdivisions 67,282 — 67,282 — OCI
Corporate bonds 1,502 — 1,502 — OCI
Derivative financial liabilities (interest rate contracts) 1,178 — 1,178 — NI
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. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation
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techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).   Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, and corporate bonds. As of June 30, 2020 and December 31, 2019, there were no Level 1 or Level 3 securities.

Held-to-maturity securities may be written down to fair value as a result of other-than-temporary impairment , and we did no t record any write-downs during the six months ended June 30, 2020 or June 30, 2019. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date.  Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction.  Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals.  Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements.  We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date.  When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties.  We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). As of June 30, 2020 and December 31, 2019, we did no t carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of June 30, 2020 and December 31, 2019, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of June 30, 2020 or December 31, 2019. The values are discussed in Note 4, Investment Securities.
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June 30, 2020 December 31, 2019
(in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy
Financial assets (recorded at amortized cost)
Cash and cash equivalents $ 397,699 $ 397,699 Level 1 $ 183,388 $ 183,388 Level 1
Investment securities held-to-maturity 125,781 132,836 Level 2 137,413 139,642 Level 2
Loans, net 2,089,333 2,108,121 Level 3 1,826,609 1,839,666 Level 3
Interest receivable 10,078 10,078 Level 2 7,732 7,732 Level 2
Financial liabilities (recorded at amortized cost)
Time deposits 95,482 95,838 Level 2 97,810 97,859 Level 2
Subordinated debenture 2,743 2,487 Level 3 2,708 3,182 Level 3
Interest payable 115 115 Level 2 134 134 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 June 30, 2020 or December 31, 2019.

Note 4: Investment Securities
Our investment securities portfolio consists of obligations of state and political subdivisions, 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:
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June 30, 2020 December 31, 2019
Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized
(in thousands) Cost Value Gains (Losses) Cost Value Gains (Losses)
Held-to-maturity:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA $ 74,688 $ 79,006 $ 4,318 $ — $ 80,451 $ 81,325 $ 1,018 $ ( 144 )
SBA-backed securities 7,029 7,473 444 — 7,999 8,264 265 —
CMOs issued by FNMA 9,011 9,524 513 — 10,210 10,492 282 —
CMOs issued by FHLMC 30,444 32,140 1,696 — 31,477 32,157 685 ( 5 )
CMOs issued by GNMA 2,687 2,714 27 — 3,763 3,816 53 —
Obligations of state and
political subdivisions 		1,922 1,979 57 — 3,513 3,588 75 —
Total held-to-maturity 125,781 132,836 7,055 — 137,413 139,642 2,378 ( 149 )
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA 62,337 65,587 3,250 — 98,502 100,071 1,617 ( 48 )
SBA-backed securities 32,517 33,993 1,536 ( 60 ) 35,674 36,286 688 ( 76 )
CMOs issued by FNMA 20,018 20,849 831 — 22,702 23,092 390 —
CMOs issued by FHLMC 150,360 158,698 8,339 ( 1 ) 139,398 143,226 3,892 ( 64 )
CMOs issued by GNMA 10,089 10,575 486 — 11,719 11,755 42 ( 6 )
Debentures of government- sponsored agencies 41,355 42,018 663 — 48,389 49,046 727 ( 70 )
Obligations of state and
political subdivisions 		94,371 98,055 3,684 — 66,042 67,282 1,386 ( 146 )
Corporate bonds — — — — 1,497 1,502 6 ( 1 )
Total available-for-sale 411,047 429,775 18,789 ( 61 ) 423,923 432,260 8,748 ( 411 )
Total investment securities $ 536,828 $ 562,611 $ 25,844 $ ( 61 ) $ 561,336 $ 571,902 $ 11,126 $ ( 560 )

The amortized cost a nd fair value of investment debt securities by contractual maturity at June 30, 2020 and December 31, 2019 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2020 December 31, 2019
Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Within one year $ 1,333 $ 1,368 $ 18,446 $ 18,575 $ 1,807 $ 1,811 $ 6,699 $ 6,706
After one but within five years 2,230 2,319 55,125 57,705 2,256 2,296 48,706 49,619
After five years through ten years 53,616 57,101 173,876 183,624 56,221 57,544 208,806 214,277
After ten years 68,602 72,048 163,600 169,871 77,129 77,991 159,712 161,658
Total $ 125,781 $ 132,836 $ 411,047 $ 429,775 $ 137,413 $ 139,642 $ 423,923 $ 432,260

Sales of investment securities and gross gains and losses are shown in the following table:
Three months ended Six months ended
(in thousands) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Available-for-sale:
Sales proceeds $ 6,314 $ 61,852 $ 33,756 $ 66,081
Gross realized gains 116 211 916 214
Gross realized losses ( 1 ) ( 150 ) ( 1 ) ( 159 )

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

Other-Than-Temporarily Impaired ("OTTI") Debt Securities
There were 7 and 40 securities in unrealized loss positions at June 30, 2020 and December 31, 2019, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
June 30, 2020 < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss
Available-for-sale:
SBA-backed securities $ — $ — $ 2,016 $ ( 60 ) $ 2,016 $ ( 60 )
CMOs issued by FHLMC 2,740 ( 1 ) — — 2,740 ( 1 )
Total available-for-sale 2,740 ( 1 ) 2,016 ( 60 ) 4,756 ( 61 )
Total temporarily impaired securities $ 2,740 $ ( 1 ) $ 2,016 $ ( 60 ) $ 4,756 $ ( 61 )
December 31, 2019 < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
(in thousands) Fair value Unrealized loss Fair value Unrealized loss Fair value Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA $ 14,203 $ ( 60 ) $ 6,073 $ ( 84 ) $ 20,276 $ ( 144 )
CMOs issued by FHLMC — — 1,725 ( 5 ) 1,725 ( 5 )
Total held-to-maturity 14,203 ( 60 ) 7,798 ( 89 ) 22,001 ( 149 )
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA 4,367 ( 34 ) 4,464 ( 14 ) 8,831 ( 48 )
SBA-backed securities 9,227 ( 14 ) 2,448 ( 62 ) 11,675 ( 76 )
CMOs issued by FHLMC 14,918 ( 58 ) 2,981 ( 6 ) 17,899 ( 64 )
CMOs issued by GNMA 7,139 ( 6 ) — — 7,139 ( 6 )
Debentures of government- sponsored agencies 25,228 ( 70 ) — — 25,228 ( 70 )
Obligations of state and political subdivisions 20,579 ( 145 ) 659 ( 1 ) 21,238 ( 146 )
Corporate Bonds 500 ( 1 ) — — 500 ( 1 )
Total available-for-sale 81,958 ( 328 ) 10,552 ( 83 ) 92,510 ( 411 )
Total temporarily impaired securities $ 96,161 $ ( 388 ) $ 18,350 $ ( 172 ) $ 114,511 $ ( 560 )

As of June 30, 2020, the investment portfolio included 5 investment securities that had been in a continuous loss position for twelve months or more and 2 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.

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We routinely perform internal analyses of latest financial information of the issuers of obligations of state and political subdivisions, their credit ratings by major credit agencies, and/or credit enhancements. Based on our comprehensive analyses, we determined that the decline in the fair values of obligations of state and political subdivisions and corporate bonds as of December 31, 2019 were primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At June 30, 2020, Management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. Therefore, we do not consider these investment securities to be other-than-temporarily impaired at June 30, 2020.
Non-Marketable Securities Included in Other Assets

As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. We held $ 11.9 million and $ 11.7 million of FHLB stock included in other assets on the consolidated statements of condition at June 30, 2020 and December 31, 2019, respectively. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, 2020 and December 31, 2019. On July 23, 2020, FHLB announced a cash dividend for the second quarter of 2020 at an annualized dividend rate of 5.00 % to be distributed in mid-August 2020. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at June 30, 2020 and December 31, 2019. 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 conversion rate of 1.6228 both at June 30, 2020 and December 31, 2019, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $ 3.3 million and $ 3.2 million at June 30, 2020 and December 31, 2019, 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.

We invest in low-income housing tax credit funds as a limited partner, which totaled $ 3.8 million and $ 4.1 million recorded in other assets as of June 30, 2020 and December 31, 2019, respectively. In the first six months of 2020, we recognized $ 327 thousand of low-income housing tax credits and other tax benefits, offset by $ 275 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2020, our unfunded commitments for these low-income housing tax credit funds totaled $ 886 thousand. We did no t recognize any impairment losses on these low-income housing tax credit investments during the first six months of 2020 or 2019, as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5: Loans and Allowance for Loan Losses

Credit Quality of Loans
The following table shows outstanding loans by class and payment aging as of June 30, 2020 and December 31, 2019.
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Loan Aging Analysis by Class
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
June 30, 2020
30-59 days past due $ — $ — $ — $ — $ 169 $ — $ — $ 169
60-89 days past due 10 — — — — — 2 12
90 days or more past due — — — — 69 — — 69
Total past due 10 — — — 238 — 2 250
Current 525,107 296,163 946,389 66,368 112,673 136,859 26,392 2,109,951
Total loans 1
$ 525,117 $ 296,163 $ 946,389 $ 66,368 $ 112,911 $ 136,859 $ 26,394 $ 2,110,201
Non-accrual loans 2
$ — $ — $ 907 $ — $ 625 $ — $ 55 $ 1,587
December 31, 2019
30-59 days past due $ 1 $ — $ 1,001 $ — $ 279 $ — $ 7 $ 1,288
60-89 days past due — — — — 98 — 95 193
90 days or more past due — — — — 167 — — 167
Total past due 1 — 1,001 — 544 — 102 1,648
Current 246,686 308,824 945,316 61,095 115,480 136,657 27,580 1,841,638
Total loans 1
$ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286
Non-accrual loans 2
$ — $ — $ — $ — $ 168 $ — $ 58 $ 226
1 Amounts include net deferred loan origination (fees) costs of $( 6.8 ) million (including $ 8.1 million in deferred SBA PPP loan fees, net of costs) and $ 983 thousand at June 30, 2020 and December 31, 2019, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $ 925 thousand at June 30, 2020 and $ 983 thousand at December 31, 2019.
2 There were no accruing loans past due more than ninety days at June 30, 2020 or December 31, 2019.

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

Pursuant to the CARES Act, on April 6, 2020, the Bank began accepting applications from eligible small businesses and non-profit organizations to participate in the Paycheck Protection Program (“PPP”) administered by the U.S. Small Business Administration (“SBA”). PPP loans have terms of two to five years and earn interest at 1%. In addition, the Bank receives a fee of 1%-5% from the SBA depending on the loan amount, which is netted with loan origination costs and amortized into interest income over the contractual life of the loan. The recognition of fees/costs is accelerated when the loan is forgiven by the SBA and/or paid off prior to maturity. PPP loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if they meet the requirements of the program. PPP loans totaling $ 298.9 million at June 30, 2020 are included in commercial and industrial loan balances. The Bank ended its origination of new PPP loans on June 30, 2020.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow and to be supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or 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 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 capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the
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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 primarily consist of home equity lines of credit, other residential loans and floating homes, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.

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.
Substandard : Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.
Doubtful : Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.

We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, at June 30, 2020 and December 31, 2019.
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Credit Risk Profile by Internally Assigned Risk Grade
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
June 30, 2020
Pass $ 491,861 $ 252,321 $ 939,323 $ 66,368 $ 111,266 $ 136,859 $ 26,249 $ 2,024,247
Special Mention 33,042 34,470 4,047 — 850 — — 72,409
Substandard 214 9,372 3,019 — 795 — 145 13,545
Total loans $ 525,117 $ 296,163 $ 946,389 $ 66,368 $ 112,911 $ 136,859 $ 26,394 $ 2,110,201
December 31, 2019
Pass $ 209,213 $ 264,766 $ 945,757 $ 61,095 $ 114,935 $ 136,657 $ 27,538 $ 1,759,961
Special Mention 37,065 35,016 560 — 750 — — 73,391
Substandard 409 9,042 — — 339 — 144 9,934
Total loans $ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ 1,843,286
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.

The same Management level that approved the loan classification upgrade must approve the removal of TDR status. There were no loans removed from TDR designation during the six months ended June 30, 2020. There was one commercial loan with a recorded investment of $ 3 thousand removed from TDR designation during the six months ended June 30, 2019 after meeting all of the conditions above.

Section 4013 of the CARES Act provided optional, temporary relief from evaluating loans that may have been considered TDRs under GAAP. This relief applies to loan modifications executed between March 1, 2020 and either the earlier of 60 days after the national emergency is terminated or December 31, 2020. The Bank elected to apply these temporary accounting provisions to payment relief loans beginning in March 2020. As of July 10, 2020, the Bank approved over 260 loan modifications for full payment deferral or interest-only payments for up to 120 days on loan balances exceeding $ 386 million. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will first be applied to the accrued interest due and nothing will be applied to principal until the accrued interest is fully paid. We have been reaching out to each borrower before the expiration of the initial 120 day relief period to determine if additional short-term relief is necessary.

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The following table summarizes the carrying amount of TDR loans by loan class as of June 30, 2020 and December 31, 2019.
(in thousands)
Recorded Investment in Troubled Debt Restructurings 1
June 30, 2020 December 31, 2019
Commercial and industrial $ 578 $ 1,223
Commercial real estate, owner-occupied 7,002 6,998
Commercial real estate, investor-owned 1,757 1,770
Home equity 527 251
Other residential — 452
Installment and other consumer 780 639
Total $ 10,644 $ 11,333
1 There was one acquired home equity TDR loan with a recorded investment of $ 276 thousand as of June 30, 2020. There were no acquired TDR loans as of December 31, 2019. TDR loans on non-accrual status totaled $ 331 thousand and $ 58 thousand at June 30, 2020 and December 31, 2019, respectively.

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 June 30, 2020:
Home equity 1 $ 276 $ 276 $ 276
Installment and other consumer 1 108 108 108
2 $ 384 $ 384 $ 384
TDRs during the three months ended June 30, 2019:
Commercial and industrial 1 $ 298 $ 298 $ 298
TDRs during the six months ended June 30, 2020:
Commercial and industrial 1 $ 170 $ 162 $ 144
Home equity 1 276 276 276
Installment and other consumer 3 211 211 210
5 $ 657 $ 649 $ 630
TDRs during the six months ended June 30, 2019:
Commercial and industrial 1 $ 298 $ 298 $ 298
The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications. The loan modified during the first six months of 2019 reflected a maturity extension and interest rate concession. During the six months ended June 30, 2020 and 2019, 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.

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Impaired Loans

The following tables summarize information by class on impaired loans and their related allowances. Total impaired loans include non-accrual loans and accruing TDR loans.
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
June 30, 2020
Recorded investment in impaired loans:
With no specific allowance recorded $ 309 $ — $ 906 $ — $ 625 $ — $ 92 $ 1,932
With a specific allowance recorded 269 7,002 1,758 — 251 — 688 9,968
Total recorded investment in impaired loans $ 578 $ 7,002 $ 2,664 $ — $ 876 $ — $ 780 $ 11,900
Unpaid principal balance of impaired loans $ 569 $ 6,993 $ 2,655 $ — $ 893 $ — $ 778 $ 11,888
Specific allowance 10 192 64 — 4 — 164 434
Average recorded investment in impaired loans during the quarter ended
June 30, 2020 		777 6,999 2,681 — 880 225 755 12,317
Interest income recognized on impaired loans during the quarter ended
June 30, 2020 1
7 67 19 — 3 — 7 103
Average recorded investment in impaired loans during the six months ended
June 30, 2020 		926 6,999 2,377 — 726 300 717 12,045
Interest income recognized on impaired loans during the six months ended
June 30, 2020 1
21 133 39 — 7 4 14 218
Average recorded investment in impaired loans during the quarter ended
June 30, 2019 		1,498 7,000 1,804 1,590 503 458 670 13,523
Interest income recognized on impaired loans during the quarter ended 
June 30, 2019 1
19 66 20 13 29 5 6 158
Average recorded investment in impaired loans during the six months ended
June 30, 2019 		1,607 6,998 1,809 1,956 523 460 675 14,028
Interest income recognized on impaired loans during the six months ended
June 30, 2019 1
41 132 39 56 33 9 13 323
1 No interest income was recognized on a cash basis during the three and six months ended June 30, 2020. Interest income recognized on a cash basis during the three and six months ended June 30, 2019 totaled $ 24 thousand related to the pay-off of a non-accrual home equity loan.
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Total
December 31, 2019
Recorded investment in impaired loans:
With no specific allowance recorded $ 349 $ — $ — $ — $ 167 $ 452 $ 98 $ 1,066
With a specific allowance recorded 874 6,998 1,770 — 251 — 541 10,434
Total recorded investment in impaired loans $ 1,223 $ 6,998 $ 1,770 $ — $ 418 $ 452 $ 639 $ 11,500
Unpaid principal balance of impaired loans $ 1,209 $ 6,992 $ 1,764 $ — $ 417 $ 451 $ 638 $ 11,471
Specific allowance $ 103 $ 195 $ 41 $ — $ 5 $ — $ 53 $ 397

Management monitors delinquent loans continuously and identifies problem loans (loans on non-accrual status and loans modified in a TDR) to evaluate individually for impairment. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were no charged-off amounts on impaired loans at June 30, 2020 or December 31, 2019. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At June 30, 2020 and December 31, 2019, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $ 979 thousand and $ 534 thousand, respectively.

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The following tables disclose activity in the allowance for loan losses ("ALLL") and the recorded investment in loans by class, as well as the related ALLL disaggregated by impairment evaluation method.
Allowance for Loan Losses Rollforward for the Period
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
Three months ended June 30, 2020
Beginning balance $ 2,784 $ 2,797 $ 9,225 $ 727 $ 982 $ 1,098 $ 363 $ 908 $ 18,884
Provision (reversal) ( 159 ) 113 1,178 109 62 168 63 466 2,000
Charge-offs ( 20 ) — — — — — — — ( 20 )
Recoveries 4 — — — — — — — 4
Ending balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868
Three months ended June 30, 2019
Beginning balance $ 2,612 $ 2,358 $ 7,766 $ 704 $ 923 $ 800 $ 340 $ 314 $ 15,817
Provision (reversal) ( 250 ) ( 37 ) ( 57 ) ( 85 ) ( 16 ) 49 ( 17 ) 413 —
Charge-offs — — — — — — — — —
Recoveries 6 — 12 — — — — — 18
Ending balance $ 2,368 $ 2,321 $ 7,721 $ 619 $ 907 $ 849 $ 323 $ 727 $ 15,835
Allowance for Loan Losses Rollforward for the Period
(in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor Construction Home equity Other residential Installment and other consumer Unallocated Total
Six months ended June 30, 2020
Beginning balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677
Provision (reversal) 287 448 1,920 195 194 293 142 721 4,200
Charge-offs ( 20 ) — — — — — — — ( 20 )
Recoveries 8 — — 3 — — — — 11
Ending balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868
Six months ended June 30, 2019
Beginning balance $ 2,436 $ 2,407 $ 7,703 $ 756 $ 915 $ 800 $ 310 $ 494 $ 15,821
Provision (reversal) ( 70 ) ( 86 ) 6 ( 137 ) ( 8 ) 49 13 233 —
Charge-offs ( 9 ) — — — — — — — ( 9 )
Recoveries 11 — 12 — — — — — 23
Ending balance $ 2,368 $ 2,321 $ 7,721 $ 619 $ 907 $ 849 $ 323 $ 727 $ 15,835
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
June 30, 2020
Ending ALLL related to loans collectively evaluated for impairment $ 2,599 $ 2,718 $ 10,339 $ 836 $ 1,040 $ 1,266 $ 262 $ 1,374 $ 20,434
Ending ALLL related to loans individually evaluated for impairment 10 192 64 — 4 — 164 — 434
Ending balance $ 2,609 $ 2,910 $ 10,403 $ 836 $ 1,044 $ 1,266 $ 426 $ 1,374 $ 20,868
Recorded Investment:
Collectively evaluated for impairment $ 524,539 $ 289,161 $ 943,725 $ 66,368 $ 112,035 $ 136,859 $ 25,614 $ — $ 2,098,301
Individually evaluated for impairment 578 7,002 2,664 — 876 — 780 — 11,900
Total $ 525,117 $ 296,163 $ 946,389 $ 66,368 $ 112,911 $ 136,859 $ 26,394 $ — $ 2,110,201
Ratio of allowance for loan losses to total loans 0.50 % 0.98 % 1.10 % 1.26 % 0.92 % 0.93 % 1.61 % NM 0.99 %
Allowance for loan losses to non-accrual loans NM NM 1,147 % NM 167 % NM 775 % NM 1,315 %
NM - Not Meaningful
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Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) Commercial and industrial Commercial real estate, owner-occupied Commercial real estate, investor-owned Construction Home equity Other residential Installment and other consumer Unallocated Total
December 31, 2019
Ending ALLL related to loans collectively evaluated for impairment $ 2,231 $ 2,267 $ 8,442 $ 638 $ 845 $ 973 $ 231 $ 653 $ 16,280
Ending ALLL related to loans individually evaluated for impairment 103 195 41 — 5 — 53 — 397
Ending balance $ 2,334 $ 2,462 $ 8,483 $ 638 $ 850 $ 973 $ 284 $ 653 $ 16,677
Recorded Investment:
Collectively evaluated for impairment $ 245,464 $ 301,826 $ 944,547 $ 61,095 $ 115,606 $ 136,205 $ 27,043 $ — $ 1,831,786
Individually evaluated for impairment 1,223 6,998 1,770 — 418 452 639 — 11,500
Total $ 246,687 $ 308,824 $ 946,317 $ 61,095 $ 116,024 $ 136,657 $ 27,682 $ — $ 1,843,286
Ratio of allowance for loan losses to total loans 0.95 % 0.80 % 0.90 % 1.04 % 0.73 % 0.71 % 1.03 % NM 0.90 %
Allowance for loan losses to non-accrual loans NM NM NM NM 506 % NM 490 % NM 7,379 %
NM - Not Meaningful

Pledged Loans

Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1,154.4 million and $ 1,133.4 million at June 30, 2020 and December 31, 2019, respectively. In addition, we pledge eligible TIC loans, which totaled $ 120.8 million and $ 115.7 million at June 30, 2020 and December 31, 2019, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). Also, see Note 6, Borrowings.

Related Party Loans
The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $ 7.7 million at June 30, 2020 and $ 8.3 million at December 31, 2019. In addition, undisbursed commitments to related parties totaled $ 8.8 million at June 30, 2020 and $ 9.2 million at December 31, 2019.

Note 6: Borrowings and Other Obligations
Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $ 135.0 million at June 30, 2020 and $ 92.0 million at December 31, 2019.  In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at June 30, 2020 or December 31, 2019 .
Federal Home Loan Bank Borrowings – As of June 30, 2020 and December 31, 2019, the Bank had lines of credit with the FHLB totaling $ 674.4 million and $ 648.0 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at June 30, 2020 or December 31, 2019.

Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans.  At June 30, 2020 and December 31, 2019, the Bank had borrowing capacity under this line totaling $ 82.0 million and $ 80.3 million, respectively, and had no outstanding borrowings with the FRBSF.

Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. The trust preferred securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The subordinated debenture was recorded at fair value totaling $ 2.14 million at the acquisition date with a contractual balance of $ 4.12 million. The difference
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between the contractual balance and the fair value at the acquisition date is accreted into interest expense over the life of the debenture. Accretion on the subordinated debenture totaled $ 35 thousand and $ 34 thousand for the six months ended June 30, 2020 and 2019, respectively. Bancorp has the option to defer payment of the interest on the subordinated debenture for a period of up to five years , as long as there is no event of default. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited. Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $ 4.0 million issued by the Trust, which have identical maturity, repricing and payment terms as the subordinated debenture. The subordinated debenture due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly (repricing quarterly, based on 3-month LIBOR plus 1.40 %, or 1.71 % as of June 30, 2020) is redeemable in whole or in part on any interest payment date.

Other Obligations – The Bank leases certain equipment under finance leases, which are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.

Note 7: Stockholders' Equity
Dividends

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

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

Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three -year 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 six months ended June 30, 2020, we withheld 8,409 shares totaling $ 346 thousand at a weighted-average price of $ 41.17 for cashless exercises. During the six months ended June 30,
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2019, we withheld 6,937 shares totaling $ 290 thousand at a weighted-average price of $ 41.78 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program 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. On January 24, 2020, Bancorp Board of Directors approved a new Share Repurchase Program under which Bancorp may repurchase up to $ 25.0 million of its outstanding common stock through February 28, 2022. The new share repurchase program began on March 1, 2020 and was suspended indefinitely by the Board of Directors on March 20, 2020 to focus our resources on responding to customer needs during the COVID-19 pandemic.

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.

During the six months ended June 30, 2020, Bancorp repurchased 92,664 shares totaling $ 3.2 million for a cumulative 619,881 shares totaling $ 25.2 million repurchased from May 1, 2018 through June 30, 2020. Due to the suspension of the program in March 2020, there were no shares repurchased during the three months ended June 30, 2020.

Note 8: Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.
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 undrawn loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:
(in thousands) June 30, 2020 December 31, 2019
Commercial lines of credit $ 305,233 $ 287,533
Revolving home equity lines 189,107 189,035
Undisbursed construction loans 45,209 41,033
Personal and other lines of credit 10,967 9,567
Standby letters of credit 2,784 1,964
Total commitments and standby letters of credit $ 553,300 $ 529,132
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We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of the utilization of these commitments according to our historical experience on different types of commitments and expected loss. The allowance for losses on off-balance sheet commitments totaled $ 1.4 million and $ 1.1 million as of June 30, 2020 and December 31, 2019, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition.

Leases

We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 12 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.

We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.

The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of June 30, 2020.
(in thousands) June 30, 2020 December 31, 2019
Operating leases:
Operating lease right-of-use assets $ 23,090 $ 11,002
Operating lease liabilities $ 24,574 $ 12,615
Finance leases:
Finance lease right-of-use assets $ 397 $ 379
Accumulated amortization ( 258 ) ( 170 )
Finance lease right-of-use assets, net 1
$ 139 $ 209
Finance lease liabilities 2
$ 140 $ 212
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.
Six months ended
(in thousands) June 30, 2020 June 30, 2019
Right-of-use assets obtained in exchange for operating lease liabilities $ 14,030 $ 1,286
Right-of-use assets obtained in exchange for finance lease liabilities $ 18 $ 31
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets upon adoption of ASC 842 $ — $ 1,967

The following table shows components of operating and finance lease cost.
Three months ended Six months ended
(in thousands) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Operating lease cost $ 1,114 $ 1,067 $ 2,169 $ 2,071
Variable lease cost 2 — 3 —
Total operating lease cost 1
$ 1,116 $ 1,067 $ 2,172 $ 2,071
Finance lease cost:
Amortization of right-of-use assets 2
$ 44 $ 43 $ 88 $ 85
Interest on finance lease liabilities 3
1 2 2 $ 5
Total finance lease cost 45 45 $ 90 $ 90
Total lease cost $ 1,161 $ 1,112 $ 2,262 $ 2,161
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.

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The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of June 30, 2020. Total minimum lease payments do not include obligations of approximately $ 3.1 million for operating lease modifications related to two existing retail branches and an operating lease agreement for a new loan production office in San Mateo that commenced subsequent to June 30, 2020. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.
(in thousands) June 30, 2020
Year Operating Leases Finance Leases
2020 $ 2,301 $ 83
2021 3,835 42
2022 3,487 13
2023 3,039 4
2024 2,407 —
Thereafter 11,714 —
Total minimum lease payments 26,783 142
Amounts representing interest (present value discount) ( 2,209 ) ( 2 )
Present value of net minimum lease payments (lease liability) $ 24,574 $ 140
Weighted average remaining term (in years) 8.5 1.3
Weighted average discount rate 2.08 % 2.64 %

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. On September 17, 2018, Visa signed an amended settlement agreement with the putative class action plaintiffs of the U.S. interchange multidistrict litigation that superseded the 2012 settlement agreement. Visa's share of the settlement amount under the amended class settlement agreement increased to $ 4.1 billion. On September 27, 2019, Visa deposited an additional $ 300 million into the litigation escrow account. Certain merchants chose to opt out of the class settlement agreement and on December 13, 2019, the court entered the final judgment order approving the amended settlement agreement. On December 27, 2019, Visa received a takedown payment of approximately $ 467 million, which was deposited into the litigation escrow account with a corresponding increase in accrued litigation to address opt-out claims. The escrow balance of $ 1.1 billion as of June 30, 2020, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.

The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate might change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims
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as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.

Note 9: Derivative Financial Instruments and Hedging Activities

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

Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is in a liability position exceeding a certain threshold, we may be required to post collateral to the counterparty in an amount determined by the agreements. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values.

As of June 30, 2020, we had five interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, August 2037 and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $ 13 thousand at June 30, 2020 and $ 6 thousand at December 31, 2019. Information on our derivatives follows:
Asset Derivatives Liability Derivatives
(in thousands) June 30,
2020 		December 31, 2019 June 30,
2020 		December 31, 2019
Fair value hedges:
Interest rate contracts notional amount $ — $ — $ 16,466 $ 16,956
Interest rate contracts fair value 1
$ — $ — $ 2,682 $ 1,178
1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of June 30, 2020 and December 31, 2019.
Carrying Amounts of Hedged Assets Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands)
June 30, 2020 December 31, 2019 June 30, 2020 December 31, 2019
Loans $ 18,938 $ 17,900 $ 2,473 $ 944


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The following table presents the net gains (losses) recognized in interest income on loans on the consolidated statements of comprehensive income related to our derivatives designated as fair value hedges.
Three months ended Six months ended
(in thousands) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Interest and fees on loans 1
$ 21,217 $ 20,988 $ 42,104 $ 41,683
Decrease in value of designated interest rate swaps due to LIBOR interest rate movements $ ( 63 ) $ ( 547 ) $ ( 1,504 ) $ ( 904 )
Payment on interest rate swaps ( 96 ) ( 14 ) ( 146 ) ( 26 )
Increase in value of hedged loans 59 573 1,529 935
Decrease in value of yield maintenance agreement ( 3 ) ( 3 ) ( 6 ) ( 7 )
Net (losses) gains on fair value hedging relationships recognized in interest income $ ( 103 ) $ 9 $ ( 127 ) $ ( 2 )
1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.

Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:
Offsetting of Financial Assets and Derivative Assets
Gross Amounts Net Amounts of Gross Amounts Not Offset in
Gross Amounts Offset in the Assets Presented the Statements of Condition
of Recognized Statements of in the Statements Financial Cash Collateral
( in thousands)
Assets Condition of Condition Instruments Received Net Amount
June 30, 2020
Derivatives by Counterparty:
Counterparty A $ — $ — $ — $ — $ — $ —
Total $ — $ — $ — $ — $ — $ —
December 31, 2019
Derivatives by Counterparty:
Counterparty A $ — $ — $ — $ — $ — $ —
Total $ — $ — $ — $ — $ — $ —
Offsetting of Financial 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
June 30, 2020
Derivatives by Counterparty:
Counterparty A $ 2,682 $ — $ 2,682 $ — $ ( 2,682 ) $ —
Total $ 2,682 $ — $ 2,682 $ — $ ( 2,682 ) $ —
December 31, 2019
Derivatives by Counterparty:
Counterparty A $ 1,178 $ — $ 1,178 $ — $ ( 1,178 ) $ —
Total $ 1,178 $ — $ 1,178 $ — $ ( 1,178 ) $ —
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 2019 Form 10-K filed with the SEC on March 13, 2020.
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ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2019 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
Forward-Looking Statements

This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of Management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."
Forward-looking statements are based on Management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond Management’s control, could cause future results to vary materially from current Management expectations. Such factors include, but are not limited to, natural disasters (such as wildfires and earthquakes), pandemics such as COVID-19 and the economic impact caused directly by the disease and by government responses thereto, general economic conditions, economic uncertainty in the United States and abroad, changes in interest rates, deposit flows, real estate values, costs or effects of acquisitions, competition, changes in accounting principles, policies or guidelines, legislation or regulation (including the Tax Cuts & Jobs Act of 2017 and the Coronavirus Aid, Relief and Economic Security Act of 2020, as amended), interruptions of utility service in our markets for sustained periods, and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting Bancorp's operations, pricing, products and services.

Important factors that could cause results or performance to materially differ from those expressed in our prior forward-looking statements are detailed in the Risk Factors section of this Form 10-Q and in Item 1A . Risk Factors section of our 2019 Form 10-K as filed with the SEC, copies of which are available from us at no charge. These and other important factors are detailed in various securities law filings made periodically by Bancorp, copies of which are available from Bancorp without charge. Forward-looking statements speak only as of the date they are made. Bancorp undertakes no obligation to release publicly the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Critical Accounting Policies and Estimates

Critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require Management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and imprecise. There have been no material changes to our critical accounting policies, which include: Allowance for Loan Losses, Other-than-temporary Impairment of Investment Securities, Accounting for Income Taxes, and Fair Value Measurements . For a detailed discussion, refer to Note 1 to the Consolidated Financial Statements included in our 2019 Form 10-K filed with the SEC on March 13, 2020 and Note 2, Recently Adopted and Issued Accounting Standards , to the Consolidated Financial Statements in this Form 10-Q. Under the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act, which was signed into law on March 27, 2020, the Bank postponed the adoption of the current expected credit losses (“CECL”) accounting standard until the earlier of the end of the national emergency or December 31, 2020 to focus on customers' needs during the COVID-19 pandemic. Additionally, the lack of clarity around the extent and duration of the COVID-19 pandemic hindered the development of reasonable and supportable economic forecasts early in the pandemic.
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Executive Summary
Net income for the second quarter of 2020 totaled $7.4 million, compared to $8.2 million in the second quarter of 2019. Diluted earnings per share were $0.55 in the second quarter of 2020, compared to $0.60 in the same quarter a year ago. Earnings for the first six months of 2020 totaled $14.6 million compared to $15.7 million in the same period last year.

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

The Bank has responded to the COVID-19 pandemic in a number of ways, distributing funds to over 1,800 small businesses with nearly 28,000 employees in our markets through the PPP, while also accommodating loan payment relief requests for over 260 loans with balances exceeding $386 million, lowering interest rate floors on commercial Prime Rate-indexed loans, waiving ATM and overdraft fees, and cancelling early withdrawal penalties for certificates of deposit when allowed by law.

The following are highlights of our operating and financial performance for the periods presented:
• Loans totaled $2,110.2 million at June 30, 2020, compared to $1,843.3 million at December 31, 2019, an increase of $266.9 million, primarily due to SBA PPP loans, which totaled $298.9 million or 14% of loan balances at June 30, 2020. During the first half of 2020, new non-PPP-related loan originations of $71.6 million were offset by $83.4 million in loan payoffs and a $16.8 million decrease in line utilization.
• In the first six months of 2020, with the onset of the pandemic, we identified industries within our loan portfolio that could be most impacted by the pandemic, including retail-related commercial real estate, retail businesses, transportation and energy, medical and dental, hospitality, health clubs and movie theaters, private schools, and the wine industry. Not including SBA PPP loans, exposure to these segments totaled $429.8 million at June 30, 2020, or 20% of the loan portfolio, $365.7 million (or 85%) of which was real estate secured with an average loan-to-value ratio of 38%. The greatest exposure was related to both retail businesses and retail-related commercial real estate loans totaling $198.0 million or 9% of the total portfolio, $184.8 million of which are secured by commercial real estate with an average loan-to-value ratio ("LTV") of 39%, and the majority are also backed by personal guarantees. The wine-industry exposure was $76.7 million, or 4% of the total portfolio, of which $42.1 million is real estate secured, education was $67.4 million, or 3% of the total portfolio, of which $63.0 million is secured by real estate, and hospitality was $48.1 million, of which $45.3 million is secured by real estate.
• As of June 30, 2020, we had made $102.5 million in PPP loans to industries most impacted by the pandemic, the largest of which were in the medical and dental sector at $33.4 million, hospitality at $16.6 million, retail businesses at $16.3 million and education at $11.7 million. As of June 30, 2020, the Bank had originated $298.9 million (net of $8.1 million in deferred fees and costs) in SBA PPP loans to small businesses, the majority of which were our existing customers. Approximately 80% of these customers did not have loans outstanding with the Bank at the onset of the pandemic. We were able to assist 178 non-profit organizations, employing over 6,000 individuals, in receiving $57.4 million in PPP loans. Notably, 73% of the PPP loans were for $150 thousand or less, and almost 90% were $350 thousand or less. Only 48 loans were one million dollars or greater, representing approximately 30% of the total balance. We ended the origination of new PPP loans on June 30, 2020 to help our customers through the loan forgiveness process.
• To provide immediate relief to our clients experiencing hardship, the Bank has granted payment relief on over 260 loans with balances exceeding $386 million, providing full payment deferral or interest-only payments for up to 120 days. Of the loans on payment relief, almost 50% fell into pandemic-impacted industries, the largest being retail-related commercial real estate at $69.7 million, hotels and motels at $36.9 million, and education-related commercial real estate at $25.3 million. Approximately 94% of the payment
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relief loans are secured by real estate and have an average LTV of 49%, with average LTVs being 43% for retail-related properties, 39% for hotels and motels, and 37% for education-related properties.
• Strong credit quality remains a cornerstone of the Bank's consistent performance. Non-accrual loans totaled $1.6 million, or 0.08% of total loans at June 30, 2020, compared to $226 thousand, or 0.01% at December 31, 2019. Accruing loans past due 30 to 89 days totaled $83 thousand at June 30, 2020, compared to $1.5 million at December 31, 2019. Classified assets (loans with substandard or doubtful risk grades) increased to $13.5 million at June 30, 2020, from $9.9 million at December 31, 2019. Provision for loan losses was $4.2 million for the first six months of 2020 compared to no provision for the same period in 2019. Provision for losses on off-balance sheet commitments for the first six months of 2020 was $362 thousand compared to $129 thousand for the same period in 2019.
• Total deposits increased $443.4 million in the first half of 2020 to $2,779.9 million at June 30, 2020, largely due to temporary increases in our deposits from SBA PPP borrowers. Non-interest bearing deposits represented 52% of total deposits as of June 30, 2020, compared to 48% at December 31, 2019. The cost of average deposits decreased 4 basis points to 0.15% during the first six months of 2020, compared to the same period of 2019.
• Total cash, cash equivalents and restricted cash were $397.7 million at June 30, 2020, compared to $183.4 million at December 31, 2019. Deposits by SBA PPP borrowers contributed significantly to the increase.
• All capital ratios were above regulatory requirements to be considered well-capitalized. The total risk-based capital ratio for Bancorp was 15.8% at June 30, 2020, compared to 15.1% at December 31, 2019.
• Return on assets was 1.05% for the six months ended June 30, 2020, compared to 1.26% for the first six months of 2019. Return on equity was 8.53% for the six months ended June 30, 2020, compared to 9.90% for the six months ended June 30, 2019.
• The Board of Directors has suspended its search for a Chief Executive Officer. Our current CEO, Russell A. Colombo, is committed to remaining in the job as long as needed.
• As announced on June 30, 2020, Timothy D. Myers was appointed Executive Vice President and Chief Operating Officer of Bank of Marin. Mr. Myers will be responsible for the management of Commercial Banking, Retail Banking, Wealth Management & Trust Services and Marketing.
• Also in June, the Bank hired Jake Nguyen, Senior Vice President and Commercial Banking Regional Manager for the San Mateo Commercial Banking Office ("CBO"), which opened August 3, 2020 to serve commercial banking clients in the Peninsula and South Bay regions.
• The Board of Directors declared a cash dividend of $0.23 per share on July 17, 2020. This represents the 61st consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August 7, 2020, to shareholders of record at the close of business on July 31, 2020.

Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve. For the remainder of 2020 and looking forward into 2021, we believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics and low-cost deposit base will help us navigate the pandemic and low interest rate environment.
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RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:
(dollars in thousands) June 30, 2020 December 31, 2019
Selected financial condition data:
Total assets $ 3,181,540 $ 2,707,280
Loans, net 2,089,333 1,826,609
Deposits 2,779,866 2,336,489
Borrowings and other obligations 2,883 2,920
Stockholders' equity 352,240 336,788
Asset quality ratios:
Allowance for loan losses to total loans 0.99 % 0.90 %
Allowance for loan losses to total loans, excluding non-PCI and SBA PPP loans 1
1.22 % 0.96 %
Allowance for loan losses to non-accrual loans 13.15x 73.86x
Non-accrual loans to total loans 0.08 % 0.01 %
Capital ratios:
Equity to total assets ratio 11.07 % 12.44 %
Tangible common equity to tangible assets 2
10.10 % 11.30 %
Total capital (to risk-weighted assets) 15.77 % 15.07 %
Tier 1 capital (to risk-weighted assets) 14.71 % 14.24 %
Tier 1 capital (to average assets) 10.71 % 11.66 %
Common equity Tier 1 capital (to risk weighted assets) 14.58 % 14.11 %
Three months ended Six months ended
(dollars in thousands, except per share data) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Selected operating data:
Net interest income $ 24,375 $ 23,789 $ 48,494 $ 47,635
Provision for loan losses 2,000 — 4,200 —
Non-interest income 1,813 2,274 4,933 4,045
Non-interest expense 14,141 14,916 29,610 30,444
Net income 7,406 8,235 14,634 15,714
Net income per common share:
Basic $ 0.55 $ 0.60 $ 1.08 $ 1.15
Diluted $ 0.55 $ 0.60 $ 1.07 $ 1.13
Performance and other financial ratios:
Return on average assets 1.01 % 1.32 % 1.05 % 1.26 %
Return on average equity 8.52 % 10.26 % 8.53 % 9.90 %
Tax-equivalent net interest margin 3
3.53 % 4.04 % 3.70 % 4.03 %
Cost of deposits 0.09 % 0.20 % 0.15 % 0.19 %
Efficiency ratio 54.00 % 57.23 % 55.42 % 58.91 %
Cash dividend payout ratio on common stock 4
41.82 % 31.67 % 42.59 % 33.04 %
1 The allowance for loan losses to total loans, excluding non-impaired non-PCI and guaranteed SBA PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for loan losses. Non-PCI loans that were not impaired at June 30, 2020 and December 31, 2019 totaled $95.6 million and $106.8 million, respectively. SBA PPP loans totaled $298.9 million at June 30, 2020. There were no SBA PPP loans as of December 31, 2019.
2 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $318 million and $302 million at June 30, 2020 and December 31, 2019, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $34.4 million and $34.8 million at June 30, 2020 and December 31, 2019, respectively.
3 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets.
4 Calculated as dividends on common shares divided by basic net income per common share.
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Net Interest Income
Net interest income is the difference between the interest earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.

Average Statements of Condition and Analysis of Net Interest Income

The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.
Three months ended Three months ended
June 30, 2020 June 30, 2019
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks 1
$ 173,161 $ 39 0.09 % $ 30,928 $ 190 2.43 %
Investment securities 2, 3
550,483 3,886 2.82 % 567,813 3,844 2.71 %
Loans 1, 3, 4
2,043,197 21,399 4.14 % 1,758,874 21,180 4.76 %
Total interest-earning assets 1
2,766,841 25,324 3.62 % 2,357,615 25,214 4.23 %
Cash and non-interest-bearing due from banks 37,680 34,437
Bank premises and equipment, net 5,543 7,108
Interest receivable and other assets, net 133,639 107,089
Total assets $ 2,943,703 $ 2,506,249
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 142,778 $ 39 0.11 % $ 124,620 $ 91 0.29 %
Savings accounts 182,371 17 0.04 % 174,102 17 0.04 %
Money market accounts 794,654 383 0.19 % 661,363 787 0.48 %
Time accounts including CDARS 95,076 142 0.60 % 115,272 175 0.61 %
Borrowings and other obligations 1
156 1 2.62 % 3,608 24 2.59 %
Subordinated debenture 1
2,733 40 5.73 %

2,664 58 8.69 %
Total interest-bearing liabilities 1,217,768 622 0.21 % 1,081,629 1,152 0.43 %
Demand accounts 1,332,986 1,073,909
Interest payable and other liabilities 43,255 28,621
Stockholders' equity 349,694 322,090
Total liabilities & stockholders' equity $ 2,943,703 $ 2,506,249
Tax-equivalent net interest income/margin 1
$ 24,702 3.53 % $ 24,062 4.04 %
Reported net interest income/margin 1
$ 24,375 3.49 % $ 23,789 3.99 %
Tax-equivalent net interest rate spread 3.41 % 3.80 %
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Six months ended Six months ended
June 30, 2020 June 30, 2019
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(in thousands; unaudited) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks 1
$ 136,261 $ 371 0.54 % $ 26,832 $ 329 2.44 %
Investment securities 2, 3
553,690 8,151 2.94 % 593,545 8,034 2.71 %
Loans 1, 3, 4
1,938,189 42,465 4.33 % 1,757,602 42,067 4.76 %
Total interest-earning assets 1
2,628,140 50,987 3.84 % 2,377,979 50,430 4.22 %
Cash and non-interest-bearing due from banks 39,262 32,702
Bank premises and equipment, net 5,741 7,308
Interest receivable and other assets, net 126,274 105,894
Total assets $ 2,799,417 $ 2,523,883
Liabilities and Stockholders' Equity
Interest-bearing transaction accounts $ 140,587 $ 105 0.15 % $ 126,168 $ 168 0.27 %
Savings accounts 172,905 33 0.04 % 177,211 35 0.04 %
Money market accounts 777,635 1,354 0.35 % 667,218 1,551 0.47 %
Time accounts including CDARS 95,616 303 0.64 % 114,336 294 0.52 %
Borrowings and other obligations 1
257 3 2.06 % 5,500 71 2.56 %
Subordinated debenture 1
2,724 89 6.46 % 2,655 118 8.87 %
Total interest-bearing liabilities 1,189,724 1,887 0.32 % 1,093,088 2,237 0.41 %
Demand accounts 1,226,481 1,080,392
Interest payable and other liabilities 38,150 30,383
Stockholders' equity 345,062 320,020
Total liabilities & stockholders' equity $ 2,799,417 $ 2,523,883
Tax-equivalent net interest income/margin 1
$ 49,100 3.70 % $ 48,193 4.03 %
Reported net interest income/margin 1
$ 48,494 3.65 % $ 47,635 3.98 %
Tax-equivalent net interest rate spread 3.52 % 3.81 %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21%.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.

Analysis of Changes in Tax-Equivalent Net Interest Income

The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the six months ended June 30, 2020.
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Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Six Months Ended June 30, 2020 Compared to Six Months Ended
June 30, 2019
(in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total
Interest-earning deposits with banks $ 875 $ (184) $ (842) $ (151) $ 1,343 $ (257) $ (1,044) $ 42
Investment securities 1
(117) 165 (6) 42 (539) 703 (47) 117
Loans 1
3,424 (2,759) (446) 219 4,322 (3,770) (154) 398
Total interest-earning assets 4,182 (2,778) (1,294) 110 5,126 (3,324) (1,245) 557
Interest-bearing transaction accounts 13 (57) (8) (52) 19 (74) (8) (63)
Savings accounts 1 — (1) — (1) — (1) (2)
Money market accounts 158 (468) (94) (404) 257 (396) (58) (197)
Time accounts, including CDARS (31) (2) — (33) (48) 66 (9) 9
Borrowings and other obligations (23) — — (23) (68) (14) 14 (68)
Subordinated debenture 2 (20) — (18) 3 (32) — (29)
Total interest-bearing liabilities 120 (547) (103) (530) 162 (450) (62) (350)
Changes in tax-equivalent net interest income $ 4,062 $ (2,231) $ (1,191) $ 640 $ 4,964 $ (2,874) $ (1,183) $ 907
1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%.
Second Quarter of 2020 Compared to Second Quarter of 2019

Net interest income totaled $24.4 million in the second quarter of 2020, compared to $23.8 million in the same quarter a year ago. The $586 thousand increase was primarily due to higher balances in most loan categories led by SBA PPP loans and higher interest-earning balances with banks due to temporary increases in SBA PPP borrowers' deposit accounts. These increases were partially offset by the net effect of a full quarter of lower rates on interest-earning assets and interest-bearing liabilities.

The tax-equivalent net interest margin was 3.53% in the second quarter of 2020 compared to 4.04% in the same quarter of the previous year.  The decrease from the second quarter of 2019 was mostly attributed to low interest rates impacting yields on interest-earning assets, partially offset by lower rates on deposit accounts. The SBA PPP loans lowered the second quarter of 2020 tax-equivalent net interest margin by 3 basis points.

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

Net interest income totaled $48.5 million in the six months ended June, 30 2020, compared to $47.6 million in the same period a year ago. The $859 thousand increase was primarily due to higher average loan and interest-earning cash balances driven by SBA PPP loans and deposits. These increases were partially offset by the net effect of lower rates on interest-earning assets and interest-bearing liabilities for a full quarter.

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

Market Interest Rates

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

Provision for Loan Losses
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Management assesses the adequacy of the allowance for loan losses quarterly based on several factors including growth of the loan portfolio, analysis of probable losses in the portfolio, historical loss experience and the current economic climate, including the economic uncertainties of the COVID-19 pandemic. While loss recoveries and provisions for loan losses charged to expense increase the allowance, actual losses on loans reduce the allowance.
Impaired loan balances totaled $11.9 million at June 30, 2020 and $11.5 million at December 31, 2019, with specific valuation allowances of $434 thousand and $397 thousand for the same respective dates. Loans graded special mention totaled $72.4 million at June 30, 2020 and $73.4 million at December 31, 2019. Classified assets (loans with substandard or doubtful risk grades) increased to $13.5 million at June 30, 2020, from $9.9 million at December 31, 2019. The $3.6 million increase was primarily due to the downgrade of two non-owner occupied commercial real estate loans and one loan secured by a triplex property (both with low loan-to-value ratios), and three home equity loans. There were no loans with doubtful risk grades at June 30, 2020 or December 31, 2019.

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

The ratio of allowance for loan losses to total loans, including acquired loans and SBA-guaranteed PPP loans, was 0.99% at June 30, 2020, compared to 0.90% at December 31, 2019. Excluding the $298.9 million in guaranteed SBA PPP loans and $96.8 million in non-PCI acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.22% at June 30, 2020. The Bank had no SBA loans at December 31, 2019. Non-accrual loans totaled $1.6 million, or 0.08% of total loans at June 30, 2020, compared to $226 thousand, or 0.01% of total loans at December 31, 2019. The $1.4 million increase in non-accrual loans was attributable to one loan secured by a triplex property and one home equity loan.

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

Non-interest Income
The following tables detail the components of non-interest income.
Three months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Service charges on deposit accounts $ 293 $ 485 $ (192) (39.6) %
Wealth Management and Trust Services 421 473 (52) (11.0) %
Debit card interchange fees, net 308 414 (106) (25.6) %
Merchant interchange fees, net 47 87 (40) (46.0) %
Earnings on bank-owned life insurance 234 235 (1) (0.4) %
Dividends on FHLB stock 146 193 (47) (24.4) %
Gains on sale of investment securities, net 115 61 54 88.5 %
Other income 249 326 (77) (23.6) %
Total non-interest income $ 1,813 $ 2,274 $ (461) (20.3) %
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Six months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Service charges on deposit accounts $ 744 $ 964 $ (220) (22.8) %
Wealth Management and Trust Services 925 911 14 1.5 %
Debit card interchange fees, net 668 794 (126) (15.9) %
Merchant interchange fees, net 120 174 (54) (31.0) %
Earnings on bank-owned life insurance, net 509 175 334 190.9 %
Dividends on FHLB stock 354 389 (35) (9.0) %
Gains on investment securities, net 915 55 860 1,563.6 %
Other income 698 583 115 19.7 %
Total non-interest income $ 4,933 $ 4,045 $ 888 22.0 %

Second Quarter of 2020 Compared to Second Quarter of 2019

Non-interest income decreased by $461 thousand in the second quarter of 2020 to $1.8 million, compared to $2.3 million in the same quarter a year ago. The decrease was primarily related to lower service charges on deposit accounts from waiving ATM and overdraft fees in response to COVID-19, lower interchange fees due to decreased activity and volume, and small decreases in most other non-interest income categories.

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

Non-interest income increased by $888 thousand in the first six months of 2020 to $4.9 million, compared to $4.0 million in the same period a year ago. The increase was mostly attributable to higher gains on the sale of investment securities in the first half of 2020 and $283 thousand non-refundable costs for underwriting two new bank-owned life insurance policies purchased in the first quarter of 2019. These increases were partially offset by service charges on deposit accounts from waiving ATM and overdraft fees in response to COVID-19 and lower interchange fees due to decreased activity and volume.

Non-interest Expense
The following tables detail the components of non-interest expense.
Three months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 7,864 $ 8,868 $ (1,004) (11.3) %
Occupancy and equipment 1,661 1,578 83 5.3 %
Depreciation and amortization 526 572 (46) (8.0) %
Federal Deposit Insurance Corporation insurance 116 174 (58) (33.3) %
Data processing 829 1,004 (175) (17.4) %
Professional services 550 535 15 2.8 %
Directors' expense 175 187 (12) (6.4) %
Information technology 252 284 (32) (11.3) %
Amortization of core deposit intangible 213 221 (8) (3.6) %
Provision for losses on off-balance sheet commitments 260 — 260 NM
Other non-interest expense
Advertising 158 194 (36) (18.6) %
Other expense 1,537 1,299 238 18.3 %
Total other non-interest expense 1,695 1,493 202 13.5 %
Total non-interest expense $ 14,141 $ 14,916 $ (775) (5.2) %
NM - Not Meaningful
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Six months ended Amount Percent
(dollars in thousands) June 30, 2020 June 30, 2019 Increase (Decrease) Increase (Decrease)
Salaries and related benefits $ 17,341 $ 18,014 $ (673) (3.7) %
Occupancy and equipment 3,324 3,109 215 6.9 %
Depreciation and amortization 1,052 1,128 (76) (6.7) %
Federal Deposit Insurance Corporation insurance 118 353 (235) (66.6) %
Data processing 1,615 2,019 (404) (20.0) %
Professional services 1,094 1,121 (27) (2.4) %
Directors' expense 349 366 (17) (4.6) %
Information technology 502 543 (41) (7.6) %
Core deposit intangible amortization 426 443 (17) (3.8) %
Provision for losses on off-balance sheet commitments 362 129 233 180.6 %
Other non-interest expense
Advertising 409 405 4 1.0 %
Other expense 3,018 2,814 204 7.2 %
Total other non-interest expense 3,427 3,219 208 6.5 %
Total non-interest expense $ 29,610 $ 30,444 $ (834) (2.7) %

Second Quarter of 2020 Compared to Second Quarter of 2019

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

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

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

To assist our employees through the pandemic, on July 31, 2020 we paid $1,200 per employee totaling $360 thousand. In addition to employee assistance, we expect to donate approximately $350 thousand in charitable contributions to nonprofit organizations in the third quarter of 2020.

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

Provision for Income Taxes

Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes for the second quarter of 2020 totaled $2.6 million at an effective tax rate of 26.3%, compared to $2.9 million at an effective tax rate of 26.1% in the same quarter last year. The provision for income taxes for the first half of 2020 totaled $5.0 million at an effective tax rate of 25.4%, compared to $5.5 million at an
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effective tax rate of 26.0% for the first half of 2019. The decrease in the provision reflected the lower level of pre-tax income and higher tax exempt earnings on investment securities and BOLI. The decrease in the effective tax rate reflected a higher level of discrete tax benefits in 2020 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options compared to 2019, partially offset by a decrease in tax benefits associated with the vesting of restricted stock.

We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At June 30, 2020, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

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

Total cash, cash equivalents and restricted cash were $397.7 million at June 30, 2020, compared to $183.4 million at December 31, 2019. The $214.3 million increase was largely due to temporary increases in SBA PPP borrowers' deposit accounts. Effective March 26, 2020, the Federal Reserve reduced the reserve requirement ratios to zero percent in response to the COVID-19 pandemic resulting in no restricted cash requirements as of June 30, 2020. Restricted cash held at the Federal Reserve as of December 31, 2019 totaled $4.8 million.

Investment Securities

The investment securities portfolio totaled $555.6 million at June 30, 2020, a decrease of $14.1 million from December 31, 2019. The decrease reflects paydowns, calls and maturities totaling $48.5 million and sales totaling $32.8 million during the first half of 2020, partially offset by purchases of $56.9 million high credit quality longer duration securities and increase in the fair value of available-for-sale securities in 2020. During the first and second quarters of 2020, respectively, we sold $26.6 million of short duration agency residential mortgage-backed securities subject to increasing prepayment speeds and $6.2 million of obligations of state and political subdivisions that were sensitive to the credit exposure posed by the COVID-19 pandemic.

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

The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (55.5%), Maryland (7.1%), and Florida (5.6%). During March 2020, we strategically increased our credit exposure to obligations issued by high credit quality municipal issuers in Texas that are either guaranteed by the AAA-rated
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Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We have little or no exposure to municipal sectors such as higher education or health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.

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

• The soundness of a municipality’s budgetary position and stability of its tax revenues
• Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer
• Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values
• For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts)
• Credit ratings by major credit rating agencies

Loans

Loans increased by $266.9 million and totaled $2,110.2 million at June 30, 2020, primarily due to SBA PPP loans which totaled $298.9 million (net of $8.1 million in deferred loan origination fees and costs) or 14% of loan balances at June 30, 2020. We ended the origination of new PPP loans on June 30, 2020 to focus our efforts on helping our customers through the loan forgiveness process. New non-PPP related loan originations totaled $71.6 million in the first six months of 2020. Payoffs totaled $83.4 million and line utilization decreased $16.8 million during the first six months of 2020.

Liabilities

During the first six months of 2020, total liabilities increased by $458.8 million to $2,829.3 million. Deposits increased $443.4 million in the first six months of 2020, primarily driven by a combination of PPP loan proceeds and increased liquidity throughout the banking system as a result of depositors' higher level of savings during these uncertain economic times. Non-interest bearing deposits increased $314.0 million in the first six months of 2020 to $1,442.8 million, and represented 51.9% of total deposits at June 30, 2020, compared to 48.3% at December 31, 2019. Liabilities as of June 30, 2020 included operating lease liabilities totaling $24.6 million, which increased $12.0 million in the first six months of 2020 due to the extension of lease terms for our existing headquarters office and three retail branches and a new lease agreement for one of our retail branches.

Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.  For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of June 30, 2020. There are no conditions or events since that notification that Management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

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In July 2013, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ("Agencies") finalized regulatory capital rules known as “Basel III.” Fully phased in on January 1, 2019, Basel III required the Bank to maintain (i) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 8.5%, and (ii) a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 7.0%, both inclusive of a 2.50% “capital conservation buffer." The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by 0.625% each subsequent January 1, until it reached 2.50% on January 1, 2019). In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion. As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, 2019. However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in 2019.

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2020 and December 31, 2019 are presented in the following tables. Bancorp's Tier 1 capital includes the subordinated debenture, which are not included at the Bank level.
Capital Ratios for Bancorp
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold 1
Ratio to be a Well Capitalized Bank Holding Company
June 30, 2020 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 332,166 15.77 % ≥ $ 221,176 ≥ 10.50 % ≥ $ 210,644 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 309,849 14.71 % ≥ $ 179,048 ≥   8.50 % ≥ $ 168,515 ≥   8.00 %
Tier 1 Capital (to average assets) $ 309,849 10.71 % ≥ $ 115,702 ≥   4.00 % ≥ $ 144,627 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 307,106 14.58 % ≥ $ 147,451 ≥   7.00 % ≥ $ 136,919 ≥   6.50 %
December 31, 2019
Total Capital (to risk-weighted assets) $ 319,317 15.07 % ≥ $ 222,430 ≥ 10.50 % ≥ $ 211,838 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 301,553 14.24 % ≥ $ 180,063 ≥   8.50 % ≥ $ 169,471 ≥   8.00 %
Tier 1 Capital (to average assets) $ 301,553 11.66 % ≥ $ 103,489 ≥   4.00 % ≥ $ 129,361 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 298,845 14.11 % ≥ $ 148,287 ≥   7.00 % ≥ $ 137,695 ≥   6.50 %
1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.
Capital Ratios for the Bank
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold 1
Ratio to be Well Capitalized under Prompt Corrective Action Provisions
June 30, 2020 Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk-weighted assets) $ 316,621 15.03 % ≥ $ 221,177 ≥ 10.50 % ≥ $ 210,644 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 294,305 13.97 % ≥ $ 179,048 ≥   8.50 % ≥ $ 168,516 ≥   8.00 %
Tier 1 Capital (to average assets) $ 294,305 10.17 % ≥ $ 115,701 ≥   4.00 % ≥ $ 144,626 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 294,305 13.97 % ≥ $ 147,451 ≥   7.00 % ≥ $ 136,919 ≥   6.50 %
December 31, 2019
Total Capital (to risk-weighted assets) $ 309,875 14.63 % ≥ $ 222,437 ≥ 10.50 % ≥ $ 211,844 ≥ 10.00 %
Tier 1 Capital (to risk-weighted assets) $ 292,111 13.79 % ≥ $ 180,068 ≥   8.50 % ≥ $ 169,476 ≥   8.00 %
Tier 1 Capital (to average assets) $ 292,111 11.29 % ≥ $ 103,488 ≥   4.00 % ≥ $ 129,360 ≥   5.00 %
Common Equity Tier 1 (to risk-weighted assets) $ 292,111 13.79 % ≥ $ 148,291 ≥   7.00 % ≥ $ 137,699 ≥   6.50 %
1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.

Liquidity
The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the President and Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency
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funding plan that provides early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a potential liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales, as part of our cash management strategy.
We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.  Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings and dividends to common stockholders.
T he most significant factor in our daily liquidity position has been the level of customer deposits. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, and rates paid to customers, as well as our financial strength. The $443.4 million increase in deposits in the first half of 2020 was primarily due to temporary increases in deposits from PPP borrowers, which we expect to be utilized by the end of 2020. As of June 30, 2020, the Bank had funded $298.9 million in PPP loans (net of $8.1 million of deferred loan origination fees, net of costs). In addition, there has been an influx of deposits throughout the banking system as a result of depositors' higher level of savings during the uncertain economic times.

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

Our cash and cash equivalents increased $214.3 million from December 31, 2019, primarily due an increase in deposits of $443.4 million as explained above. Other significant sources of liquidity during the first six months of 2020 included $82.2 million in paydowns, maturities and sales of investment securities and $29.6 million net cash provided by operating activities (including $10.4 million in processing fees received from the SBA for the origination of PPP loans as of June 30, 2020). Uses of liquidity during the first six months of 2020 included $273.2 million in loan originations, net of principal collected, $56.9 million in investment securities purchases, and $6.2 million in cash dividends paid on common stock to our shareholders. There were no common stock repurchases in the second quarter of 2020. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base will provide adequate liquidity to fund our operations.

Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $553.3 million at June 30, 2020. These commitments, to the extent used, are expected to be funded primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, $67.3 million of time deposits will mature. In addition, we waived the early withdrawal penalties for certificates of deposit as part of the CARES Act, which might cause more depositors to withdraw time deposits during the uncertain economic environment. Our emphasis on local deposits combined with our equity position is expected to provide a strong funding base.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses.  Bancorp held $15.5 million of cash at June 30, 2020. The cash level at Bancorp is deemed sufficient to cover Bancorp's operational needs and cash dividends to shareholders through mid-2021. Management anticipates that the Bank will continue to have sufficient earnings to provide dividends to Bancorp to meet its funding requirements going forward.


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ITEM 3.     Quantitative and Qualitative Disclosure about Market Risk

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

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

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

ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, Management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At June 30, 2020, interest rate risk was within policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates is a series of immediate parallel shifts in the yield curve. These are provided in the following table as an example rather than an expectation of likely interest rate movements.
Immediate Changes in Interest Rates (in basis points) Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income
up 400 (2.5) % 9.7 %
up 300 (1.7) % 7.6 %
up 200 (1.1) % 4.8 %
up 100 (0.9) % 1.3 %
down 100 (0.6) % (1.1) %

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change. Further, the actual rates and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.

ITEM 4.       Controls and Procedures
Evaluation of Disclosure Controls and Procedures

Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, of the
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effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this report. The term disclosure controls and procedures means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Act (15 U.S.C. 78a et seq .) is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Act is accumulated and communicated to our Management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

While many employees have been working remotely due to the COVID-19 pandemic, our branches remain open and we are continually monitoring our internal controls over financial reporting to minimize any related impact of pandemic. In April 2020, Bank of Marin began participating in the SBA PPP and integrated the related processes and systems into our overall internal control over financial reporting. As a result, we implemented or modified certain internal controls, including but not limited to the following:
• Enhanced controls to facilitate SBA PPP loan application, approval, and data input processes.
• Added controls for the deferral and recognition of the SBA PPP processing fees and loan origination costs.
• Implemented controls over SBA PPP loan reporting (Form 1502).
• Began to establish controls and necessary systems related to the SBA PPP loan forgiveness program, which we expect to begin in the third quarter of 2020.
During the quarter ended June 30, 2020, other than the items described above, there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

PART II       OTHER INFORMATION
ITEM 1         Legal Proceedings

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

ITEM 1A      Risk Factors
The following risk factors are in addition to the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” for its year ended December 31, 2019 and in its subsequent periodic reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. The effects of the events and circumstances described in the following risk factors may have heightened several of the risks contained in our Form 10-K.
Our Business, Results of Operations, and Financial Condition Have Been, and Will Likely Continue to be, Adversely Affected by the Ongoing COVID-19 Pandemic
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, which has spread globally including in the United States. On March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency. The pandemic has caused significant economic disruption and many states and local governments have continued to order non-essential businesses to close or scale back services. The extent to which the pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California. As a result, we are subject to the
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following risks, which could have a material effect on our business, financial condition, results of operations, capital position and liquidity:
• The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and equity market valuations, and increased unemployment levels. This may lead to an increase in loan delinquencies, problem assets and foreclosures, which may increase loan losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Additionally, the expiration of the payment relief provided under Section 4013 of the CARES Act may result in loan delinquencies and impairments that could increase the provision for loan losses.
• Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and necessitate increases in the allowance for loan losses.
• Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.
• The decline in the target federal funds rate has decreased yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may continue to reduce our net interest margin.
• The future adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.
• The continued market turmoil could reduce our wealth management and trust services revenue.
• Our business operations may be disrupted if significant portions of our workforce are unable to work effectively because of illness, quarantines, government actions, and other restrictions in connection with the pandemic.
Recent government actions to provide substantial financial support to businesses (e.g., Paycheck Protection Program) could partially mitigate the financial impact to us and our borrowers. However, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic.
Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic
In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees. All branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as a maximum of two customers allowed in a branch at one time. Our customers have been encouraged to utilize alternative banking options including ATM, digital and telephone banking. Further, many employees are working remotely, and travel as well as face-to-face meeting restrictions are in effect. In addition, given the increasing risk of cybersecurity incidents during the pandemic, we have enhanced our cybersecurity protocols. If the pandemic worsens or lasts for an extended period of time, to protect the health of the Bank’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period. These changes to our traditional service delivery channels may negatively impact our customers' experience of banking with us, and therefore negatively impact our financial condition and results of operations.

ITEM 2       Unregistered Sales of Equity Securities and Use of Proceeds
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. The Board subsequently extended the Share Repurchase Program, which expired on February 28, 2020, with cumulative purchases of 561,355 shares totaling $23.5 million. Approximately $1.5 million in authorized share repurchases expired utilized.

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

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

ITEM 3       Defaults upon Senior Securities
None.
ITEM 4      Mine Safety Disclosures
Not applicable.

ITEM 5      Other Information
None.
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ITEM 6       Exhibits

The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.
Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Herewith
3.01 10-Q 001-33572 3.01 November 7, 2007
3.02 10-Q 001-33572 3.02 May 9, 2011
3.02a 8-K 001-33572 3.03 July 6, 2015
4.01 8-A12B 001-33572 4.1 July 7, 2017
4.02 10-K 001-33572 4.02 March 13, 2020
10.01 S-8 333-218274 4.1 May 26, 2017
10.02 S-8 333-221219 4.1 October 30, 2017
10.03 S-8 333-227840 4.1 October 15, 2018
10.04 S-8 333-239555 4.1 June 30, 2020
10.05 10-Q 001-33572 10.06 November 7, 2007
10.06 8-K 001-33572 10.1 January 26, 2009
10.07 8-K 001-33572 99.1 October 21, 2010
10.08 8-K 001-33572 10.1 January 6, 2011
10.09 8-K 001-33572 10.4 January 6, 2011
10.10 8-K 001-33572 10.2 November 4, 2014
10.11 8-K 001-33572 10.3 November 4, 2014
10.12 8-K 001-33572 10.4 June 2, 2015
10.13 8-K 001-33572 10.1 October 31, 2007
31.01 Filed
31.02 Filed
32.01 Filed
101.INS Inline XBRL Instance Document Filed
101.SCH Inline XBRL Taxonomy Extension Schema Document Filed
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document Filed
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document Filed
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document Filed
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bank of Marin Bancorp
(registrant)
August 7, 2020 /s/ Russell A. Colombo
Date Russell A. Colombo
President &
Chief Executive Officer
(Principal Executive Officer)
August 7, 2020 /s/ Tani Girton
Date
Tani Girton
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
August 7, 2020 /s/ David A. Merck
Date David A. Merck
Vice President &
Financial Reporting Manager
(Principal Accounting Officer)

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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1: Basis Of PresentationNote 2: Recently Adopted and Issued Accounting StandardsNote 3: Fair Value Of Assets and LiabilitiesNote 4: Investment SecuritiesNote 5: Loans and Allowance For Loan LossesNote 6: Borrowings and Other ObligationsNote 7: Stockholders' EquityNote 8: Commitments and ContingenciesNote 9: Derivative Financial Instruments and Hedging ActivitiesItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About MarketItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresItem 4. ControlsPart II Other InformationItem 1 Legal ProceedingsItem 1A Risk FactorsItem 2 Unregistered Sales Of Equity Securities and Use Of ProceedsItem 2 Unregistered Sales Of Equity Securities and Use OfItem 3 Defaults Upon Senior SecuritiesItem 4 Mine Safety DisclosuresItem 5 Other InformationItem 6 Exhibits

Exhibits

3.01 Articles of Incorporation, as amended 10-Q 001-33572 3.01 November 7, 2007 3.02 Bylaws 10-Q 001-33572 3.02 May 9, 2011 3.02a Bylaws Amendment 8-K 001-33572 3.03 July 6, 2015 4.01 Rights Agreement, dated July 6, 2017 8-A12B 001-33572 4.1 July 7, 2017 4.02 Description of Capital Stock 10-K 001-33572 4.02 March 13, 2020 10.01 Employee Stock Ownership Plan S-8 333-218274 4.1 May 26, 2017 10.03 2017 Equity Plan, as amended S-8 333-227840 4.1 October 15, 2018 10.05 Form of Indemnification Agreement for Directors and Executive Officers, dated August 9, 2007 10-Q 001-33572 10.06 November 7, 2007 10.06 Form of Employment Agreement, dated January 23, 2009 8-K 001-33572 10.1 January 26, 2009 10.07 2010 Annual Individual Incentive Compensation Plan 8-K 001-33572 99.1 October 21, 2010 10.08 Salary Continuation Agreement for executive officer Russell Colombo, Chief Executive Officer, dated January 1, 2011 8-K 001-33572 10.1 January 6, 2011 10.09 Salary Continuation Agreement for executive officer Peter Pelham, Director of Retail Banking, dated January 1, 2011 8-K 001-33572 10.4 January 6, 2011 10.10 Salary Continuation Agreement for executive officer Tani Girton, Chief Financial Officer, dated October 18, 2013 8-K 001-33572 10.2 November 4, 2014 10.11 Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014 8-K 001-33572 10.3 November 4, 2014 10.12 Salary Continuation Agreement for executive officer Timothy Myers, Executive Vice President and Commercial Banking Manager, dated May 28, 2015 8-K 001-33572 10.4 June 2, 2015 10.13 2007 Form of Change in Control Agreement 8-K 001-33572 10.1 October 31, 2007 31.01 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed 31.02 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed 32.01 Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002 Filed