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EX-31.02 - EXHIBIT 31.02 - Bank of Marin Bancorpbmrc-ex3102_20180630x10q.htm
EX-32.01 - EXHIBIT 32.01 - Bank of Marin Bancorpbmrc-ex3201_20180630x10q.htm
EX-31.01 - EXHIBIT 31.01 - Bank of Marin Bancorpbmrc-ex3101_20180630x10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q
(Mark One)
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
OR
 
 o 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)  
 
(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
 
Indicate by check mark whether the registrant (1) has filed all reports 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 x                    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x                   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o
 
     Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
     Smaller reporting company o
Emerging growth company o
 
 
 
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.
o 

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes   o     No  x
 
As of July 31, 2018, there were 6,993,452 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, 2018 and December 31, 2017
(in thousands, except share data; unaudited)
June 30, 2018

December 31, 2017

Assets
 

 
Cash and due from banks
$
83,855

$
203,545

Investment securities
 

 
Held-to-maturity, at amortized cost
170,652

151,032

Available-for-sale, at fair value
388,137

332,467

Total investment securities
558,789

483,499

Loans, net of allowance for loan losses of $15,813 and $15,767 at
June 30, 2018 and December 31, 2017, respectively
1,701,798

1,663,246

Bank premises and equipment, net
7,965

8,612

Goodwill
30,140

30,140

Core deposit intangible
6,032

6,492

Interest receivable and other assets
76,463

72,620

Total assets
$
2,465,042

$
2,468,154

 
 
 
Liabilities and Stockholders' Equity
 

 

Liabilities
 

 

Deposits
 

 

Non-interest bearing
$
1,057,745

$
1,014,103

Interest bearing
 

 
Transaction accounts
132,272

169,195

Savings accounts
179,187

178,473

Money market accounts
631,479

626,783

Time accounts
137,040

160,116

Total deposits
2,137,723

2,148,670

Subordinated debentures
5,802

5,739

Interest payable and other liabilities
17,319

16,720

Total liabilities
2,160,844

2,171,129

 
 
 
Stockholders' Equity
 

 

Preferred stock, no par value,
Authorized - 5,000,000 shares, none issued


Common stock, no par value,
Authorized - 15,000,000 shares;
Issued and outstanding - 6,991,821 and 6,921,542 at
June 30, 2018 and December 31, 2017, respectively
146,195

143,967

Retained earnings
166,281

155,544

Accumulated other comprehensive loss, net of taxes
(8,278
)
(2,486
)
Total stockholders' equity
304,198

297,025

Total liabilities and stockholders' equity
$
2,465,042

$
2,468,154


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, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
Interest income
 
 

 
 
 
Interest and fees on loans
$
19,624

$
16,423

 
$
38,511

$
32,272

Interest on investment securities
 
 
 
 
 

Securities of U.S. government agencies
2,860

1,534

 
5,335

3,052

Obligations of state and political subdivisions
604

553

 
1,242

1,121

Corporate debt securities and other
35

36

 
79

73

Interest on Federal funds sold and due from banks
285

157

 
688

217

Total interest income
23,408

18,703

 
45,855

36,735

Interest expense
 

 

 
 

 

Interest on interest-bearing transaction accounts
48

21

 
100

50

Interest on savings accounts
18

16

 
36

31

Interest on money market accounts
236

114

 
452

227

Interest on time accounts
140

139

 
296

285

Interest on Federal Home Loan Bank ("FHLB") and other borrowings
1


 
1


Interest on subordinated debentures
123

109

 
237

217

Total interest expense
566

399

 
1,122

810

Net interest income
22,842

18,304

 
44,733

35,925

Provision for loan losses


 


Net interest income after provision for loan losses
22,842

18,304

 
44,733

35,925

Non-interest income
 

 
 
 

 

Service charges on deposit accounts
455

447

 
932

899

Wealth Management and Trust Services
488

504

 
1,003

1,007

Debit card interchange fees
360

384

 
756

756

Merchant interchange fees
118

112

 
198

208

Earnings on bank-owned life insurance
230

210

 
458

419

Dividends on FHLB stock
192

176

 
388

408

Gains on investment securities, net
11

10

 
11

10

Other income
384

253

 
734

504

Total non-interest income
2,238

2,096

 
4,480

4,211

Non-interest expense
 

 
 
 

 

Salaries and related benefits
8,316

7,287

 
17,333

14,762

Occupancy and equipment
1,511

1,380

 
3,018

2,699

Depreciation and amortization
546

463

 
1,093

944

Federal Deposit Insurance Corporation insurance
191

162

 
382

323

Data processing
1,023

963

 
2,404

1,902

Professional services
810

522

 
2,109

1,044

Directors' expense
183

224

 
357

382

Information technology
264

186

 
533

384

Provision for losses on off-balance sheet commitments

(208
)
 

(43
)
Other expense
1,665

1,652

 
3,361

3,245

Total non-interest expense
14,509

12,631

 
30,590

25,642

Income before provision for income taxes
10,571

7,769

 
18,623

14,494

Provision for income taxes
2,680

2,583

 
4,343

4,760

Net income
$
7,891

$
5,186

 
$
14,280

$
9,734

Net income per common share:
 

 
 
 

 
Basic
$
1.14

$
0.85

 
$
2.06

$
1.60

Diluted
$
1.12

$
0.84

 
$
2.03

$
1.58

Weighted average shares:
 
 

 
 

 

Basic
6,944

6,110

 
6,929

6,101

Diluted
7,033

6,174

 
7,019

6,173

Dividends declared per common share
$
0.31

$
0.27

 
$
0.60

$
0.54

Comprehensive income:
 
 
 
 


Net income
$
7,891

$
5,186

 
$
14,280

$
9,734

Other comprehensive (loss) income




 




Change in net unrealized gain or loss on available-for-sale securities
(1,131
)
1,961

 
(7,301
)
3,635

Reclassification adjustment for gains on available-for-sale securities in net income
(11
)
(10
)
 
(11
)
(10
)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity
(278
)

 
(278
)

Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity
132

124

 
268

165

Subtotal
(1,288
)
2,075

 
(7,322
)
3,790

Deferred tax (benefit) expense
(384
)
892

 
(2,168
)
1,596

Other comprehensive (loss) income, net of tax
(904
)
1,183

 
(5,154
)
2,194

Comprehensive income
$
6,987

$
6,369

 
$
9,126

$
11,928

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 year ended December 31, 2017 and the six months ended June 30, 2018
(in thousands, except share data; unaudited)
Common Stock
Retained
Earnings

Accumulated Other
Comprehensive Loss ("AOCI"),
Net of Taxes

 Total

Shares

Amount

Balance at December 31, 2016
6,127,314

$
87,392

$
146,464

$
(3,293
)
$
230,563

Net income


15,976


15,976

Other comprehensive income



807

807

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
9,266

28



28

Stock issued under employee stock purchase plan
512

32



32

Stock issued under employee stock ownership plan ("ESOP")
29,547

1,850



1,850

Restricted stock granted
16,230





Stock-based compensation - stock options

529



529

Stock-based compensation - restricted stock

742



742

Cash dividends paid on common stock


(6,896
)

(6,896
)
Stock purchased by directors under director stock plan
531

35



35

Stock issued in payment of director fees
2,878

188



188

Stock and stock options issued to Bank of Napa shareholders (net of payment for fractional shares of $14 thousand)
735,264

53,171



53,171

Balance at December 31, 2017
6,921,542

$
143,967

$
155,544

$
(2,486
)
$
297,025

Net income
 
 
14,280

 
14,280

Other comprehensive loss
 
 
 
(5,154
)
(5,154
)
Reclassification of stranded tax effects in AOCI
 
 
638

(638
)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
50,075

534

 
 
534

Stock issued under employee stock purchase plan
265

19

 
 
19

Stock issued under ESOP
7,900

601

 
 
601

Restricted stock granted
18,520

 
 
 

Restricted stock surrendered for tax withholdings upon vesting
(658
)
(45
)
 
 
(45
)
Restricted stock forfeited / cancelled
(6,028
)
 
 
 

Stock-based compensation - stock options
 
442

 
 
442

Stock-based compensation - restricted stock
 
672

 
 
672

Cash dividends paid on common stock
 
 
(4,181
)
 
(4,181
)
Stock purchased by directors under director stock plan
260

18

 
 
18

Stock issued in payment of director fees
1,343

91

 
 
91

Stock repurchased, net of commissions
(1,398
)
(104
)
 
 
(104
)
Balance at June 30, 2018
6,991,821

146,195

166,281

(8,278
)
304,198


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, 2018 and 2017
(in thousands; unaudited)
June 30, 2018
 
June 30, 2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
14,280

 
$
9,734

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

 
 

Reversal of losses on off-balance sheet commitments

 
(43
)
Noncash contribution expense to employee stock ownership plan
601

 

Noncash director compensation expense
146

 
106

Stock-based compensation expense
1,114

 
710

Amortization of core deposit intangible
460

 
236

Amortization of investment security premiums, net of accretion of discounts
1,496

 
1,496

Accretion of discount on acquired loans
(428
)
 
(498
)
Accretion of discount on subordinated debentures
63

 
80

Net change in deferred loan origination costs/fees
18

 
60

Gain on sale of investment securities
(11
)
 
(10
)
Depreciation and amortization
1,093

 
944

Gain on sale of repossessed assets

 
(1
)
Earnings on bank-owned life insurance policies
(458
)
 
(419
)
Net change in operating assets and liabilities:
 
 
 
Deferred rent and other rent-related expenses
(179
)
 
114

Interest receivable and other assets
(971
)
 
93

Interest payable and other liabilities
1,543

 
(389
)
Total adjustments
4,487

 
2,479

Net cash provided by operating activities
18,767

 
12,213

Cash Flows from Investing Activities:
 

 
 

Purchase of held-to-maturity securities
(1,989
)
 
(4,496
)
Purchase of available-for-sale securities
(121,269
)
 
(9,377
)
Proceeds from sale of available-for-sale securities
5,006

 
1,321

Proceeds from paydowns/maturities of held-to-maturity securities
9,615

 
14,601

Proceeds from paydowns/maturities of available-for-sale securities
24,540

 
15,385

Loans originated and principal collected, net
(38,835
)
 
(4,563
)
Purchase of premises and equipment
(446
)
 
(814
)
Proceeds from sale of other real estate owned or repossessed assets

 
170

Cash paid for low-income housing tax credit investment
(373
)
 
(628
)
Net cash (used in) provided by investing activities
(123,751
)
 
11,599

Cash Flows from Financing Activities:
 

 
 

Net (decrease) increase in deposits
(10,947
)
 
67,840

Proceeds from stock options exercised
585

 
88

Payment of tax withholdings for stock options exercised and vesting of restricted stock
(96
)
 
(60
)
Proceeds from stock issued under employee and director stock purchase plans
37

 
737

Stock repurchased, net of commissions
(104
)
 

Cash dividends paid on common stock
(4,181
)
 
(3,315
)
Net cash (used in) provided by financing activities
(14,706
)
 
65,290

Net (decrease) increase in cash and cash equivalents
(119,690
)
 
89,102

Cash and cash equivalents at beginning of period
203,545

 
48,804

Cash and cash equivalents at end of period
$
83,855

 
$
137,906

Supplemental disclosure of cash flow information:
 
 
 
Cash paid in interest
$
1,083

 
$
751

Cash paid in income taxes
$
2,000

 
$
4,620

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Change in net unrealized gain or loss on available-for-sale securities
$
(7,301
)
 
$
3,635

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

 
$
128,965

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity
$
268

 
$
165

Stock issued to ESOP
$
601

 
$

Stock issued in payment of director fees
$
91

 
$
82


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

Page-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 1:  Basis of Presentation
 
The consolidated financial statements include the accounts of 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 2017 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 Trusts I and II, respectively (the "Trusts") were formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the subordinated debentures are shown as a liability on our consolidated statements of condition (See Note 6, Borrowings). Bancorp accounts for its investment in the securities of the Trusts under the equity method, which is included in interest receivable and other assets in the consolidated statements of condition.
 
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, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
Weighted average basic shares outstanding
6,944

6,110

 
6,929

6,101

Potentially dilutive common shares related to:
 
 
 
 
 
Stock options
74

52

 
74

57

Unvested restricted stock awards
15

12

 
16

15

Weighted average diluted shares outstanding
7,033

6,174

 
7,019

6,173

Net income
$
7,891

$
5,186

 
$
14,280

$
9,734

Basic EPS
$
1.14

$
0.85

 
$
2.06

$
1.60

Diluted EPS
$
1.12

$
0.84

 
$
2.03

$
1.58

Weighted average anti-dilutive shares not included in the calculation of diluted EPS
30

33

 
35

23


Page-7



Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in 2018

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of this ASU (and all subsequent updates) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This ASU establishes a five-step model that must be used to recognize revenue that requires the entity to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation. The ASU does not apply to the majority of our revenue, including revenue associated with financial instruments, such as loans and investment securities, and certain non-interest income, such as earnings on bank-owned life insurance, dividends on Federal Home Loan Bank ("FHLB") stock, gains or losses on sales of investment securities, and deposit overdraft charges. The standard allowed the use of either the full retrospective or modified retrospective transition method. We elected to apply the modified retrospective transition method to incomplete contracts as of the initial date of application on January 1, 2018. The adoption of the new standards did not have a material impact on our financial condition or results of operations as revenue recognition under the new standards did not change significantly from our current practice of recognizing the in-scope non-interest income. In addition, we did not retroactively revise prior period amounts or record a cumulative adjustment to retained earnings upon adoption. We considered the nature, amount, timing, and uncertainty of revenue from contracts with customers and determined that significant revenue streams are sufficiently disaggregated in the consolidated statements of comprehensive income.

Descriptions of our significant revenue-generating transactions that are within the scope of the new revenue recognition standards, which are presented in the consolidated statements of comprehensive income as components of non-interest income, are as follows:

Wealth Management & Trust ("WM&T") fees - WM&T services include, but are not limited to: customized investment advisory and management; administrative services such as bill pay and tax reporting; trust administration, estate settlement, custody and fiduciary services. Performance obligations for investment advisory and management services are generally satisfied over time. Revenue is recognized monthly according to a tiered fee schedule based on the client's month-end market value of assets under our management. WM&T does not earn revenue based on performance or incentives. Costs associated with WM&T revenue-generating activities, such as payments to sub-advisors, are recorded separately as part of professional service expenses when incurred.

Deposit account service charges - Service charges on deposit accounts consist of monthly maintenance fees, business account analysis fees, business online banking fees, check order charges, and other deposit account-related fees. Performance obligations for monthly maintenance fees and account analysis fees are satisfied, and the related revenue recognized, when we complete our performance obligation each month. Performance obligations related to transaction-based services (such as check orders) are satisfied, and the related revenue recognized, at a point in time when completed, except for business accounts subject to analysis where the transaction-based fees are part of the monthly account analysis fees.

Debit card interchange fees - We issue debit cards to our consumer and small business customers that allow them to purchase goods and services from merchants in person, online, or via mobile devices using funds held in their demand deposit accounts held with us. Debit cards issued to our customers are part of global electronic payment networks (such as Visa) who pass a portion of the merchant interchange fees to debit card-issuing member banks like us when our customers make purchases through their networks. Performance obligations for debit card services are satisfied and revenue is recognized daily as the payment networks process transactions. Because we act in an agent capacity, we determined that network costs previously recorded as a component of non-interest expense should be netted with interchange fees recorded in non-interest income. Network costs were immaterial for the six months ended June 30, 2018 and 2017.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU make improvements to accounting standards related to financial instruments, including the following:


Page-8



Requires equity investments, except for those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When impairment exists, an entity is required to measure the investment at fair value.
Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value required under current standards for financial instruments measured at amortized cost on the consolidated balance sheet.
Requires public companies to use the exit price notion when measuring and disclosing the fair value of financial instruments.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets.

We adopted the requirements of this ASU effective January 1, 2018, which did not have a material impact on our financial condition and results of operations. The fair value of our loans held for investment, which is recorded at amortized cost, now incorporates the exit price notion reflecting factors such as a liquidity premium. See Note 3, Fair Value of Assets and Liabilities.
 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU provides guidance on how to present and classify eight specific cash flow topics in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied using a retrospective transition method to each period presented, if practical. We adopted the requirements of this ASU effective January 1, 2018, which did not impact our financial condition, results of operations, or related financial statement disclosures for the periods presented.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments are intended to help companies evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses and provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments should be applied prospectively and are effective for annual periods after December 31, 2017, including interim periods within those periods. We adopted the amendments effective January 1, 2018, which did not impact our financial condition, results of operations, or related financial statement disclosures in the first quarter of 2018.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU applies to entities that change the terms or conditions of a share-based payment award. The FASB adopted this ASU to provide clarity in what constitutes a modification and to reduce diversity in practice in applying Topic 718. In order for a change to a share-based arrangement to not require Topic 718 modification accounting treatment, all of the following must be met: no change in fair value, no change in vesting conditions and no change in the balance sheet classification of the modified award. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted, including adoption in an interim period. The amendments should be applied prospectively to an award modified on or after the adoption date. We adopted the requirements of this ASU effective January 1, 2018, which did not impact our financial condition, results of operation, or related financial statement disclosures.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This amendment changes both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. It is intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The ASU is effective for fiscal years beginning after

Page-9



December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We early-adopted the amendments of this ASU in the second quarter of 2018, and elected to perform hedge effectiveness assessments using a qualitative approach instead of quantitative regression analysis going forward. The adoption of this ASU had an immaterial impact to our financial results. The amendments also require additional disclosures, which are included in Note 9, Derivative Financial Instruments and Hedging Activities.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This amendment helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the enactment of the Tax Cuts and Jobs Act of 2017. The ASU requires financial statement preparers to disclose a description of the accounting policy for releasing income tax effects from AOCI, whether or not they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act of 2017, and information about the other income tax effects that are reclassified. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied in either the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate tax rate in the Tax Cuts and Jobs Act of 2017 is recognized. We early adopted this ASU in the first quarter of 2018. See Note 7, Stockholders' Equity.

Accounting Standards Not Yet Effective

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU intend to increase transparency and comparability among organizations by recognizing an asset, which represents the right to use the asset for the lease term, and a lease liability, which is a lessee's obligation to make lease payments measured on a discounted basis. This ASU generally applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method of adoption. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides various corrections and clarifications to ASU 2016-02. Early application of the amendments is permitted. We intend to adopt this ASU during the first quarter of 2019, as required. We completed an inventory of our lease agreements and continue to evaluate potential accounting software solutions that will aid in the transition to the new leasing guidance. As of June 30, 2018, our undiscounted operating lease obligations that were off-balance sheet totaled $16.5 million (See Note 8, Commitments and Contingencies). Upon adoption of this ASU, the present values of leases currently classified as operating leases will be recognized as lease assets and liabilities on our consolidated balance sheets. Additional disclosures of key information about our leasing arrangements will also be required. We do not expect that the ASU will have a material impact on our capital ratios or return on average assets when adopted and we are currently evaluating the effect that the ASU will have on other components of our financial condition and results of operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, entities will be required to present financial assets at the net amount expected to be collected. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of a credit over its remaining life. In addition, the ASU amends the accounting for expected credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We have formed an internal Current Expected Credit Loss ("CECL") committee and are working with our third party vendor to determine the appropriate methodologies and resources to utilize in preparation for transition to the new accounting standards. The impact of this ASU on our financial condition and results of operations is not known at this time.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees, applying some of the same requirements as employee share-based payment transactions. The ASU will not affect the accounting for share-based payment awards to nonemployee directors, which will continue to be treated as employee share-based transactions under the current standards. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect that the ASU will have a material impact on our financial condition or results of operations, as it is not our practice to issue stock-based awards to pay for goods and services from nonemployees, other than nonemployee directors.

Page-10




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.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. 

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 In1
June 30, 2018
 

 
 

 

 
Securities available-for-sale:
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies
$
240,794

$

$
240,794

$

OCI
SBA-backed securities
23,954


23,954


OCI
Debentures of government sponsored agencies
32,139


32,139


OCI
Privately-issued collateralized mortgage obligations
435


435


OCI
Obligations of state and political subdivisions
87,788


87,788


OCI
Corporate bonds
3,027


3,027


OCI
Derivative financial assets (interest rate contracts)
327


327


NI
Derivative financial liabilities (interest rate contracts)
276


276


NI
December 31, 2017
 

 
 

 

 
Securities available-for-sale:
 

 
 

 

 
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies
$
188,061

$

$
188,061

$

OCI
SBA-backed securities
25,982


25,817

165

OCI
Debentures of government sponsored agencies
12,938


12,938


OCI
Privately-issued collateralized mortgage obligations
1,431


1,431


OCI
Obligations of state and political subdivisions
97,491


97,491


OCI
Corporate bonds
6,564


6,564


OCI
Derivative financial assets (interest rate contracts)
74


74


NI
Derivative financial liabilities (interest rate contracts)
740


740


NI
 1 Other comprehensive income ("OCI") or net income ("NI").


Page-11



Securities available-for-sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available-for-sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).   Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, and corporate bonds. As of June 30, 2018 and December 31, 2017, there were no Level 1 securities. As of December 31, 2017, we had one Level 3 available-for-sale U.S. government agency obligation, which was paid off during the second quarter of 2018.

Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of other-than-temporary impairment, and we did not record any write-downs during the six months ended June 30, 2018 or June 30, 2017.
 
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 either LIBOR or OIS curves depending on whether the swap positions are fully collateralized 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 the Bank. 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, 2018 and December 31, 2017, we did not carry any assets measured at fair value on a non-recurring basis.
 
 
 
 
 


Page-12



Disclosures about Fair Value of Financial Instruments
 
The following table summarizes fair value estimates for financial instruments as of June 30, 2018 and December 31, 2017, 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 hold shares of FHLB stock and Visa Inc. Class B common stock at cost. These shares are restricted from resale, except among member banks, and their values are discussed in Note 4, Investment Securities.
 
June 30, 2018
 
December 31, 2017
(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
$
83,855

$
83,855

Level 1
 
$
203,545

$
203,545

Level 1
Investment securities held-to-maturity
170,652

166,127

Level 2
 
151,032

151,032

Level 2
Loans, net
1,701,798

1,666,409

Level 3
 
1,663,246

1,650,198

Level 3
Interest receivable
7,814

7,814

Level 2
 
7,501

7,501

Level 2
Financial liabilities (recorded at amortized cost)
 

 
 
 
 

 
Time deposits
137,040

136,023

Level 2
 
160,116

159,540

Level 2
Subordinated debentures
5,802

6,988

Level 3
 
5,739

5,118

Level 3
Interest payable
167

167

Level 2
 
191

191

Level 2

Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material at June 30, 2018 and December 31, 2017.

Note 4:  Investment Securities
 
Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including residential and commercial mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued or guaranteed by Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Small Business Administration ("SBA"), or Government National Mortgage Association ("GNMA"), debentures issued by government-sponsored agencies such as FNMA, Federal Farm Credit Bureau, FHLB and FHLMC, and privately issued CMOs, as reflected in the following table.

Page-13



 
June 30, 2018
 
December 31, 2017
 
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 agencies:
 
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
$
94,203

$
90,824

$

$
(3,379
)

$
100,376

$
100,096

$
234

$
(514
)
SBA-backed securities
8,882

8,743


(139
)
 




  CMOs issued by FNMA
11,881

11,766


(115
)
 




     CMOs issued by FHLMC
34,668

33,591


(1,077
)
 
31,010

30,938

2

(74
)
CMOs issued by GNMA
3,730

3,713


(17
)
 




Obligations of state and
political subdivisions
17,288

17,490

235

(33
)
 
19,646

19,998

383

(31
)
Total held-to-maturity
170,652

166,127

235

(4,760
)

151,032

151,032

619

(619
)
Available-for-sale:
 
 
 
 
 
 
 
 
 
Securities of U.S. government agencies:
 
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
90,082

87,590

17

(2,509
)

65,559

65,262

126

(423
)
SBA-backed securities
24,620

23,954


(666
)
 
25,979

25,982

58

(55
)
CMOs issued by FNMA
21,026

20,571

7

(462
)

35,340

35,125

33

(248
)
CMOs issued by FHLMC
123,359

120,411

1

(2,949
)

70,514

69,889

3

(628
)
CMOs issued by GNMA
12,641

12,222

2

(421
)

17,953

17,785

26

(194
)
Debentures of government- sponsored agencies
32,395

32,139


(256
)

12,940

12,938

3

(5
)
Privately issued CMOs
431

435

4



1,432

1,431

1

(2
)
Obligations of state and
political subdivisions
89,699

87,788

77

(1,988
)

98,027

97,491

298

(834
)
  Corporate bonds
3,015

3,027

24

(12
)

6,541

6,564

26

(3
)
Total available-for-sale
397,268

388,137

132

(9,263
)

334,285

332,467

574

(2,392
)
Total investment securities
$
567,920

$
554,264

$
367

$
(14,023
)

$
485,317

$
483,499

$
1,193

$
(3,011
)

The amortized cost and fair value of investment debt securities by contractual maturity at June 30, 2018 and December 31, 2017 are shown in the following table. 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, 2018
 
December 31, 2017
 
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
$
2,859

$
2,882

 
$
8,272

$
8,263

 
$
2,151

$
2,172

 
$
10,268

$
10,272

After one but within five years
13,063

13,147

 
79,662

78,514

 
15,577

15,791

 
71,576

71,237

After five years through ten years
63,321

61,350

 
216,584

210,650

 
54,641

54,554

 
129,723

128,954

After ten years
91,409

88,748

 
92,750

90,710

 
78,663

78,515

 
122,718

122,004

Total
$
170,652

$
166,127

 
$
397,268

$
388,137

 
$
151,032

$
151,032

 
$
334,285

$
332,467


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, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Available-for-sale:
 
 
 
 
 
 
 
Sales proceeds
$
5,006

 
$
1,321

 
$
5,006

 
$
1,321

Gross realized gains
27

 
13

 
27

 
13

Gross realized losses
(16
)
 
(3
)
 
(16
)
 
(3
)


Page-14



Pledged investment securities are shown in the following table.
(in thousands)
June 30, 2018
December 31, 2017
Pledged to the State of California:
 
 
   Secure public deposits in compliance with the Local Agency Security Program
$
103,097

$
107,829

   Collateral for trust deposits
749

761

      Total investment securities pledged to the State of California
$
103,846

$
108,590

Collateral for Wealth Management and Trust Services checking account
$
2,014

$
2,026


As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. During 2018 and 2017, we transferred $27.4 million and $129.0 million, respectively, of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $278 thousand and $3.0 million, at the respective transfer dates, remained in accumulated other comprehensive income and are amortized over the remaining lives of the securities. Amortization of the net unrealized pre-tax losses totaled $268 thousand and $165 thousand for the six months ended June 30, 2018 and 2017, respectively.

Other-Than-Temporarily Impaired ("OTTI") Debt Securities
 
We have evaluated the credit of our investment securities and their issuers and/or insurers. Based on our evaluation, Management has determined that no investment security in our investment portfolio is other-than-temporarily impaired as of June 30, 2018. We do not have the intent and it is more likely than not that we will not have to sell the remaining securities temporarily impaired at June 30, 2018 before recovery of the amortized cost basis.
 
There were 266 and 198 investment securities in unrealized loss positions at June 30, 2018 and December 31, 2017, respectively. Those securities are summarized and classified according to the duration of the loss period in the following tables:
June 30, 2018
< 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
$
22,100

$
(830
)
 
$
68,724

$
(2,549
)
 
$
90,824

$
(3,379
)
SBA-backed securities

8,742

(139
)
 


 
$
8,742

$
(139
)
CMOs issued by FNMA
11,766

(115
)
 


 
11,766

(115
)
CMOs issued by FHLMC
19,798

(564
)
 
13,793

(513
)
 
33,591

(1,077
)
CMOs issued by GNMA


 
3,713

(17
)
 
3,713

(17
)
Obligations of state and political subdivisions
3,816

(33
)
 


 
3,816

(33
)
Total held-to-maturity
66,222

(1,681
)
 
86,230

(3,079
)
 
152,452

(4,760
)
Available-for-sale:
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
68,906

(1,843
)
 
17,713

(666
)
 
86,619

(2,509
)
SBA-backed securities

23,954

(666
)
 


 
23,954

(666
)
CMOs issued by FNMA
15,687

(321
)
 
4,642

(141
)
 
20,329

(462
)
CMOs issued by FHLMC
115,370

(2,949
)
 


 
115,370

(2,949
)
CMOs issued by GNMA
11,297

(419
)
 
603

(2
)
 
11,900

(421
)
Debentures of government- sponsored agencies
32,139

(256
)
 


 
32,139

(256
)
Privately issued CMOs


 


 


Obligations of state and political subdivisions
57,217

(835
)
 
18,832

(1,153
)
 
76,049

(1,988
)
Corporate bonds
1,522

(12
)
 


 
1,522

(12
)
Total available-for-sale
326,092

(7,301
)
 
41,790

(1,962
)
 
367,882

(9,263
)
Total temporarily impaired securities
$
392,314

$
(8,982
)
 
$
128,020

$
(5,041
)
 
$
520,334

$
(14,023
)

Page-15



December 31, 2017
< 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:
 
 
 
 
 
 
 
 
Obligations of state and political subdivisions
$
3,648

$
(31
)
 
$

$

 
$
3,648

$
(31
)
MBS pass-through securities issued by FHLMC and FNMA
16,337

(143
)
 
46,845

(371
)
 
63,182

(514
)
CMOs issued by FHLMC
11,066

(31
)
 
13,824

(43
)
 
24,890

(74
)
Total held-to-maturity
31,051

(205
)
 
60,669

(414
)
 
91,720

(619
)
Available-for-sale:




 




 




MBS pass-through securities issued by FHLMC and FNMA
32,189

(121
)
 
15,325

(302
)
 
47,514

(423
)
SBA-backed securities
11,028

(53
)
 
165

(2
)
 
11,193

(55
)
CMOs issued by FNMA
26,401

(171
)
 
5,440

(77
)
 
31,841

(248
)
CMOs issued by FHLMC
69,276

(628
)
 


 
69,276

(628
)
CMOs issued by GNMA
14,230

(194
)
 


 
14,230

(194
)
Debentures of government- sponsored agencies
2,984

(5
)
 


 
2,984

(5
)
   Privately issued CMO's
1,310

(2
)
 


 
1,310

(2
)
Obligations of state and political subdivisions
52,197

(288
)
 
19,548

(546
)
 
71,745

(834
)
Corporate bonds
3,060

(3
)
 


 
3,060

(3
)
Total available-for-sale
212,675

(1,465
)
 
40,478

(927
)
 
253,153

(2,392
)
Total temporarily impaired securities
$
243,726

$
(1,670
)
 
$
101,147

$
(1,341
)
 
$
344,873

$
(3,011
)

As of June 30, 2018, sixty-four investment securities in our portfolio had been in a continuous loss position for twelve months or more. They consisted of five CMOs issued by FHLMC, three CMOs issued by FNMA, two CMOs issued by GNMA, twenty-two agency MBS securities and thirty-two obligations of U.S. state and political subdivisions securities. We have evaluated the securities and believe that the decline in fair value is primarily driven by factors other than credit. It is probable that we will be able to collect all amounts due according to the contractual terms and no other-than-temporary impairment exists on these securities. The debenture of government-sponsored agency security is supported by the U.S. Federal Government, which protects us from credit losses. Based upon our assessment of the credit fundamentals, we concluded that these securities were not other-than-temporarily impaired at June 30, 2018.

There were two hundred one investment securities in our portfolio that had been in temporary loss positions for less than twelve months as of June 30, 2018, and their temporary loss positions mainly arose from changes in interest rates since purchase. They consisted of eleven SBA-backed securities, eight debentures of a U.S. government-sponsored agency, ninety-eight obligations of U.S. state and political subdivisions, thirty-six MBS securities, forty-six CMOs issued by government-sponsored agencies, and three corporate bonds. Securities of government-sponsored agencies are supported by the U.S. Federal Government, which protects us from credit losses. Other temporarily impaired securities are deemed creditworthy after internal analysis of the issuers' latest financial information and credit enhancement. Additionally, all are rated as investment grade by at least one major rating agency. As a result of this impairment analysis, we concluded that these securities were not other-than-temporarily impaired at June 30, 2018.

Non-Marketable Securities

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 $11.1 million of FHLB stock recorded at cost in other assets in the consolidated statements of condition at both June 30, 2018 and December 31, 2017. 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. Management does not believe that the FHLB stock is other-than-temporarily-impaired, due to FHLB's current financial condition. On July 26, 2018, FHLB announced a cash

Page-16



dividend to be distributed in mid-August 2018 at an annualized dividend rate of 7.00%. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock with a carrying value of zero, which is equal to our cost basis. These shares are restricted from resale until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction, these shares are not considered available-for-sale and are not carried at fair value. When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6298 as of June 30, 2018 and 1.6483 as of December 31, 2017, and the closing stock price of Class A shares, the value of our shares of Class B common stock would have been $3.7 million and $3.2 million at June 30, 2018 and December 31, 2017, respectively. The conversion rate is subject to further reduction 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 if-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 $4.9 million and $2.1 million recorded in other assets as of June 30, 2018 and December 31, 2017, respectively. In the first six months of 2018, we recognized $282 thousand of low-income housing tax credits and other tax benefits, net of $237 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2018, our unfunded commitments for these low-income housing tax credit funds totaled $3.2 million. We did not recognize any impairment losses on these low-income housing tax credit investments during the six months ended June 30, 2018 or 2017, 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, 2018 and December 31, 2017.
Loan Aging Analysis by Loan Class
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential 1

Installment and other consumer

Total

June 30, 2018
 

 

 

 

 

 

 

 

 30-59 days past due
$

$

$

$

$
77

$

$
11

$
88

 60-89 days past due








 90 days or more past due








Total past due




77


11

88

Current
241,994

317,587

839,667

57,015

125,954

108,829

26,477

1,717,523

Total loans 3
$
241,994

$
317,587

$
839,667

$
57,015

$
126,031

$
108,829

$
26,488

$
1,717,611

Non-accrual loans 2
$

$

$

$

$
385

$

$

$
385

December 31, 2017
 

 

 

 

 

 

 

 

 30-59 days past due
$

$

$

$

$
99

$
255

$
330

$
684

 60-89 days past due
1,340







1,340

 90 days or more past due




307



307

Total past due
1,340




406

255

330

2,331

Current
234,495

300,963

822,984

63,828

132,061

95,271

27,080

1,676,682

Total loans 3
$
235,835

$
300,963

$
822,984

$
63,828

$
132,467

$
95,526

$
27,410

$
1,679,013

Non-accrual loans 2
$

$

$

$

$
406

$

$

$
406

1 Our residential loan portfolio does not include sub-prime loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages", the characteristics of which are loans lacking full documentation, borrowers having low FICO scores or higher loan-to-value ratios.
2 One purchased credit impaired ("PCI") loan with an unpaid balance of $6 thousand and no carrying value was not accreting interest at June 30, 2018. Three PCI loans with unpaid balances totaling $131 thousand and no carrying values were not accreting interest at December 31, 2017. Amounts exclude accreting PCI loans totaling $2.1 million at both June 30, 2018 and December 31, 2017 as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. There were no accruing loans past due more than ninety days at June 30, 2018 or December 31, 2017.
3 Amounts include net deferred loan origination costs of $800 thousand and $818 thousand at June 30, 2018 and December 31, 2017, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $956 thousand and $1.2 million at June 30, 2018 and December 31, 2017, respectively.

We generally make commercial loans to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions.  Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans

Page-17



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.
 
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, the owners of the properties guarantee substantially all of our commercial real estate loans.  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.

We generally make construction loans to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. 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 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.

Page-18




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 are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly and review them on an ongoing basis. We review home equity and other consumer loans based on delinquency status. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.

The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, including PCI loans, at June 30, 2018 and December 31, 2017.
Credit Risk Profile by Internally Assigned Risk Grade
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Purchased credit-impaired

Total

June 30, 2018
 
 
 
 
 
 
 
 
 
Pass
$
224,707

$
299,469

$
836,634

$
54,324

$
124,103

$
108,829

$
26,389

$
2,140

$
1,676,595

Special Mention
14,842

8,904

2,232


1,121




27,099

Substandard
2,403

8,005


2,691

719


99


13,917

Total loans
$
241,952

$
316,378

$
838,866

$
57,015

$
125,943

$
108,829

$
26,488

$
2,140

$
1,717,611

December 31, 2017
 

 

 

 

 

 

 

 

 

Pass
$
214,636

$
281,104

$
818,570

$
60,859

$
130,558

$
95,526

$
27,287

$
1,325

$
1,629,865

Special Mention
9,318

9,284

1,850





790

21,242

Substandard
11,816

9,409

1,774

2,969

1,815


123


27,906

Total loans
$
235,770

$
299,797

$
822,194

$
63,828

$
132,373

$
95,526

$
27,410

$
2,115

$
1,679,013

 
Troubled Debt Restructuring
 
Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally six months, and obtains reasonable assurance of repayment and performance.
 
We may remove a loan from TDR designation if it meets all of the following conditions:
The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards;
The borrower is no longer considered to be in financial difficulty;
Performance on the loan is reasonably assured; and;
Existing loan did not have any forgiveness of principal or interest.

The same Management level that approved the upgrading of the loan classification must approve the removal of TDR status. During the six months ended June 30, 2018, one TIC loan with a recorded investment of $150 thousand was removed from TDR designation after meeting all of the conditions noted above. There were no loans removed from TDR designation during 2017.
 

Page-19



The following table summarizes the carrying amount of TDR loans by loan class as of June 30, 2018 and December 31, 2017.
(in thousands)
 
Recorded investment in Troubled Debt Restructurings 1
June 30, 2018

December 31, 2017

Commercial and industrial
$
1,917

$
2,165

Commercial real estate, owner-occupied
7,002

6,999

Commercial real estate, investor
1,844

2,171

Construction
2,691

2,969

Home equity
348

347

Other residential
988

1,148

Installment and other consumer
704

721

Total
$
15,494

$
16,520

1 There were no TDR loans on non-accrual status at June 30, 2018 and December 31, 2017.

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.
(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, 2018:
 
 
 

Commercial and industrial
2

$
254

$
245

$
235

TDRs during the three months ended June 30, 2017:
 

 

 



None

$

$

$

TDRs during the six months ended June 30, 2018:
 
 
 
 
Commercial and industrial
2

$
254

$
245

$
235

TDRs during the six months ended June 30, 2017:
 

 

 

 
Installment and consumer
1

$
50

$
50

$
49

The two loans that were modified during the six months ended June 30, 2018 were to the same borrower and included loan extensions and other changes in loan terms. The modification during the six months ended June 30, 2017 primarily involved an interest rate concession and other changes to loan terms. During the first six months of 2018 and 2017, 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.

Impaired Loans

The following tables summarize information by class on impaired loans and their related allowances. Total impaired loans include non-accrual loans, accruing TDR loans and accreting PCI loans that have experienced post-acquisition declines in cash flows expected to be collected.

Page-20



(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Total

June 30, 2018
 

 

 

 

 

 

 

Recorded investment in impaired loans:
 
 
 
 
 
 
With no specific allowance recorded
$
306

$

$

$
2,691

$
385

$
989

$
46

$
4,417

With a specific allowance recorded
1,611

7,002

1,844


347


658

11,462

Total recorded investment in impaired loans
$
1,917

$
7,002

$
1,844

$
2,691

$
732

$
989

$
704

$
15,879

Unpaid principal balance of impaired loans
$
1,905

$
6,993

$
1,837

$
2,688

$
729

$
987

$
703

$
15,842

Specific allowance
232

126

47


6


92

503

Average recorded investment in impaired loans during the quarter ended
June 30, 2018
2,092

7,005

1,849

2,833

736

990

708

16,213

Interest income recognized on impaired loans during the quarter ended
June 30, 2018
1
28

66

20

37

5

13

8

177

Average recorded investment in impaired loans during the six months ended
June 30, 2018
2,104

7,003

1,956

2,878

742

1,043

712

16,438

Interest income recognized on impaired loans during the six months ended
June 30, 2018
1
183

132

42

75

10

26

15

483

Average recorded investment in impaired loans during the quarter ended
June 30, 2017
2,072

7,000

3,283

3,240

642

1,173

943

18,353

Interest income recognized on impaired loans during the quarter ended
June 30, 2017
1
25

66

20

37

7

14

10

179

Average recorded investment in impaired loans during the six months ended
June 30, 2017
2,117

6,998

2,941

3,241

667

1,437

939

18,340

Interest income recognized on impaired loans during the six months ended
June 30, 2017
1
48

132

43

71

14

34

20

362

1 No interest income on impaired loans was recognized on a cash basis during the three months ended June 30, 2018. Interest income recognized on a cash basis totaled $128 thousand during the six months ended June 30, 2018 and was primarily related to the pay-off of two non-accrual commercial PCI loans. No interest income on impaired loans was recognized on a cash basis during the three and six months ended June 30, 2017.
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Total

December 31, 2017
 

 

 

 

 

 

 

Recorded investment in impaired loans:
 

 

 

 

 

 

With no specific allowance recorded
$
309

$

$

$
2,689

$
406

$
995

$
46

$
4,445

With a specific allowance recorded
1,856

6,999

2,171

280

347

153

675

12,481

Total recorded investment in impaired loans
$
2,165

$
6,999

$
2,171

$
2,969

$
753

$
1,148

$
721

$
16,926

Unpaid principal balance of impaired loans
$
2,278

$
6,993

$
2,168

$
2,963

$
750

$
1,147

$
720

$
17,019

Specific allowance
$
50

$
188

$
159

$
7

$
6

$
1

$
102

$
513


Management monitors delinquent loans continuously and identifies problem loans, generally loans graded Substandard or worse, loans on non-accrual status and loans modified in a TDR, to be evaluated individually for impairment. 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, 2018 or December 31, 2017. 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, 2018 and December 31, 2017, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $850 thousand and $935 thousand, respectively.


Page-21



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

Construction

Home equity

Other residential

Installment and other consumer

Unallocated

Total

Three months ended June 30, 2018







Beginning balance
$
3,693

$
2,080

$
6,455

$
697

$
979

$
543

$
351

$
973

$
15,771

Provision (reversal)
(1,098
)
259

935

(189
)
(27
)
203

(66
)
(17
)

Charge-offs
(3
)





(2
)

(5
)
Recoveries
5






42


47

Ending balance
$
2,597

$
2,339

$
7,390

$
508

$
952

$
746

$
325

$
956

$
15,813

Three months ended June 30, 2017
 
 
 
 
 
 
 
Beginning balance
$
4,413

$
1,992

$
6,133

$
546

$
990

$
444

$
359

$
342

$
15,219

Provision (reversal)
(490
)
90

(68
)
(135
)
(9
)
65

(23
)
570


Charge-offs









Recoveries
9






4


13

Ending balance
$
3,932

$
2,082

$
6,065

$
411

$
981

$
509

$
340

$
912

$
15,232

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, 2018
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
3,654

$
2,294

$
6,475

$
681

$
1,031

$
536

$
378

$
718

$
15,767

Provision (reversal)
(1,063
)
45

915

(173
)
(79
)
210

(93
)
238


Charge-offs
(3
)





(2
)

(5
)
Recoveries
9






42


51

Ending balance
$
2,597

$
2,339

$
7,390

$
508

$
952

$
746

$
325

$
956

$
15,813

Six months ended June 30, 2017
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
Beginning balance
$
3,248

$
1,753

$
6,320

$
781

$
973

$
454

$
372

$
1,541

$
15,442

Provision (reversal)
896

329

(255
)
(370
)
8

55

(34
)
(629
)

Charge-offs
(284
)





(3
)

(287
)
Recoveries
72






5


77

Ending balance
$
3,932

$
2,082

$
6,065

$
411

$
981

$
509

$
340

$
912

$
15,232


Page-22



Allowance for Loan Losses and Recorded Investment in Loans
(dollars 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

June 30, 2018
Ending ALLL related to loans collectively evaluated for impairment
$
2,365

$
2,213

$
7,343

$
508

$
946

$
746

$
233

$
956

$
15,310

Ending ALLL related to loans individually evaluated for impairment
232

126

47


6


92


503

Ending ALLL related to purchased credit-impaired loans









Ending balance
$
2,597

$
2,339

$
7,390

$
508

$
952

$
746

$
325

$
956

$
15,813

Recorded Investment:
 

 

 

 

 

 
 

Collectively evaluated for impairment
$
240,035

$
309,376

$
837,022

$
54,324

$
125,211

$
107,840

$
25,784

$

$
1,699,592

Individually evaluated for impairment
1,917

7,002

1,844

2,691

732

989

704


15,879

Purchased credit-impaired
42

1,209

801


88




2,140

Total
$
241,994

$
317,587

$
839,667

$
57,015

$
126,031

$
108,829

$
26,488

$

$
1,717,611

Ratio of allowance for loan losses to total loans
1.07
%
0.74
%
0.88
%
0.89
%
0.76
%
0.69
%
1.23
%
NM

0.92
%
Allowance for loan losses to non-accrual loans
NM

NM

NM

NM

247
%
NM

NM

NM

4,107
%
NM - Not Meaningful
Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Unallocated

Total

December 31, 2017
Ending ALLL related to loans collectively evaluated for impairment
$
3,604

$
2,106

$
6,316

$
674

$
1,025

$
535

$
276

$
718

$
15,254

Ending ALLL related to loans individually evaluated for impairment
50

188

159

7

6

1

102


513

Ending ALLL related to purchased  credit-impaired loans









Ending balance
$
3,654

$
2,294

$
6,475

$
681

$
1,031

$
536

$
378

$
718

$
15,767

Recorded Investment:
 

 

 

 

 

 

 

Collectively evaluated for impairment
$
233,605

$
292,798

$
820,023

$
60,859

$
131,620

$
94,378

$
26,689

$

$
1,659,972

Individually evaluated for impairment
2,165

6,999

2,171

2,969

753

1,148

721


16,926

Purchased credit-impaired
65

1,166

790


94




2,115

Total
$
235,835

$
300,963

$
822,984

$
63,828

$
132,467

$
95,526

$
27,410

$

$
1,679,013

Ratio of allowance for loan losses to total loans
1.55
%
0.76
%
0.79
%
1.07
%
0.78
%
0.56
%
1.38
%
NM

0.94
%
Allowance for loan losses to non-accrual loans
NM

NM

NM

NM

254
%
NM

NM

NM

3,883
%
NM - Not Meaningful

Purchased Credit-Impaired Loans
 
Acquired loans are considered credit-impaired if there is evidence of significant deterioration of credit quality since origination and it is probable, at the acquisition date, that we will be unable to collect all contractually required payments receivable. Management has determined certain loans purchased in our three bank acquisitions to be PCI loans based on credit indicators such as nonaccrual status, past due status, loan risk grade, loan-to-value ratio, etc. Revolving credit agreements (e.g., home equity lines of credit and revolving commercial loans) are not considered PCI loans as cash flows cannot be reasonably estimated.
 

Page-23



The following table reflects the unpaid principal balance and related carrying value of PCI loans.
PCI Loans
June 30, 2018
December 31, 2017

(in thousands)
Unpaid Principal Balance

Carrying Value

Unpaid Principal Balance

Carrying Value

Commercial and industrial
$
125

$
42

$
276

$
65

Commercial real estate, owner occupied
1,271

1,209

1,297

1,166

Commercial real estate, investor
1,049

801

1,064

790

Home equity
220

88

231

94

Total purchased credit-impaired loans
$
2,665

$
2,140

$
2,868

$
2,115

 
The activities in the accretable yield, or income expected to be earned over the remaining lives of the PCI loans were as follows:
Accretable Yield
Three months ended
Six months ended
(in thousands)
June 30, 2018
June 30, 2017
June 30, 2018
June 30, 2017
Balance at beginning of period
$
1,142

$
1,386

$
1,254

$
1,476

Accretion
(83
)
(80
)
(195
)
(170
)
Balance at end of period
$
1,059

$
1,306

$
1,059

$
1,306


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 $996.9 million and $887.9 million at June 30, 2018 and December 31, 2017, respectively. In addition, we pledge a certain residential loan portfolio, which totaled $80.0 million and $67.6 million at June 30, 2018 and December 31, 2017, 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 transactions, including 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 $12.3 million at June 30, 2018 compared to $11.9 million at December 31, 2017. In addition, undisbursed commitments to related parties totaled $8.6 million and $9.1 million at June 30, 2018 and December 31, 2017, respectively.

Note 6: Borrowings
 
Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowing totaling $92.0 million at June 30, 2018 and $100.4 million at December 31, 2017.  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, 2018 or December 31, 2017.
 
Federal Home Loan Bank Borrowings – As of June 30, 2018 and December 31, 2017, the Bank had lines of credit with the FHLB totaling $627.4 million and $538.9 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at June 30, 2018 or December 31, 2017.

Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans.  At June 30, 2018 and December 31, 2017, the Bank had borrowing capacity under this line totaling $59.5 million and $52.1 million, respectively, and had no outstanding borrowings with the FRBSF.

As part of an acquisition, Bancorp assumed two subordinated debentures due to NorCal Community Bancorp Trusts I and II (the "Trusts"), established for the sole purpose of issuing trust preferred securities on September 22, 2003 and December 29, 2005, respectively. The subordinated debentures were recorded at fair values totaling $4.95 million at acquisition date with contractual values totaling $8.2 million. The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the lives of the debentures. Accretion on the subordinated debentures totaled $63 thousand and $80 thousand in the first six months of 2018 and 2017, respectively.

Page-24



Bancorp has the option to defer payment of the interest on the subordinated debentures for a period of up to five years, as long as there is no default on the subordinated debentures. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited. 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. Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $8.0 million issued by the Trusts, which have identical maturity, repricing, and payment terms as the subordinated debentures.

The following table summarizes the contractual terms of the subordinated debentures due to the Trusts as of June 30, 2018:
(in thousands)
 
Subordinated debentures due to NorCal Community Bancorp Trust I on October 7, 2033 with interest payable quarterly, based on 3-month LIBOR plus 3.05%, repricing quarterly (5.40% as of June 30, 2018), redeemable, in whole or in part, on any interest payment date
$
4,124

Subordinated debentures due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly, based on 3-month LIBOR plus 1.40%, repricing quarterly (3.74% as of June 30, 2018), redeemable, in whole or in part, on any interest payment date
4,124

   Total
$
8,248


Note 7:  Stockholders' Equity
 
Dividends
 
The following table summarizes cash dividends paid to common shareholders, recorded as a reduction of retained earnings.
 
Three months ended
 
Six months ended
(in thousands, except per share data)
June 30, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
Cash dividends to common stockholders
$
2,166

$
1,660

 
$
4,181

$
3,315

Cash dividends per common share
$
0.31

$
0.27

 
$
0.60

$
0.54


On July 20, 2018, the Board of Directors declared a $0.32 per share cash dividend, payable on August 10, 2018 to shareholders of record at the close of business on August 3, 2018.

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 fair value of the restricted stock awards on the grant date, which equals the intrinsic value, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Stock option and restricted stock awards issued in 2018 include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate stock-based compensation if the award holder is eligible to retire. However, retirement eligibility does not affect the legal vesting schedule of the awards.

Performance-based stock awards (restricted stock awards) 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 the stock awards cliff vest. 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.

In addition, 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

Page-25



(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 on 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.

Under the 2017 Equity Plan, stock options may be net settled by a reduction in the number of shares otherwise deliverable upon exercise in satisfaction of the exercise payment and applicable tax withholding requirements. During the six months ended June 30, 2018, option holders exchanged 19,863 shares totaling $1.4 million at a weighted-average price of $70.34 for cashless stock option exercises and tax withholdings upon vesting of performance-based stock awards. During the six months ended June 30, 2017, option holders exchanged 5,651 shares totaling $385 thousand at a weighted-average price of $68.04 for cashless stock option exercises. Shares exchanged under net settlement arrangements are available for future grants under the 2017 Equity Plan.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $638 thousand from AOCI to retained earnings. This amount represents the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017. For more information regarding ASU No. 2018-02, refer to Note 2, Accounting Standards Adopted in 2018.

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.

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 quarter ended June 30, 2018, Bancorp purchased 1,398 shares for a total amount of $104 thousand.

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.

Page-26



 
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, 2018

December 31, 2017

Commercial lines of credit
$
222,547

$
224,370

Revolving home equity lines
186,652

177,678

Undisbursed construction loans
34,336

35,322

Personal and other lines of credit
12,408

11,758

Standby letters of credit
2,207

4,074

   Total commitments and standby letters of credit
$
458,150

$
453,202


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 $958 thousand as of June 30, 2018 and December 31, 2017, which is recorded in interest payable and other liabilities in the consolidated statements of condition.

Operating Leases
 
We rent certain premises under long-term, non-cancelable operating leases expiring at various dates through the year 2032. Most of the leases contain certain renewal options and escalation clauses. At June 30, 2018, the approximate minimum future commitments payable under non-cancelable contracts for leased premises are as follows:
(in thousands)
2018

2019

2020

2021

2022

Thereafter

Total

Operating leases
$
2,209

$
4,198

$
3,758

$
2,138

$
1,330

$
2,904

$
16,537


Rent expense included in occupancy expense totaled $1.2 million and $1.0 million for the three months ended June 30, 2018 and 2017, respectively. Rent expense totaled $2.3 million and $2.0 million for the six months ended June 30, 2018 and 2017, respectively.

Litigation Matters

We may be party to legal actions that arise from time to time during the normal course of business.  We believe, after consultation with legal counsel, that litigation contingent liability, if any, would not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

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 lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). 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 in Note 4, Investment Securities. The conversion rate may decrease if Visa makes more Covered Litigation settlement payments in the future, and the full effect on member banks is still uncertain. Presently, we are not aware of any significant future cash settlement payments required by the Bank on the Covered Litigation.

In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement for which it maintains an escrow account to be used for settlements or judgments in the Covered Litigation. Based on progress in recent settlement discussions in the U.S. interchange multi-district litigation, Visa recorded a $600 million litigation provision in the quarter ended June 30, 2018 and on June 28, Visa deposited an additional $600 million into the litigation escrow under the terms of the U.S. retrospective responsibility plan. Funding of the escrow triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock. At June 30, 2018, according to Visa's Form 10-Q filed on July 27, 2018, the escrow account balance was $1.5 billion. As of the date of Visa's filing, it had reached settlement agreements with individual merchants representing 51% of the Visa-branded payment card sales volume of merchants who opted out of the 2012 settlement agreement. Litigation is ongoing and until the appeal process is complete, Visa is uncertain whether it will resolve the claims as contemplated by the settlement agreement and additional lawsuits may arise.

Page-27



Note 9: Derivative Financial Instruments and Hedging Activities

We have entered into interest rate swap agreements, primarily as an interest rate risk 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, 2018, 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 designated hedging instruments and 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 $5 thousand and $8 thousand as of June 30, 2018 and December 31, 2017, respectively.

The following tables presents the notional amount and fair value of our derivatives designated as hedging instruments:
 
Derivative Assets
 
Derivative Liabilities
(in thousands)
June 30,
2018
December 31, 2017
 
June 30,
2018
December 31, 2017
Fair value hedges:
 
 
 
 
 
Interest rate contracts notional amount
$
9,081

$
4,019

 
$
9,293

$
14,810

Interest rate contracts fair value1
$
327

$
74

 
$
276

$
740

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

The table below 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, 2018:
(in thousands)
Carrying Amounts of Hedged Assets

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

Loans
$
18,112

$
(262
)

The table below 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
(in thousands)
 
June 30, 2018
June 30, 2017
Increase (decrease) in value of designated interest rate swaps
 
$
187

$
(129
)
Payment on interest rate swaps
 
$
(40
)
$
(87
)
(Decrease) increase in value of hedged loans
 
$
(116
)
$
191

Decrease in value of yield maintenance agreement
 
$
(3
)
$
(4
)
Net gain (loss) on fair value hedging relationships recognized in interest income
 
$
28

$
(29
)
 
 
 
 
Six months ended
(in thousands)
 
June 30, 2018
June 30, 2017
Increase (decrease) in value of designated interest rate swaps
 
$
716

$
(18
)
Payment on interest rate swaps
 
$
(95
)
$
(185
)
(Decrease) increase in value of hedged loans
 
$
(693
)
$
78

Decrease in value of yield maintenance agreement
 
$
(7
)
$
(7
)
Net loss on fair value hedging relationships recognized against interest income
 
$
(79
)
$
(132
)

Page-28



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.

The following table shows information on financial instruments that are eligible for offset in the consolidated statements of condition.
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)
Assets1
Condition
of Condition1
Instruments
Received
Net Amount
June 30, 2018
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
327

$

$
327

$
(276
)
$

$
51

December 31, 2017
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
74

$

$
74

$
(74
)
$

$

1 Amounts exclude accrued interest totaling less than $1 thousand at both June 30, 2018 and December 31, 2017.
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)
Liabilities2
Condition
of Condition2
Instruments
Pledged
Net Amount
June 30, 2018
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
276

$

$
276

$
(276
)


$

December 31, 2017
 
 
 
 
 
 
Derivatives by Counterparty:
 
 
 
 
 
 
Counterparty A
$
740

$

$
740

$
(74
)
$
(666
)
$

2 Amounts exclude accrued interest totaling $4 thousand and $8 thousand at June 30, 2018 and December 31, 2017, respectively.

For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2017 Form 10-K filed with the SEC on March 14, 2018.

Note 10: Acquisition

On November 21, 2017, we completed the merger of Bank of Napa, N.A. (OTCQB: BNNP), to enhance our market presence in Napa, California. Bank of Napa was a national bank with two branch offices serving Napa. The acquisition added $134.7 million in loans, $249.9 million in deposits and $75.5 million in investment securities to Bank of Marin as of the acquisition date. Bank of Napa shareholders received 0.307 shares of Bancorp common stock for each share of Bank of Napa common stock outstanding. We have accounted for the acquisition of Bank of Napa as a business combination under the acquisition method of accounting. The assets acquired and liabilities assumed, both tangible and intangible, were recorded at their fair values as of the acquisition date in accordance with ASC 805, Business Combinations. The acquisition was treated as a "reorganization" within the definition of section 368(a) of the Internal Revenue Code and is generally considered tax-free for U.S. federal income tax purposes.

The Bank of Napa acquisition resulted in $23.7 million in goodwill, which represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of Bank of Napa and Bank of Marin, which we evaluate for impairment annually. We determined that the fair value of our traditional community banking activities (provided through our branch network) exceeded the carrying amount of the bank-level reporting unit. The goodwill is not deductible for tax purposes.

The core deposit intangible represents the estimated future benefits of acquired deposits and is booked separately from the related deposits. We recorded a core deposit intangible asset of $4.4 million from the Bank of Napa acquisition on November 21, 2017, of which $56 thousand was amortized in 2017 and $254 thousand was amortized in the first six months of 2018. The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and is evaluated periodically for impairment. No impairment loss was recognized as of June 30, 2018.

Page-29




Acquisition-related expenses are recognized as incurred and continue until all systems have been converted and operational functions become fully integrated. Bank of Marin Bancorp incurred acquisition-related expenses in the consolidated statements of comprehensive income for the three and six months ended June 30, 2018 as follows:
(in thousands)
Three months ended June 30, 2018
Six months ended June 30, 2018
Data processing1
$
163

$
555

Professional services
31

126

Personnel severance
35

141

Other
21

43

   Total
$
250

$
865

1 Primarily relates to Bank of Napa's core processing system contract termination and deconversion fees.
 


Page-30



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 2017 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, and the successful integration of acquisitions 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, general economic conditions and the economic uncertainty in the United States and abroad, including changes in interest rates, deposit flows, real estate values, and expected future cash flows on loans and securities; costs or effects of acquisitions; competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation (including the Tax Cuts and Jobs Act of 2017); natural disasters (such as the 2017 wildfires in our area); adverse weather conditions; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cyber-security threats) affecting our 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 2017 Form 10-K as filed with the SEC, copies of which are available from us at no charge. Forward-looking statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made 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 2017 Form 10-K filed with the SEC on March 14, 2018 and Note 2, Recently Adopted and Issued Accounting Standards, to the Consolidated Financial Statements in this Form 10-Q.


Page-31



Executive Summary
 
Earnings in the second quarter of 2018 totaled $7.9 million, compared to $5.2 million in the second quarter of 2017. Diluted earnings per share were $1.12 in the second quarter of 2018, compared to $0.84 in the same quarter a year ago. Earnings for the first six months of 2018 totaled $14.3 million compared to $9.7 million in the same period last year. Diluted earnings per share were $2.03 and $1.58 in the first six months of 2018 and 2017, respectively.

The following are highlights of our operating and financial performance for the periods presented:
The Board of Directors declared a cash dividend of $0.32 per share on July 20, 2018, a $0.01 increase from the prior quarter. This represents the 53rd consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on August 10, 2018, to shareholders of record at the close of business on August 3, 2018.
Loans totaled $1,717.6 million at June 30, 2018, compared to $1,679.0 million at December 31, 2017, raising the loan to deposit ratio from 78.1% to 80.3%. New loan volume of $113.2 million in the in the first half of 2018 was partially offset by payoffs of $68.8 million, and combined with changes in lines of credit utilization and amortization on existing loans, resulted in the net increase of $38.6 million.
Strong credit quality remains a cornerstone of the Bank's consistent performance. Non-accrual loans totaled $385 thousand, or 0.02% of the loan portfolio at June 30, 2018, compared to $406 thousand, or 0.02% at December 31, 2017. Classified loans totaled $13.9 million at June 30, 2018, compared to $27.9 million at December 31, 2017. The decrease in classified loans is primarily due to two borrowing relationships whose risk grades were upgraded from substandard to special mention in the second quarter of 2018. Accruing loans past due 30 to 89 days totaled $88 thousand at June 30, 2018, compared to $1.9 million at December 31, 2017. There was no provision for either loan losses or off-balance sheet commitments recorded in the first six months of 2018.
Total deposits decreased $10.9 million in the first half of 2018 to $2,137.7 million at June 30, 2018. The decrease in deposits was primarily due to normal cash fluctuations of our large business clients. Additionally, some businesses moved balances into off-balance sheet time deposit products to realize higher interest rates while maintaining their relationships with the Bank. A small number of account holders who were focused solely on obtaining the highest rates in the marketplace moved to other institutions. Non-interest bearing deposits represented 49.5% of total deposits, and the annualized cost of total deposits for the first six months of 2018 was 0.08%.
Reported net interest margin was 3.87% in the second quarter of 2018, which increased 16 basis points compared to the second quarter of 2017, resulting primarily from higher loan and investment yields.
Pre-tax net income was up $2.8 million, or 36.1%, compared to the same quarter last year. Due to recent tax reform, the federal statutory income tax rate decreased to 21% beginning January 1, 2018. Bancorp's effective tax rate in the second quarter of 2018 was 25.4%, compared to 33.2% in the second quarter of 2017. Earnings in the second quarter of 2018 were favorably impacted by both the tax reform and higher earning assets from the Bank of Napa acquisition. Cost savings from the Bank of Napa acquisition are meeting expectations and should be fully embedded in the third quarter of 2018.
Return on assets was 1.28% for the quarter ended June 30, 2018, compared to 1.01% for the quarter ended June 30, 2017. Return on equity was 10.54% for the quarter ended June 30, 2018, compared to 8.74% for the quarter ended June 30, 2017.
All capital ratios are well above regulatory requirements for a well-capitalized institution. The total risk-based capital ratio for Bancorp was 15.2% at June 30, 2018, compared to 14.9% at December 31, 2017.

Looking forward into 2018, we believe that our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve - will continue to drive the success of the Bank.  By building strong relationships in vibrant markets, we are able to grow our loan portfolio and deposit franchise organically. Disciplined fundamentals ensure that our credit quality remains high, our deposit base is reasonably priced, and our operations are highly efficient, all of which contribute to profitability and net interest margin expansion.  Our success helps us to attract the most qualified professionals in the marketplace.

Our strong liquidity and capital supports our organic growth as well as acquisitions. This gives us a great deal of flexibility as we seek opportunities that add value to the Company.

Page-32



RESULTS OF OPERATIONS
 
Highlights of the financial results are presented in the following tables:
(dollars in thousands)
June 30, 2018
December 31, 2017
Selected financial condition data:
 
 
Total assets
$
2,465,042

$
2,468,154

Loans, net
1,701,798

1,663,246

Deposits
2,137,723

2,148,670

Borrowings
5,802

5,739

Stockholders' equity
304,198

297,025

Asset quality ratios:
 
 
Allowance for loan losses to total loans
0.92%

0.94
%
Allowance for loan losses to non-accrual loans
41.11
x
38.88x

Non-accrual loans to total loans
0.02%

0.02
%
Capital ratios:
 
 
Equity to total assets ratio
12.34
%
12.03
%
Total capital (to risk-weighted assets)
15.15
%
14.91
%
Tier 1 capital (to risk-weighted assets)
14.30
%
14.04
%
Tier 1 capital (to average assets)
11.57
%
12.13
%
Common equity Tier 1 capital (to risk weighted assets)
14.01
%
13.75
%

 
Three months ended
 
Six months ended
(dollars in thousands, except per share data)
June 30, 2018
June 30, 2017
 
June 30, 2018
June 30, 2017
Selected operating data:
 
 
 
 
 
Net interest income
$
22,842

$
18,304

 
$
44,733

$
35,925

Non-interest income
2,238

2,096

 
4,480

4,211

Non-interest expense 1
14,509

12,631

 
30,590

25,642

Net income 1
7,891

5,186

 
14,280

9,734

Net income per common share:
 
 
 
 
 
Basic
$
1.14

$
0.85

 
$
2.06

$
1.60

Diluted
$
1.12

$
0.84

 
$
2.03

$
1.58

Performance and other financial ratios:
 
 
 
 
 
Return on average assets
1.28%

1.01%

 
1.17%

0.96%

Return on average equity
10.54%

8.74%

 
9.63%

8.34%

Tax-equivalent net interest margin 3
3.92%

3.85%

 
3.89%

3.82%

Efficiency ratio
57.85%

61.92%

 
62.16%

63.89%

Cash dividend payout ratio on common stock 2
27.19%

31.76%

 
29.13%

33.75%

1 Includes merger-related costs totaling $250 thousand and $865 thousand for the three and six months ended June 30, 2018.
2 Calculated as dividends on common shares divided by basic net income per common share.
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 in 2018 and 35 percent in 2017, by total average interest-earning assets.

Page-33



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 amounts and 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, 2018

June 30, 2017



Interest



Interest



Average
Income/
Yield/

Average
Income/
Yield/
(dollars in thousands)
Balance
Expense
Rate

Balance
Expense
Rate
Assets







 
Interest-bearing due from banks 1
$
62,665

$
285

1.80
%

$
56,597

$
157

1.10
%
 
Investment securities 2, 3
574,669

3,611

2.51
%

408,335

2,355

2.31
%
 
Loans 1, 3, 4
1,700,057

19,852

4.62
%

1,487,419

16,868

4.49
%
 
   Total interest-earning assets 1
2,337,391

23,748

4.02
%

1,952,351

19,380

3.93
%
 
Cash and non-interest-bearing due from banks
40,383




46,204



 
Bank premises and equipment, net
8,203




8,390



 
Interest receivable and other assets, net
87,183




60,115



Total assets
$
2,473,160




$
2,067,060



Liabilities and Stockholders' Equity







 
Interest-bearing transaction accounts
$
142,133

$
48

0.14
%

$
94,799

$
21

0.09
%
 
Savings accounts
178,956

18

0.04
%

163,424

16

0.04
%
 
Money market accounts
612,612

236

0.15
%

539,192

114

0.08
%
 
Time accounts including CDARS
140,799

140

0.40
%

146,042

139

0.38
%
 
Overnight borrowings 1
231

1

1.84
%
 


%
 
Subordinated debentures 1
5,786

123

8.40
%

5,646

109

7.59
%
 
   Total interest-bearing liabilities
1,080,517

566

0.21
%

949,103

399

0.17
%
 
Demand accounts
1,072,976




868,070



 
Interest payable and other liabilities
19,443




11,771



 
Stockholders' equity
300,224




238,116



Total liabilities & stockholders' equity
$
2,473,160




$
2,067,060



Tax-equivalent net interest income/margin 1

$
23,182

3.92
%


$
18,981

3.85
%
Reported net interest income/margin 1

$
22,842

3.87
%


$
18,304

3.71
%
Tax-equivalent net interest rate spread


3.81
%



3.76
%

Page-34



 
 
Six months ended
 
Six months ended
 
 
June 30, 2018
 
June 30, 2017
 
 
 
Interest
 
 
 
Interest
 
 
 
Average
Income/
Yield/
 
Average
Income/
Yield/
(dollars in thousands)
Balance
Expense
Rate
 
Balance
Expense
Rate
Assets
 
 
 
 
 
 
 
 
Interest-bearing due from banks 1
$
83,641

$
688

1.64
%
 
$
43,043

$
217

1.00
%
 
Investment securities 2, 3
553,723

6,887

2.49
%
 
411,427

4,716

2.29
%
 
Loans 1, 3, 4
1,687,841

38,971

4.59
%
 
1,482,977

33,090

4.44
%
 
   Total interest-earning assets 1
2,325,205

46,546

3.98
%
 
1,937,447

38,023

3.90
%
 
Cash and non-interest-bearing due from banks
43,084





 
42,189

 
 
 
Bank premises and equipment, net
8,351





 
8,415

 
 
 
Interest receivable and other assets, net
88,096





 
59,071

 
 
Total assets
$
2,464,736





 
$
2,047,122

 
 
Liabilities and Stockholders' Equity






 
 
 
 
 
Interest-bearing transaction accounts
$
155,180

$
100

0.13
%
 
$
97,943

$
50

0.10
%
 
Savings accounts
179,601

36

0.04
%
 
162,175

31

0.04
%
 
Money market accounts
597,868

452

0.15
%
 
528,923

227

0.09
%
 
Time accounts including CDARS
147,633

296

0.40
%
 
146,501

285

0.39
%
 
Overnight borrowings 1
116

1

1.84
%
 


%
 
Subordinated debentures 1
5,770

237

8.16
%
 
5,627

217

7.67
%
 
   Total interest-bearing liabilities
1,086,168

1,122

0.21
%
 
941,169

810

0.17
%
 
Demand accounts
1,061,304





 
857,253



 
 
Interest payable and other liabilities
18,180





 
13,200



 
 
Stockholders' equity
299,084





 
235,500



 
Total liabilities & stockholders' equity
$
2,464,736





 
$
2,047,122



 
Tax-equivalent net interest income/margin 1


$
45,424

3.89
%
 
 
$
37,213

3.82
%
Reported net interest income/margin 1


$
44,733

3.83
%
 


$
35,925

3.69
%
Tax-equivalent net interest rate spread




3.77
%
 
 


3.73
%
 
 
 
 
 
 
 
 
 
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 percent in 2018 and 35 percent in 2017.
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 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.

Page-35



 
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Six Months Ended June 30, 2018 Compared to Six Months Ended
June 30, 2017
(in thousands)
Volume

Yield/Rate

Mix

Total

Volume

Yield/Rate

Mix

Total

Interest-bearing due from banks
$
17

$
100

$
11

$
128

$
205

$
137

$
129

$
471

Investment securities 1
959

211

86

1,256

1,631

401

139

2,171

Loans 1
2,411

501

72

2,984

4,571

1,151

159

5,881

Total interest-earning assets
3,387

812

169

4,368

6,407

1,689

427

8,523

Interest-bearing transaction accounts
10

11

6

27

29

13

8

50

Savings accounts
2



2

3

2


5

Money market accounts
16

94

12

122

30

173

22

225

Time accounts, including CDARS
(5
)
6


1

2

9


11

Overnight borrowings


1

1



1

1

Subordinated debentures
3

11


14

6

14


20

Total interest-bearing liabilities
26

122

19

167

70

211

31

312

 
$
3,361

$
690

$
150

$
4,201

$
6,337

$
1,478

$
396

$
8,211

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% in 2018 and 35% in 2017.

Second Quarter of 2018 Compared to Second Quarter of 2017

Net interest income totaled $22.8 million in the second quarter of 2018, compared to $18.3 million in the same quarter a year ago. The $4.5 million increase was primarily due to the $385.0 million increase in average earning assets from both the Bank of Napa acquisition and organic growth. Higher yields across all asset categories also positively impacted interest income for the current quarter.

The tax-equivalent net interest margin was 3.92% in the second quarter of 2018, compared to 3.85% in the same quarter of the previous year.  The increase compared to the second quarter of 2017 is related to higher yields on earning assets, partially offset by an increase in lower yielding securities as a percentage of total earning assets.

First Six Months of 2018 Compared to First Six Months of 2017

Net interest income totaled $44.7 million in the first six months of 2018, compared to $35.9 million for the same period in 2017. The $8.8 million increase primarily relates to a $387.8 million increase in average earning assets compared to 2017. Additionally, the higher yield on investment securities, interest-bearing cash, and loans positively impacted interest income.

The tax-equivalent net interest margin was 3.89% in the first half of 2018, compared to 3.82% in the first half of the previous year.  The increase compared to the first half of 2017 is related to higher yields on earning assets, partially offset by an increase in lower yielding cash and securities as a percentage of total earning assets.

Market Interest Rates

Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC"). Actions by the FOMC to increase the target federal funds rate by 25 basis points in December 2015, December 2016, March 2017, June 2017, December 2017, March 2018 and June 2018, have positively impacted yields on our rate sensitive interest-earning assets. The increase in June 2018, to the current target range for the federal funds rate of 1.75% to 2.00%, was the seventh rate hike since 2008. If interest rates continue to rise, we anticipate that our net interest income will increase. While short-term interest rates have risen and improved the Bank’s yields on prime-rate adjustable assets, longer-term rates that influence competitive pricing for fixed-rate lending activities have moved to a lesser degree.


Page-36



Impact of Acquired Loans on Net Interest Margin

Early payoffs or prepayments of our acquired loans with significant unamortized purchase discount/premium could result in volatility in our net interest margin. As our acquired loans from prior acquisitions continue to pay off, we expect the accretion income from these loans to continue to decline. The loans acquired from Bank of Napa are not expected to significantly increase the accretion income. Accretion and gains on payoffs of purchased loans are recorded in interest income and the positive affect on our net interest margin for the second quarter and first half of 2018 and 2017 were as follows:
 
Three months ended
 
Six months ended
 
June 30, 2018

June 30, 2017
 
June 30, 2018
 
June 30, 2017
(dollars in thousands)
Dollar Amount
Basis point impact to net interest margin

Dollar Amount
Basis point impact to net interest margin
 
Dollar Amount
Basis point impact to net interest margin
 
Dollar Amount
Basis point impact to net interest margin
Accretion on PCI loans
$
84

1 bps

$
80

2 bps
 
$
195

2 bps
 
$
170

2 bps
Accretion on non-PCI loans
$
133

2 bps

$
178

3 bps
 
$
233

2 bps
 
$
328

3 bps
Gains on pay-offs of PCI loans
$
1

0 bps

$
84

2 bps
 
$
129

1 bps
 
$
84

1 bps

Provision for Loan Losses
 
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. 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 $15.9 million at June 30, 2018 and $16.9 million at December 31, 2017, with specific valuation allowances of $503 thousand and $513 thousand for the same respective dates. Classified assets (loans with substandard or doubtful risk grades) decreased to $13.9 million at June 30, 2018, from $27.9 million at December 31, 2017. The decrease in classified loans is primarily due to two borrowing relationships whose risk grades were upgraded from substandard to special mention in the second quarter of 2018. There were no loans with doubtful risk grades at June 30, 2018 or December 31, 2017.

There was no provision for loan losses recorded in the first half of 2018 and 2017, as the level of reserves was deemed appropriate for the portfolio. The two classified borrowing relationships that were upgraded in the second quarter (mentioned above) reduced the calculated general allowance for loan losses.  This reduction was primarily offset by general allowances resulting from significant loan growth and refinement of certain loan concentration qualitative factors, and an increase in specific reserves related to a loan that was modified as a troubled debt restructuring in the second quarter. Net recoveries in the second quarter of 2018 totaled $42 thousand compared to $13 thousand in the same quarter a year ago. Net recoveries totaled $46 thousand in the first half of 2018, compared to net charge-offs of $210 thousand in the first half of 2017.

The ratio of loan loss reserves to total loans was 0.92% at June 30, 2018, compared to 0.94% at December 31, 2017. Non-accrual loans totaled $385 thousand, or 0.02% of total loans, at June 30, 2018, compared to $406 thousand, or 0.02%, at December 31, 2017.

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


Page-37



Non-interest Income
 
The following table details the components of non-interest income.
 
Three months ended
 
Amount
 
Percent
(dollars in thousands)
June 30, 2018
June 30, 2017
 
Increase (Decrease)
 
Increase (Decrease)
Service charges on deposit accounts
$
455

$
447

 
$
8

 
1.8
 %
Wealth Management and Trust Services
488

504

 
(16
)
 
(3.2
)%
Debit card interchange fees
360

384

 
(24
)
 
(6.3
)%
Merchant interchange fees
118

112

 
6

 
5.4
 %
Earnings on bank-owned life insurance
230

210

 
20

 
9.5
 %
Dividends on FHLB stock
192

176

 
16

 
9.1
 %
Gains on investment securities, net
11

10

 
1

 
10.0
 %
Other income
384

253

 
131

 
51.8
 %
Total non-interest income
$
2,238

$
2,096

 
$
142

 
6.8
 %
 
 
 
 
 
 
 
 
Six months ended
 
Amount
 
Percent
(dollars in thousands)
June 30, 2018
June 30, 2017
 
Increase (Decrease)
 
Increase (Decrease)
Service charges on deposit accounts
$
932

$
899

 
$
33

 
3.7
 %
Wealth Management and Trust Services
1,003

1,007

 
(4
)
 
(0.4
)%
Debit card interchange fees
756

756

 

 
 %
Merchant interchange fees
198

208

 
(10
)
 
(4.8
)%
Earnings on bank-owned life insurance
458

419

 
39

 
9.3
 %
Dividends on FHLB stock
388

408

 
(20
)
 
(4.9
)%
Gains on investment securities, net
11

10

 
1

 
10.0
 %
Other income
734

504

 
230

 
45.6
 %
Total non-interest income
$
4,480

$
4,211

 
$
269

 
6.4
 %

Second Quarter of 2018 Compared to Second Quarter of 2017

Non-interest income increased by $142 thousand in the second quarter of 2018 to $2.2 million, compared to $2.1 million in the same quarter a year ago. The increase in other income was primarily due to an increase in fees on one-way deposits placed into deposit networks as a result of the rising market interest rate environment.

First Six Months of 2018 Compared to First Six Months of 2017

Non-interest income increased by $269 thousand in the first half of 2018 to $4.5 million, compared to $4.2 million in the same period a year ago. The increase in other income was due to the reasons mentioned above.


Page-38



Non-interest Expense
 
The following table details the components of non-interest expense.
 
Three months ended
 
Amount
 
Percent
(dollars in thousands)
June 30, 2018
 
June 30, 2017
 
Increase (Decrease)
 
Increase (Decrease)
Salaries and related benefits
$
8,316

 
$
7,287

 
$
1,029

 
14.1
 %
Occupancy and equipment
1,511

 
1,380

 
131

 
9.5
 %
Depreciation and amortization
546

 
463

 
83

 
17.9
 %
Federal Deposit Insurance Corporation insurance
191

 
162

 
29

 
17.9
 %
Data processing
1,023

 
963

 
60

 
6.2
 %
Professional services
810

 
522

 
288

 
55.2
 %
Directors' expense
183

 
224

 
(41
)
 
(18.3
)%
Information technology
264

 
186

 
78

 
41.9
 %
Provision for losses on off-balance sheet commitments

 
(208
)
 
208

 
(100.0
)%
Other non-interest expense
 
 
 
 
 
 
 
Core deposit intangible amortization
230

 
118

 
112

 
94.9
 %
Advertising
130

 
131

 
(1
)
 
(0.8
)%
Other expense
1,305

 
1,403

 
(98
)
 
(7.0
)%
Total other non-interest expense
1,665

 
1,652

 
13

 
0.8
 %
Total non-interest expense
$
14,509

 
$
12,631

 
$
1,878

 
14.9
 %
 
 
 
 
 
 
 
 
 
Six months ended
 
Amount
 
Percent
(dollars in thousands)
June 30, 2018
 
June 30, 2017
 
Increase (Decrease)
 
Increase (Decrease)
Salaries and related benefits
$
17,333

 
$
14,762

 
$
2,571

 
17.4
 %
Occupancy and equipment
3,018

 
2,699

 
319

 
11.8
 %
Depreciation and amortization
1,093

 
944

 
149

 
15.8
 %
Federal Deposit Insurance Corporation insurance
382

 
323

 
59

 
18.3
 %
Data processing
2,404

 
1,902

 
502

 
26.4
 %
Professional services
2,109

 
1,044

 
1,065

 
102.0
 %
Directors' expense
357

 
382

 
(25
)
 
(6.5
)%
Information technology
533

 
384

 
149

 
38.8
 %
Provision for losses on off-balance sheet commitments

 
(43
)
 
43

 
(100.0
)%
Other non-interest expense
 
 

 
 
 
 
Core deposit intangible amortization
460

 
236

 
224

 
94.9
 %
Advertising
308

 
204

 
104

 
51.0
 %
Other expense
2,593

 
2,805

 
(212
)
 
(7.6
)%
Total other non-interest expense
3,361

 
3,245

 
116

 
3.6
 %
Total non-interest expense
$
30,590

 
$
25,642

 
$
4,948

 
19.3
 %
 
 
 
 
 
 
 
 
NM - Not Meaningful
 
 
 
 
 
 
 

Second Quarter of 2018 Compared to Second Quarter of 2017

Non-interest expense increased by $1.9 million to $14.5 million in the second quarter of 2018, compared to $12.6 million in the same quarter a year ago. The increase was primarily due to higher salaries and benefits related to the addition of Bank of Napa employees, merit increases and filling open positions. Professional services increased due to $300 thousand in consulting expenses related to core processing contract negotiations that will result in future technology cost savings. The increase also relates to $250 thousand in acquisition expenses ($163 thousand in data processing, $35 thousand in personnel severance, $31 thousand in professional services and $21 thousand in other expenses), as well as higher occupancy and equipment expenses related to rent for the two acquired branches from Bank of Napa, as well as the opening of the Healdsburg branch in August 2017. We expect additional Bank of Napa acquisition expenses to be minimal in the remainder of 2018. Additionally, we amortized $127 thousand of the core-

Page-39



deposit intangible ("CDI") that arose from the Bank of Napa acquisition. There was no provision for losses on off-balance sheet commitments in the second quarter of 2018, compared to a $208 thousand reversal of the provision in the second quarter of 2017.

First Six Months of 2018 Compared to First Six Months of 2017

Non-interest expense increased by $4.9 million to $30.6 million in the first half of 2018, compared to $25.6 million in the same period a year ago. The increase was primarily due to higher salaries and benefits related to the addition of Bank of Napa employees, merit increases and filling open positions, as well as higher stock-based compensation related to awards granted in 2018 with certain participants meeting retirement eligibility requirements. Professional services increased due to $1.1 million in consulting expenses related to core processing contract negotiations that will result in future technology cost savings. The increase also relates to $865 thousand in acquisition expenses ($555 thousand in data processing, $126 thousand in professional services, $141 thousand in personnel severance and $43 thousand in other expenses), higher occupancy and equipment expenses related to rent for the two acquired branches from Bank of Napa, as well as the opening of the Healdsburg branch in August 2017. Additionally, the Bank amortized $254 thousand of the core-deposit intangible ("CDI") that arose from the Bank of Napa acquisition.

Provision for Income Taxes

The provision for income taxes for the second quarter of 2018 totaled $2.7 million at an effective tax rate of 25.4%, compared to $2.6 million at an effective tax rate of 33.2% in the same quarter last year. The provision for income taxes for the first half of 2018 totaled $4.3 million at an effective tax rate of 23.3%, compared to $4.8 million at an effective tax rate of 32.8% for the first half of 2017. The declines for the 2018 periods compared to the prior year periods reflect the reduction in the federal corporate income tax rate from 35% to 21% related to the enactment of the Tax Cuts and Jobs Act of 2017, effective January 1, 2018. 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, and adjusted for the effects of all permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, and low-income housing tax credits) as well as transactions with discrete tax effects (such as the exercise of stock options and disqualifying dispositions of incentive stock options). The resulting reduction in the federal statutory rate was partially offset by the effect of the higher level of expected pre-tax income in 2018 and elimination or reductions to the deductibility of certain meals, entertainment, parking and transportation expenses due to the Tax Cuts and Jobs Act of 2017. Lastly, excess tax benefits resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards totaled $426 thousand in the first six months of 2018, an increase of $246 thousand from the first half of 2017. Except for these discrete tax effects, which reduced our effective tax rate in the first half of 2018 by approximately 2.3%, our income tax provision is reflective of our current expectation for the remainder of the year.

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, 2018, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.

FINANCIAL CONDITION SUMMARY

At June 30, 2018, assets totaled $2,465.0 million, a decrease of $3.2 million when compared to $2,468.2 million at December 31, 2017. Excess cash was mainly deployed into investment securities and new loans during the first half of 2018 as discussed below.

Investment Securities

The investment securities portfolio totaled $558.8 million at June 30, 2018, an increase of $75.3 million from December 31, 2017. The increase reflects year-to-date purchases of investment securities that are either issued or guaranteed by the US government totaling $123.3 million, which were partially offset by paydowns and maturities totaling $34.2 million and sales of $5.0 million. As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies and transferred $27.4 million of these securities from available-for-sale to held-to-maturity at fair value during the second quarter of 2018. We maintain liquidity to support our future loan growth by holding investment securities averaging less than 5 years duration and cash earning 1.95% at the Federal Reserve Bank as of June 30, 2018.


Page-40



The following table summarizes our investment in obligations of state and political subdivisions at June 30, 2018 and December 31, 2017.
 
 
June 30, 2018
 
December 31, 2017
(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
$
17,834

$
17,700

16.7
%
 
$
19,634

$
19,678

16.7
%
 
Revenue bonds
9,777

9,813

9.1

 
11,660

11,776

9.9

 
Tax allocation bonds
6,590

6,635

6.2

 
6,099

6,234

5.2

Total within California
34,201

34,148

32.0

 
37,393

37,688

31.8

Outside California:
 
 
 
 
 
 
 
 
General obligation bonds
64,219

62,624

60.0

 
68,890

68,454

58.5

 
Revenue bonds
8,567

8,506

8.0

 
11,390

11,346

9.7

Total outside California
72,786

71,130

68.0

 
80,280

79,800

68.2

Total obligations of state and political subdivisions
$
106,987

$
105,278

100.0
%
 
$
117,673

$
117,488

100.0
%

The portion of the portfolio outside the state of California is distributed among twenty states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are Washington (13.2%), Texas (12.0%), and Minnesota (8.5%). Revenue bonds, both within and outside California, primarily consist of bonds relating to essential services (such as public improvements, transportation and utilities) and school district bonds.

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 $38.6 million and totaled $1,717.6 million at June 30, 2018, compared to $1,679.0 million at December 31, 2017. New loan originations in the first six months of 2018 of $113.2 million were primarily in commercial real estate, including both owner-occupied and investor-owned, spread throughout our markets, and tenancy-in-common fractional interest loans. Loan pay-offs totaling $68.8 million were due largely to the successful completion of construction projects and customer sales of assets financed by the Bank.

Liabilities

During the first six months of 2018, total liabilities increased by $10.3 million to $2,160.8 million. Deposits decreased $10.9 million in the first six months of 2018, primarily due to fluctuations from large commercial clients' operational cash flows. Non-interest bearing deposits increased $43.6 million in the first six months of 2018 to $1,057.7 million, or 49.5% of total deposits at June 30, 2018, compared to 47.2% at December 31, 2017.


Page-41



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 March 31, 2018. There are no conditions or events since that notification that Management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.

In July 2013, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ("Agencies") finalized regulatory capital rules known as “Basel III.” The rules became effective beginning January 2015, and will be fully phased-in by January 2019. The guidelines, among other things, changed the minimum capital requirements of banks and bank holding companies, by increasing the Tier 1 capital to risk-weighted assets ratio to 6%, and introduced a new requirement to maintain a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%. By 2019, when fully phased in, the rules will require further increases to certain minimum capital requirements and a capital conservation buffer of an additional 2.5% of risk-weighted assets.

We have modeled our ratios under the fully phased-in Basel III rules, and based on present facts and the recently announced $25 million share repurchase program, we do not expect that we will be required to raise additional capital as a result of the fully phased-in rules.

On May 24, 2018, The Economic Growth, Regulatory Relief, and Consumer Protection Act, also known as the Crapo Bill, was signed into law and will exempt banks with less than $10 billion in assets from certain regulatory requirements. For those banks, it establishes a Community Bank Leverage Ratio ("CBLR"), which is calculated as tangible equity capital divided by the average total assets. The CBLR minimum requirement would be set between 8% and 10%, and if an exempt bank maintains CBLR above the threshold, it can opt out of reporting or complying with other regulatory capital ratios. We will evaluate whether to adopt this new regulatory capital framework once further details and guidance of the Crapo Bill are released.

The Bancorp’s and Bank’s capital adequacy ratios as of June 30, 2018 and December 31, 2017 are presented in the following tables. Bancorp's Tier 1 capital includes the subordinated debentures, which are not included at the Bank level. We continued to build capital in 2018 through the accumulation of net income. Our Share Repurchase Program announced on April 23, 2018 may affect future capital levels, as described in Item 1. Note 7, Stockholders Equity, of this Form 10-Q.

Page-42



Capital Ratios for Bancorp
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold1
Ratio to be a Well Capitalized Bank Holding Company
June 30, 2018
Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital (to risk-weighted assets)
$
300,015

15.15
%
≥ $
195,538

≥ 9.875
%
≥ $
198,013

≥ 10.00
%
Tier 1 Capital (to risk-weighted assets)
$
283,244

14.30
%
≥ $
155,935

≥ 7.875
%
≥ $
158,410

≥ 8.00
%
Tier 1 Capital (to average assets)
$
283,244

11.57
%
≥ $
97,925

≥ 4.000
%
≥ $
122,407

≥ 5.00
%
Common Equity Tier 1 (to risk-weighted assets)
$
277,442

14.01
%
≥ $
126,233

≥ 6.375
%
≥ $
128,708

≥ 6.50
%
December 31, 2017
 

 
 

 

 
 
Total Capital (to risk-weighted assets)
$
287,435

14.91
%
≥ $
178,323

≥ 9.250
%
≥ $
192,782

≥ 10.00
%
Tier 1 Capital (to risk-weighted assets)
$
270,710

14.04
%
≥ $
139,767

≥ 7.250
%
≥ $
154,225

≥ 8.00
%
Tier 1 Capital (to average assets)
$
270,710

12.13
%
≥ $
89,285

≥ 4.000
%
≥ $
111,607

≥ 5.00
%
Common Equity Tier 1 (to risk-weighted assets)
$
265,119

13.75
%
≥ $
110,849

≥ 5.750
%
≥ $
125,308

≥ 6.50
%
1 The adequately capitalized threshold includes the capital conservation buffer that was effective January 1, 2016. These ratios are not reflected on a fully phased-in basis, which will occur in January 2019.
Capital Ratios for the Bank
(dollars in thousands)
Actual Ratio
Adequately Capitalized Threshold1
Ratio to be Well Capitalized under Prompt Corrective Action Provisions
June 30, 2018
Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital (to risk-weighted assets)
$
267,138

13.49
%
≥ $
195,487

≥ 9.875
%
≥ $
197,961

≥ 10.00
%
Tier 1 Capital (to risk-weighted assets)
$
250,367

12.65
%
≥ $
155,895

≥ 7.875
%
≥ $
158,369

≥ 8.00
%
Tier 1 Capital (to average assets)
$
250,367

10.23
%
≥ $
97,904

≥ 4.000
%
≥ $
122,380

≥ 5.00
%
Common Equity Tier 1 (to risk-weighted assets)
$
250,367

12.65
%
≥ $
126,200

≥ 6.375
%
≥ $
128,675

≥ 6.50
%
December 31, 2017
 

 

 

 

 

 

Total Capital (to risk-weighted assets)
$
283,885

14.73
%
≥ $
178,281

≥ 9.250
%
≥ $
192,737

≥ 10.00
%
Tier 1 Capital (to risk-weighted assets)
$
267,160

13.86
%
≥ $
139,734

≥ 7.250
%
≥ $
154,189

≥ 8.00
%
Tier 1 Capital (to average assets)
$
267,160

11.97
%
≥ $
89,275

≥ 4.000
%
≥ $
111,593

≥ 5.00
%
Common Equity Tier 1 (to risk-weighted assets)
$
267,160

13.86
%
≥ $
110,824

≥ 5.750
%
≥ $
125,279

≥ 6.50
%
1 The adequately capitalized threshold includes the capital conservation buffer that was effective January 1, 2016. These ratios are not reflected on a fully phased-in basis, which will occur in January 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 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.
 
The most significant factor in our daily liquidity position has been the level of customer deposits. We attract and retain new deposits, which 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 cash cycles of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.


Page-43



At June 30, 2018 our liquid assets, which included unencumbered available-for-sale securities and cash, totaled $420.8 million, a decrease of $81.1 million from December 31, 2017. Our cash and cash equivalents decreased $127.3 million from December 31, 2017. The primary uses of liquidity during the first six months of 2018 were $123.3 million in investment securities purchased, $38.8 million in new loans net of collection, a decrease in net deposits of $10.9 million, and $4.2 million in cash dividends paid on common stock to our shareholders. The primary sources of funds during the first six months of 2018 included $39.2 million in pay-downs and maturities of investment securities, and $18.8 million net cash provided by operating activities. 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 $458.2 million at June 30, 2018. 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, $92.5 million of time deposits will mature. We expect new deposits to replace these funds. Our emphasis on local deposits combined with our well-capitalized equity position, provides a very stable 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 $32.5 million of cash at June 30, 2018. In April 2018, Bancorp obtained a dividend distribution from the Bank totaling $28.0 million, which is deemed sufficient to cover Bancorp's operational needs, share repurchases, and cash dividends to shareholders through the end of 2018. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the near future.

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.

We expect our net interest margin to increase if rates go up, primarily due to our cash earning the Federal Funds rate, adjustable rate loans and our significant non-interest bearing deposit base. Our net interest income remains most vulnerable to a falling interest rate environment.

To mitigate interest rate risk, the structure of the Consolidated Statement of Condition 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 under a variety of interest rate scenarios.

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, 2018, 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.

Page-44



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
(0.7
)%
8.0
 %
up 300
(0.4
)%
6.2
 %
up 200
(0.2
)%
4.3
 %
up 100
0.2
 %
3.0
 %
down 100
(5.8
)%
(10.1
)%

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 these 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. Further, the actual rates and timing of prepayments on loans and investment securities, and the behavior of depositors, could vary significantly from the assumptions applied in the various scenarios.

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 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

During the second quarter of 2018, we completed our integration and incorporation of Bank of Napa's business processes and systems into our overall internal control over financial reporting. During the quarter ended June 30, 2018, other than the Bank of Napa integration, 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.


Page-45



PART II       OTHER INFORMATION
 
ITEM 1         Legal Proceedings

Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our 2017 Form 10-K and Note 8 to the Consolidated Financial Statements in this Form 10-Q.

ITEM 1A      Risk Factors
 
There have been no material changes from the risk factors previously disclosed in our 2017 Form 10-K. Refer to "Risk Factors" in Item 1A of our 2017 Form 10-K, pages 10 through 20.

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. For additional information, refer to Note 7 to the Consolidated Financial Statements in this Form 10-Q.

From April 23, 2018 to June 30, 2018, Bancorp purchased 1,398 shares at prices ranging from $73.14 to $75.00 for a total cost of $104 thousand. The following table reflects purchases under the Share Repurchase Program for the periods presented.
(in thousands, except per share data)
Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Programs

Approximate Dollar Value That May yet Be Purchased Under the Program

Period
April 23-30, 2018

$


$

May 1-31, 2018
1,398

74.06

1,398

24,896

June 1-30, 2018




Total
1,398

$
74.06

1,398

$
24,896


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

ITEM 5      Other Information
 
None.
 
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.

Page-46


 
 
Incorporated by Reference
 
Exhibit Number
Exhibit Description
Form
File No.
Exhibit
Filing Date
Herewith
2.01
8-K
001-33572
2.1
August 2, 2017
 
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
 
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
333-219067
4.1
June 30, 2017
 
10.04
S-8
333-167639
4.1
June 21, 2010
 
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
 
11.01
 
 
 
 
Filed
31.01
 
 
 
 
Filed
31.02
 
 
 
 
Filed
32.01
 
 
 
 
Filed
101.01*
XBRL Interactive Data File
 
 
 
 
Furnished
*
As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.




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, 2018
 
/s/ Russell A. Colombo
 
Date
 
Russell A. Colombo
 
 
 
President &
 
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
August 7, 2018
 
/s/ Tani Girton
 
Date
 
Tani Girton
 
 
 
Executive Vice President &
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
August 7, 2018
 
/s/ Cecilia Situ
 
Date
 
Cecilia Situ
 
 
 
First Vice President &
 
 
 
Manager of Finance & Treasury
 
 
 
(Principal Accounting Officer)


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