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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)

California |  | 20-8859754
(State or other jurisdiction of incorporation) |  | (IRS Employer Identification No.)
504 Redwood Blvd. | Suite 100 | Novato | CA |  | 94947
(Address of principal executive office) |  | (Zip Code)

Registrant’s telephone number, including area code: (415) 763-4520
Not Applicable
(Former name or former address, if changes since last report)

Securities registered pursuant to 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered
Common stock, no par value | BMRC | The Nasdaq Stock Market

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 ☒ No ☐
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 ☒ No ☐
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 | ☐ |  | Accelerated filer | ☒
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☒
Emerging growth company | ☐ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes ☐ No ☒
As of October 31, 2019, there were 13,588,234 shares of common stock outstanding.

TABLE OF CONTENTS

PART I | FINANCIAL INFORMATION | Page-3
ITEM 1. | Financial Statements | Page-3
| Consolidated Statements of Condition | Page-3
| Consolidated Statements of Comprehensive Income | Page-4
| Consolidated Statements of Changes in Stockholders' Equity | Page-5
| Consolidated Statements of Cash Flows | Page-6
| Notes to Consolidated Financial Statements | Page-7
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | Page-29
ITEM 3. | Quantitative and Qualitative Disclosure about Market Risk | Page-43
ITEM 4. | Controls and Procedures | Page-44
PART II | OTHER INFORMATION | Page-44
ITEM 1. | Legal Proceedings | Page-44
ITEM 1A. | Risk Factors | Page-44
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | Page-45
ITEM 3. | Defaults Upon Senior Securities | Page-45
ITEM 4. | Mine Safety Disclosures | Page-45
ITEM 5. | Other Information | Page-45
ITEM 6. | Exhibits | Page-46
SIGNATURES |

Page-2

PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION September 30, 2019 and December 31, 2018

(in thousands, except share data; unaudited) | September 30, 2019 |  | December 31, 2018 |
Assets |  |  |
Cash, cash equivalents and restricted cash | $ | 182,486 |  | $ | 34,221 |
Investment securities |  |  |
Held-to-maturity, at amortized cost | 142,213 |  | 157,206 |
Available-for-sale, at fair value | 358,724 |  | 462,464 |
Total investment securities | 500,937 |  | 619,670 |
Loans, net of allowance for loan losses of $16,240 and $15,821 at September 30, 2019 and December 31, 2018, respectively | 1,782,450 |  | 1,748,043 |
Bank premises and equipment, net | 6,474 |  | 7,376 |
Goodwill | 30,140 |  | 30,140 |
Core deposit intangible | 4,906 |  | 5,571 |
Operating lease right-of-use assets | 11,934 |  | — |
Interest receivable and other assets | 72,744 |  | 75,871 |
Total assets | $ | 2,592,071 |  | $ | 2,520,892 |
Liabilities and Stockholders' Equity |  |  |  |
Liabilities |  |  |  |
Deposits |  |  |  |
Non-interest bearing | $ | 1,101,288 |  | $ | 1,066,051 |
Interest bearing |  |  |
Transaction accounts | 162,015 |  | 133,403 |
Savings accounts | 170,007 |  | 178,429 |
Money market accounts | 693,137 |  | 679,775 |
Time accounts | 98,077 |  | 117,182 |
Total deposits | 2,224,524 |  | 2,174,840 |
Borrowings and other obligations | 255 |  | 7,000 |
Subordinated debentures | 2,691 |  | 2,640 |
Operating lease liabilities | 13,665 |  | — |
Interest payable and other liabilities | 17,871 |  | 20,005 |
Total liabilities | 2,259,006 |  | 2,204,485 |
Stockholders' Equity |  |  |  |
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued | — |  | — |
Common stock, no par value, Authorized - 30,000,000 shares; Issued and outstanding - 13,608,525 and 13,844,353 at September 30, 2019 and December 31, 2018, respectively | 130,220 |  | 140,565 |
Retained earnings | 196,999 |  | 179,944 |
Accumulated other comprehensive income (loss), net of taxes | 5,846 |  | (4,102 | )
Total stockholders' equity | 333,065 |  | 316,407 |
Total liabilities and stockholders' equity | $ | 2,592,071 |  | $ | 2,520,892 |

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

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| Three months ended |  | Nine months ended
(in thousands, except per share amounts; unaudited) | September 30, 2019 | September 30, 2018 |  | September 30, 2019 | September 30, 2018
Interest income |  |  |  |  |  |
Interest and fees on loans | $ | 21,525 |  | $ | 20,284 |  |  | $ | 63,208 |  | $ | 58,795 |
Interest on investment securities | 3,382 |  | 3,524 |  |  | 11,242 |  | 10,180 |
Interest on federal funds sold and due from banks | 425 |  | 400 |  |  | 754 |  | 1,088 |
Total interest income | 25,332 |  | 24,208 |  |  | 75,204 |  | 70,063 |
Interest expense |  |  |  |  |  |  |  |  |
Interest on interest-bearing transaction accounts | 101 |  | 58 |  |  | 269 |  | 158 |
Interest on savings accounts | 17 |  | 18 |  |  | 52 |  | 54 |
Interest on money market accounts | 855 |  | 337 |  |  | 2,406 |  | 789 |
Interest on time accounts | 147 |  | 130 |  |  | 441 |  | 426 |
Interest on borrowings and other obligations | 4 |  | 1 |  |  | 75 |  | 2 |
Interest on subordinated debentures | 57 |  | 125 |  |  | 175 |  | 362 |
Total interest expense | 1,181 |  | 669 |  |  | 3,418 |  | 1,791 |
Net interest income | 24,151 |  | 23,539 |  |  | 71,786 |  | 68,272 |
Provision for loan losses | 400 |  | — |  |  | 400 |  | — |
Net interest income after provision for loan losses | 23,751 |  | 23,539 |  |  | 71,386 |  | 68,272 |
Non-interest income |  |  |  |  |  |  |  |
Service charges on deposit accounts | 439 |  | 475 |  |  | 1,403 |  | 1,407 |
Wealth Management and Trust Services | 495 |  | 490 |  |  | 1,406 |  | 1,493 |
Debit card interchange fees, net | 406 |  | 402 |  |  | 1,200 |  | 1,158 |
Merchant interchange fees, net | 79 |  | 99 |  |  | 253 |  | 297 |
Earnings on bank-owned life insurance, net | 795 |  | 227 |  |  | 970 |  | 685 |
Dividends on FHLB stock | 202 |  | 194 |  |  | 591 |  | 582 |
(Losses) gains on investment securities, net | — |  | (90 | ) |  | 55 |  | (79 | )
Other income | 305 |  | 439 |  |  | 888 |  | 1,173 |
Total non-interest income | 2,721 |  | 2,236 |  |  | 6,766 |  | 6,716 |
Non-interest expense |  |  |  |  |  |  |  |
Salaries and related benefits | 8,412 |  | 8,069 |  |  | 26,426 |  | 25,402 |
Occupancy and equipment | 1,507 |  | 1,444 |  |  | 4,616 |  | 4,462 |
Depreciation and amortization | 573 |  | 532 |  |  | 1,701 |  | 1,625 |
Federal Deposit Insurance Corporation insurance | 1 |  | 186 |  |  | 354 |  | 568 |
Data processing | 923 |  | 950 |  |  | 2,942 |  | 3,354 |
Professional services | 580 |  | 727 |  |  | 1,701 |  | 2,836 |
Directors' expense | 189 |  | 173 |  |  | 555 |  | 530 |
Information technology | 279 |  | 262 |  |  | 822 |  | 795 |
Amortization of core deposit intangible | 222 |  | 230 |  |  | 665 |  | 691 |
Provision for losses on off-balance sheet commitments | — |  | — |  |  | 129 |  | — |
Other expense | 1,514 |  | 1,398 |  |  | 4,733 |  | 4,298 |
Total non-interest expense | 14,200 |  | 13,971 |  |  | 44,644 |  | 44,561 |
Income before provision for income taxes | 12,272 |  | 11,804 |  |  | 33,508 |  | 30,427 |
Provision for income taxes | 2,824 |  | 3,124 |  |  | 8,346 |  | 7,467 |
Net income | $ | 9,448 |  | $ | 8,680 |  |  | $ | 25,162 |  | $ | 22,960 |
Net income per common share:1 |  |  |  |  |  |  |
Basic | $ | 0.70 |  | $ | 0.63 |  |  | $ | 1.84 |  | $ | 1.66 |
Diluted | $ | 0.69 |  | $ | 0.62 |  |  | $ | 1.82 |  | $ | 1.64 |
Weighted average shares:1 |  |  |  |  |  |  |  |
Basic | 13,571 |  | 13,900 |  |  | 13,654 |  | 13,872 |
Diluted | 13,735 |  | 14,110 |  |  | 13,825 |  | 14,062 |
Comprehensive income: |  |  |  |  |  |
Net income | $ | 9,448 |  | $ | 8,680 |  |  | $ | 25,162 |  | $ | 22,960 |
Other comprehensive income (loss) |  |  |  |  |  |  |  |  |
Change in net unrealized gains or losses on available-for-sale securities | 936 |  | (2,120 | ) |  | 13,857 |  | (9,421 | )
Reclassification adjustment for losses (gains) on available-for-sale securities in net income | — |  | 90 |  |  | (55 | ) | 79 |
Net unrealized losses on securities transferred from available-for-sale to held-to-maturity | — |  | — |  |  | — |  | (278 | )
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | 123 |  | 128 |  |  | 328 |  | 396 |
Subtotal | 1,059 |  | (1,902 | ) |  | 14,130 |  | (9,224 | )
Deferred tax expense (benefit) | 313 |  | (562 | ) |  | 4,182 |  | (2,730 | )
Other comprehensive income (loss), net of tax | 746 |  | (1,340 | ) |  | 9,948 |  | (6,494 | )
Comprehensive income | $ | 10,194 |  | $ | 7,340 |  |  | $ | 35,110 |  | $ | 16,466 |

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-4

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three and nine months ended September 30, 2019 and 2018

(in thousands, except share data; unaudited) | Common Stock | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) ("AOCI"), Net of Taxes |  | Total |
Shares1 |  | Amount |
| Three months ended September 30, 2019
Balance at July 1, 2019 | 13,659,143 |  | $ | 132,151 |  | $ | 190,416 |  | $ | 5,100 |  | $ | 327,667 |
Net income | — |  | — |  | 9,448 |  | — |  | 9,448 |
Other comprehensive income | — |  | — |  | — |  | 746 |  | 746 |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 3,452 |  | 101 |  | — |  | — |  | 101 |
Stock issued under employee stock purchase plan | 265 |  | 10 |  | — |  | — |  | 10 |
Stock issued under employee stock ownership plan | 7,600 |  | 311 |  | — |  | — |  | 311 |
Stock-based compensation - stock options | — |  | 98 |  | — |  | — |  | 98 |
Stock-based compensation - restricted stock | — |  | 142 |  | — |  | — |  | 142 |
Cash dividends paid on common stock ($0.21 per share) | — |  | — |  | (2,865 | ) | — |  | (2,865 | )
Stock purchased by directors under director stock plan | 392 |  | 16 |  | — |  | — |  | 16 |
Stock issued in payment of director fees | 2,800 |  | 117 |  | — |  | — |  | 117 |
Stock repurchased, net of commissions | (65,127 | ) | (2,726 | ) | — |  | — |  | (2,726 | )
Balance at September 30, 2019 | 13,608,525 |  | $ | 130,220 |  | $ | 196,999 |  | $ | 5,846 |  | $ | 333,065 |
| Three months ended September 30, 2018
Balance at July 1, 2018 | 13,983,642 |  | $ | 146,195 |  | $ | 166,281 |  | $ | (8,278 | ) | $ | 304,198 |
Net income | — |  | — |  | 8,680 |  | — |  | 8,680 |
Other comprehensive loss | — |  | — |  | — |  | (1,340 | ) | (1,340 | )
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 3,502 |  | — |  | — |  | — |  | — |
Stock issued under employee stock purchase plan | 242 |  | 9 |  | — |  | — |  | 9 |
Stock issued under employee stock ownership plan | 6,800 |  | 297 |  | — |  | — |  | 297 |
Stock-based compensation - stock options | — |  | 124 |  | — |  | — |  | 124 |
Stock-based compensation - restricted stock | — |  | 176 |  | — |  | — |  | 176 |
Cash dividends paid on common stock ($0.155 per share1) | — |  | — |  | (2,238 | ) | — |  | (2,238 | )
Stock purchased by directors under director stock plan | 478 |  | 19 |  | — |  | — |  | 19 |
Stock issued in payment of director fees | 2,784 |  | 113 |  | — |  | — |  | 113 |
Stock repurchased, net of commissions | (33,090 | ) | (1,435 | ) | — |  | — |  | (1,435 | )
Balance at September 30, 2018 | 13,964,358 |  | $ | 145,498 |  | $ | 172,723 |  | $ | (9,618 | ) | $ | 308,603 |

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three and nine months ended September 30, 2019 and 2018

(in thousands, except share data; unaudited) | Common Stock | Retained Earnings |  | Accumulated Other Comprehensive Income (Loss) ("AOCI"), Net of Taxes |  | Total |
Shares |  | Amount |
| Nine months ended September 30, 2019
Balance at January 1, 2019 | 13,844,353 |  | $ | 140,565 |  | $ | 179,944 |  | $ | (4,102 | ) | $ | 316,407 |
Net income | — |  | — |  | 25,162 |  | — |  | 25,162 |
Other comprehensive income | — |  | — |  | — |  | 9,948 |  | 9,948 |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 40,927 |  | 572 |  | — |  | — |  | 572 |
Stock issued under employee stock purchase plan | 1,016 |  | 40 |  | — |  | — |  | 40 |
Stock issued under employee stock ownership plan | 23,200 |  | 935 |  | — |  | — |  | 935 |
Restricted stock granted | 29,110 |  | — |  | — |  | — |  | — |
Restricted stock surrendered for tax withholdings upon vesting | (5,240 | ) | (220 | ) | — |  | — |  | (220 | )
Restricted stock forfeited / cancelled | (17,325 | ) | — |  | — |  | — |  | — |
Stock-based compensation - stock options | — |  | 437 |  | — |  | — |  | 437 |
Stock-based compensation - restricted stock | — |  | 806 |  | — |  | — |  | 806 |
Cash dividends paid on common stock ($0.59 per share) | — |  | — |  | (8,107 | ) | — |  | (8,107 | )
Stock purchased by directors under director stock plan | 591 |  | 24 |  | — |  | — |  | 24 |
Stock issued in payment of director fees | 5,544 |  | 231 |  | — |  | — |  | 231 |
Stock repurchased, net of commissions | (313,651 | ) | (13,170 | ) | — |  | — |  | (13,170 | )
Balance at September 30, 2019 | 13,608,525 |  | $ | 130,220 |  | $ | 196,999 |  | $ | 5,846 |  | $ | 333,065 |
| Nine months ended September 30, 2018
Balance at January 1, 2018 | 13,843,084 |  | $ | 143,967 |  | $ | 155,544 |  | $ | (2,486 | ) | $ | 297,025 |
Net income | — |  | — |  | 22,960 |  | — |  | 22,960 |
Other comprehensive loss | — |  | — |  | — |  | (6,494 | ) | (6,494 | )
Reclassification of stranded tax effects in AOCI | — |  | — |  | 638 |  | (638 | ) | — |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 103,652 |  | 534 |  | — |  | — |  | 534 |
Stock issued under employee stock purchase plan | 772 |  | 28 |  | — |  | — |  | 28 |
Stock issued under employee stock ownership plan | 22,600 |  | 898 |  | — |  | — |  | 898 |
Restricted stock granted | 37,040 |  | — |  | — |  | — |  | — |
Restricted stock surrendered for tax withholdings upon vesting | (1,316 | ) | (45 | ) | — |  | — |  | (45 | )
Restricted stock forfeited / cancelled | (12,056 | ) | — |  | — |  | — |  | — |
Stock-based compensation - stock options | — |  | 566 |  | — |  | — |  | 566 |
Stock-based compensation - restricted stock | — |  | 848 |  | — |  | — |  | 848 |
Cash dividends paid on common stock ($0.46 per share1) | — |  | — |  | (6,419 | ) | — |  | (6,419 | )
Stock purchased by directors under director stock plan | 998 |  | 37 |  | — |  | — |  | 37 |
Stock issued in payment of director fees | 5,470 |  | 204 |  | — |  | — |  | 204 |
Stock repurchased, net of commissions | (35,886 | ) | (1,539 | ) | — |  | — |  | (1,539 | )
Balance at September 30, 2018 | 13,964,358 |  | 145,498 |  | 172,723 |  | (9,618 | ) | 308,603 |

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
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BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2019 and 2018

(in thousands; unaudited) | September 30, 2019 |  | September 30, 2018
Cash Flows from Operating Activities: |  |  |
Net income | $ | 25,162 |  |  | $ | 22,960 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Provision for loan losses | 400 |  |  | — |
Provision for losses on off-balance sheet commitments | 129 |  |  | — |
Noncash contribution expense to employee stock ownership plan | 935 |  |  | 898 |
Noncash director compensation expense | 226 |  |  | 219 |
Stock-based compensation expense | 1,243 |  |  | 1,414 |
Amortization of core deposit intangible | 665 |  |  | 691 |
Amortization of investment security premiums, net of accretion of discounts | 1,282 |  |  | 2,172 |
Accretion of discount on acquired loans | (208 | ) |  | (531 | )
Accretion of discount on subordinated debentures | 51 |  |  | 92 |
Net change in deferred loan origination costs/fees | (345 | ) |  | 114 |
(Gain) loss on sale of investment securities | (55 | ) |  | 79 |
Depreciation and amortization | 1,701 |  |  | 1,625 |
Earnings on bank-owned life insurance policies | (970 | ) |  | (685 | )
Net change in operating assets and liabilities: |  |  |
Interest receivable and other assets | 2,287 |  |  | 2,779 |
Interest payable and other liabilities | (1,302 | ) |  | (543 | )
Total adjustments | 6,039 |  |  | 8,324 |
Net cash provided by operating activities | 31,201 |  |  | 31,284 |
Cash Flows from Investing Activities: |  |  |  |  |
Purchase of held-to-maturity securities | — |  |  | (1,988 | )
Purchase of available-for-sale securities | (18,892 | ) |  | (174,617 | )
Proceeds from sale of available-for-sale securities | 66,081 |  |  | 16,972 |
Proceeds from paydowns/maturities of held-to-maturity securities | 14,736 |  |  | 15,947 |
Proceeds from paydowns/maturities of available-for-sale securities | 69,711 |  |  | 45,917 |
Loans originated and principal collected, net | (32,895 | ) |  | (50,315 | )
Purchase of bank-owned life insurance policies | (1,892 | ) |  | — |
Purchase of premises and equipment | (419 | ) |  | (615 | )
Purchase of Federal Home Loan Bank stock | (616 | ) |  | — |
Cash paid for low-income housing tax credit investment | (339 | ) |  | (389 | )
Net cash provided by (used in) investing activities | 95,475 |  |  | (149,088 | )
Cash Flows from Financing Activities: |  |  |  |  |
Net increase in deposits | 49,684 |  |  | 64,176 |
Proceeds from stock options exercised | 572 |  |  | 585 |
Payment of tax withholdings for stock options exercised and vesting of restricted stock | (220 | ) |  | (96 | )
Proceeds from stock issued under employee and director stock purchase plans | 64 |  |  | 65 |
Stock repurchased, net of commissions | (13,279 | ) |  | (1,334 | )
Repayment of Federal Home Loan Bank borrowings | (7,000 | ) |  | — |
Repayment of finance lease obligations | (125 | ) |  | — |
Cash dividends paid on common stock | (8,107 | ) |  | (6,419 | )
Net provided by financing activities | 21,589 |  |  | 56,977 |
Net increase (decrease) in cash, cash equivalents and restricted cash | 148,265 |  |  | (60,827 | )
Cash, cash equivalents and restricted cash at beginning of period | 34,221 |  |  | 203,545 |
Cash, cash equivalents and restricted cash at end of period | $ | 182,486 |  |  | $ | 142,718 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid in interest | $ | 3,351 |  |  | $ | 1,737 |
Cash paid in income taxes | $ | 9,025 |  |  | $ | 4,900 |
Supplemental disclosure of noncash investing and financing activities: |  |  |  |  |
Change in net unrealized gain or loss on available-for-sale securities | $ | 13,857 |  |  | $ | (9,421 | )
Securities transferred from available-for-sale to held-to-maturity | $ | — |  |  | $ | 27,422 |
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity | $ | 328 |  |  | $ | 396 |
Subscription in low-income housing tax credit investment | $ | — |  |  | $ | 3,000 |
Stock issued to employee stock ownership plan | $ | 935 |  |  | $ | 898 |
Stock issued in payment of director fees | $ | 231 |  |  | $ | 204 |
Repurchase of stock not yet settled | $ | 34 |  |  | $ | 205 |
Restricted cash: |  |  |
Federal Reserve Bank reserve requirements included in cash, cash equivalents and restricted cash | $ | 10,015 |  |  | $ | 7,345 |

The accompanying notes are an integral part of these consolidated financial statements (unaudited).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Bank of Marin Bancorp (“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2018 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. Bancorp's investment in the securities of the Trusts is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for detail on the early redemption on October 7, 2018 of one subordinated debenture due to NorCal Community Bancorp Trust I.
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 |  | Nine months ended
(in thousands, except per share data)1 | September 30, 2019 | September 30, 2018 |  | September 30, 2019 | September 30, 2018
Weighted average basic shares outstanding | 13,571 |  | 13,900 |  |  | 13,654 |  | 13,872 |
Potentially dilutive common shares related to: |  |  |  |  |
Stock options | 141 |  | 177 |  |  | 146 |  | 158 |
Unvested restricted stock awards | 23 |  | 33 |  |  | 25 |  | 32 |
Weighted average diluted shares outstanding | 13,735 |  | 14,110 |  |  | 13,825 |  | 14,062 |
Net income | $ | 9,448 |  | $ | 8,680 |  |  | $ | 25,162 |  | $ | 22,960 |
Basic EPS | $ | 0.70 |  | $ | 0.63 |  |  | $ | 1.84 |  | $ | 1.66 |
Diluted EPS | $ | 0.69 |  | $ | 0.62 |  |  | $ | 1.82 |  | $ | 1.64 |
Weighted average anti-dilutive shares not included in the calculation of diluted EPS | 39 |  | — |  |  | 34 |  | 2 |

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
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Note 2: Recently Adopted and Issued Accounting Standards
Accounting Standards Adopted in 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) (the "new lease accounting standard"). The amendments in this ASU intend to increase transparency and comparability among organizations by recognizing an operating lease or finance lease right-of-use asset for the lease term, and a lease liability, which is a lessee's obligation to make lease payments, recorded based on discounting future lease payments under the lease terms. This ASU generally applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method of adoption. In July 2018, the FASB issued two amendments to ASU 2016-02: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provided various corrections and clarifications to ASU 2016-02; and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which permitted optional transition methods and provided lessors with a practical expedient for separating lease and non-lease components of a lease. The ASU allowed entities to apply either a modified retrospective approach at the beginning of the earliest period presented or at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings, which we adopted.
As a result of the adoption of the ASU on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $13.4 million, net of deferred rent and unaccreted lease incentives, operating and finance lease liabilities totaling $15.4 million, and no cumulative-effect adjustments to retained earnings. Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications and did not require us to reassess initial direct costs for any existing leases. In addition, we elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease). We made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications. See Note 8, Commitments and Contingencies for further information.
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 adopted the requirements of this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as it is not our practice to issue stock-based awards to pay for goods and services from nonemployees, other than nonemployee directors.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This update adds an alternative fifth permissible U.S. benchmark rate to be used for hedge accounting purposes. As we have already adopted the amendments in ASU 2017-12, which changed both the designation and measurement guidance for qualifying hedging relationships, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. We adopted this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as we did not have new or re-designated hedging relationships since adoption.
Accounting Standards Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace today's "incurred loss" model with a "current expected credit loss" ("CECL") model. The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt
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security. Likewise, subsequent changes in this estimate are recorded through credit loss expense and related allowance. In addition, CECL will modify the accounting for purchased loans and will require that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through credit loss expense. The CECL model requires the use of not only relevant historical experience and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for loan losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
While we believe the change from an incurred loss model to a CECL model has the potential to increase the allowance for credit losses, which will result in a one-time cumulative-effect adjustment to retained earnings at the adoption date, the full impact to our financial condition or results of operations cannot be quantified at this time as we continue to evaluate the applicability and validity of our methodologies and assumptions. In addition, any estimate could be significantly influenced by the composition and risk characteristics of the loan portfolio as well as prevailing economic conditions and forecasts as of the adoption date. Our cross-functional team and our third-party CECL model vendor continue to make progress and we will be ready for adoption on January 1, 2020. Early implementation activities focused on, among other things, capturing and validating data, segmenting the loan portfolio, evaluating various credit loss estimation methodologies, sourcing tools to forecast future economic conditions, and running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default. Continuing implementation activities include refining estimated credit loss model assumptions, model validation, evaluating the qualitative factor framework and assumptions, drafting policies and disclosures, and evaluating, documenting and testing internal controls. In addition, we will continue to run parallel tests throughout 2019 to identify opportunities for enhancing our assumptions as the processes, internal controls and policies are finalized.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities should disclose and describe the range and weighted-average of significant observable inputs used to develop Level 3 fair value measurements prospectively. Early adoption is permitted. Entities making this election are permitted to early adopt the eliminated or modified disclosure requirements and delay the adoption of all the new disclosure requirements until the ASU's effective date. As the ASU’s requirements only relate to disclosures, the amendments will not impact our financial condition or results of operations.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, regardless of whether they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity has the option to apply amendments in the ASU either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted, including adoption in an interim period. We do not expect that the ASU will have a material impact on our financial condition or results of operations.
In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. This ASU addresses two lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim
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disclosure requirements associated with adopting ASU 2016-02. The amendments related to the lessor implementation issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application is permitted. As the ASU's amendments applicable to us only relate to disclosures, the adoption of ASU 2019-01 will not impact our financial condition or results of operations.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective January 1, 2020 and contain various methods of adoption. We do not expect that the ASU will have a material impact on our financial condition or results of operations.
In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.
Note 3: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
We group our assets and liabilities that are measured at fair value in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant Management judgment and estimation.
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. No such transfers occurred during the first nine months of 2019 or 2018.
The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.
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(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
September 30, 2019 |  |  |  |  |  |  |  |
Securities available-for-sale: |  |  |  |  |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 245,603 |  | $ | — |  | $ | 245,603 |  | $ | — |  | OCI
SBA-backed securities | 36,943 |  | — |  | 36,943 |  | — |  | OCI
Debentures of government sponsored agencies | 23,822 |  | — |  | 23,822 |  | — |  | OCI
Privately-issued collateralized mortgage obligations | 119 |  | — |  | 119 |  | — |  | OCI
Obligations of state and political subdivisions | 50,232 |  | — |  | 50,232 |  | — |  | OCI
Corporate bonds | 2,005 |  | — |  | 2,005 |  | — |  | OCI
Derivative financial assets (interest rate contracts) | — |  | — |  | — |  | — |  | NI
Derivative financial liabilities (interest rate contracts) | 1,603 |  | — |  | 1,603 |  | — |  | NI
December 31, 2018 |  |  |  |  |  |  |  |
Securities available-for-sale: |  |  |  |  |  |  |  |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 278,403 |  | $ | — |  | $ | 278,403 |  | $ | — |  | OCI
SBA-backed securities | 50,781 |  | — |  | 50,781 |  | — |  | OCI
Debentures of government sponsored agencies | 53,018 |  | — |  | 53,018 |  | — |  | OCI
Privately-issued collateralized mortgage obligations | 297 |  | — |  | 297 |  | — |  | OCI
Obligations of state and political subdivisions | 77,960 |  | — |  | 77,960 |  | — |  | OCI
Corporate bonds | 2,005 |  | — |  | 2,005 |  | — |  | OCI
Derivative financial assets (interest rate contracts) | 161 |  | — |  | 161 |  | — |  | NI
Derivative financial liabilities (interest rate contracts) | 375 |  | — |  | 375 |  | — |  | NI

1 Other comprehensive income ("OCI") or net income ("NI").
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 September 30, 2019 and December 31, 2018, there were no Level 1 or Level 3 securities.
Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of other-than-temporary impairment, and we did not record any write-downs during the nine months ended September 30, 2019 or September 30, 2018.
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
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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 us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). As of September 30, 2019 and December 31, 2018, we did not carry any assets measured at fair value on a non-recurring basis.
Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of September 30, 2019 and December 31, 2018, 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, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of September 30, 2019 and December 31, 2018. The values are discussed in Note 4, Investment Securities.

| September 30, 2019 |  | December 31, 2018
(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 | $ | 182,486 |  | $ | 182,486 |  | Level 1 |  | $ | 34,221 |  | $ | 34,221 |  | Level 1
Investment securities held-to-maturity | 142,213 |  | 145,118 |  | Level 2 |  | 157,206 |  | 153,894 |  | Level 2
Loans, net | 1,782,450 |  | 1,792,192 |  | Level 3 |  | 1,748,043 |  | 1,700,971 |  | Level 3
Interest receivable | 7,037 |  | 7,037 |  | Level 2 |  | 8,292 |  | 8,292 |  | Level 2
Financial liabilities (recorded at amortized cost) |  |  |  |  |  |  |  |
Time deposits | 98,077 |  | 97,150 |  | Level 2 |  | 117,182 |  | 116,584 |  | Level 2
Federal Home Loan Bank overnight borrowings | — |  | — |  | Level 2 |  | 7,000 |  | 7,000 |  | Level 2
Subordinated debentures | 2,691 |  | 3,094 |  | Level 3 |  | 2,640 |  | 3,268 |  | Level 3
Interest payable | 120 |  | 120 |  | Level 2 |  | 104 |  | 104 |  | 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 as of September 30, 2019 or December 31, 2018.
Note 4: Investment Securities
Our investment securities portfolio consists of obligations of state and political subdivisions, U.S. corporations, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprise securities ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, and privately issued CMOs, as reflected in the following table:
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| September 30, 2019 |  | December 31, 2018
| Amortized | Fair | Gross Unrealized |  | Amortized | Fair | Gross Unrealized
(in thousands) | Cost | Value | Gains | (Losses) |  | Cost | Value | Gains | (Losses)
Held-to-maturity: |  |  |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 80,166 |  | $ | 81,308 |  | $ | 1,357 |  | $ | (215 | ) |  | $ | 88,606 |  | $ | 85,804 |  | $ | 7 |  | $ | (2,809 | )
SBA-backed securities | 8,001 |  | 8,360 |  | 359 |  | — |  |  | 8,720 |  | 8,757 |  | 37 |  | — |
CMOs issued by FNMA | 10,679 |  | 10,981 |  | 302 |  | — |  |  | 11,447 |  | 11,327 |  | — |  | (120 | )
CMOs issued by FHLMC | 32,568 |  | 33,524 |  | 966 |  | (10 | ) |  | 33,583 |  | 33,021 |  | 8 |  | (570 | )
CMOs issued by GNMA | 3,757 |  | 3,810 |  | 53 |  | — |  |  | 3,739 |  | 3,769 |  | 30 |  | — |
Obligations of state and political subdivisions | 7,042 |  | 7,135 |  | 93 |  | — |  |  | 11,111 |  | 11,216 |  | 128 |  | (23 | )
Total held-to-maturity | 142,213 |  | 145,118 |  | 3,130 |  | (225 | ) |  | 157,206 |  | 153,894 |  | 210 |  | (3,522 | )
Available-for-sale: |  |  |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 62,654 |  | 64,290 |  | 1,683 |  | (47 | ) |  | 95,339 |  | 94,467 |  | 358 |  | (1,230 | )
SBA-backed securities | 36,014 |  | 36,943 |  | 990 |  | (61 | ) |  | 50,722 |  | 50,781 |  | 465 |  | (406 | )
CMOs issued by FNMA | 24,168 |  | 24,560 |  | 392 |  | — |  |  | 28,275 |  | 28,079 |  | 134 |  | (330 | )
CMOs issued by FHLMC | 138,731 |  | 144,067 |  | 5,374 |  | (38 | ) |  | 145,979 |  | 144,836 |  | 454 |  | (1,597 | )
CMOs issued by GNMA | 12,621 |  | 12,686 |  | 66 |  | (1 | ) |  | 11,294 |  | 11,021 |  | 1 |  | (274 | )
Debentures of government- sponsored agencies | 23,069 |  | 23,822 |  | 753 |  | — |  |  | 52,956 |  | 53,018 |  | 185 |  | (123 | )
Privately issued CMOs | 120 |  | 119 |  | — |  | (1 | ) |  | 295 |  | 297 |  | 2 |  | — |
Obligations of state and political subdivisions | 48,993 |  | 50,232 |  | 1,292 |  | (53 | ) |  | 79,046 |  | 77,960 |  | 134 |  | (1,220 | )
Corporate bonds | 1,999 |  | 2,005 |  | 7 |  | (1 | ) |  | 2,004 |  | 2,005 |  | 15 |  | (14 | )
Total available-for-sale | 348,369 |  | 358,724 |  | 10,557 |  | (202 | ) |  | 465,910 |  | 462,464 |  | 1,748 |  | (5,194 | )
Total investment securities | $ | 490,582 |  | $ | 503,842 |  | $ | 13,687 |  | $ | (427 | ) |  | $ | 623,116 |  | $ | 616,358 |  | $ | 1,958 |  | $ | (8,716 | )

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2019 and December 31, 2018 are shown in the following table below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.

| September 30, 2019 |  | December 31, 2018
| 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 | $ | 5,327 |  | $ | 5,335 |  |  | $ | 5,475 |  | $ | 5,478 |  |  | $ | 6,194 |  | $ | 6,182 |  |  | $ | 9,863 |  | $ | 9,795 |
After one but within five years | 2,269 |  | 2,318 |  |  | 57,102 |  | 58,144 |  |  | 5,481 |  | 5,492 |  |  | 84,871 |  | 84,435 |
After five years through ten years | 56,183 |  | 58,018 |  |  | 188,601 |  | 195,869 |  |  | 59,231 |  | 58,120 |  |  | 252,274 |  | 250,055 |
After ten years | 78,434 |  | 79,447 |  |  | 97,191 |  | 99,233 |  |  | 86,300 |  | 84,100 |  |  | 118,902 |  | 118,179 |
Total | $ | 142,213 |  | $ | 145,118 |  |  | $ | 348,369 |  | $ | 358,724 |  |  | $ | 157,206 |  | $ | 153,894 |  |  | $ | 465,910 |  | $ | 462,464 |

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

| Three months ended |  | Nine months ended
(in thousands) | September 30, 2019 | September 30, 2018 |  | September 30, 2019 | September 30, 2018
Available-for-sale: |  |  |  |  |
Sales proceeds | $ | — |  | $ | 11,966 |  |  | $ | 66,081 |  | $ | 16,972 |
Gross realized gains | — |  | — |  |  | 214 |  | 27 |
Gross realized losses | — |  | (90 | ) |  | (159 | ) | (106 | )

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Pledged investment securities are shown in the following table.

(in thousands) | September 30, 2019 | December 31, 2018
Pledged to the State of California: |  |
Secure public deposits in compliance with the Local Agency Security Program | $ | 84,574 |  | $ | 125,696 |
Collateral for trust deposits | 745 |  | 734 |
Total investment securities pledged to the State of California | $ | 85,319 |  | $ | 126,430 |
Collateral for Wealth Management and Trust Services checking account | $ | 625 |  | $ | 2,000 |

Other-Than-Temporarily Impaired ("OTTI") Debt Securities
There were 37 and 229 securities in unrealized loss positions at September 30, 2019 and December 31, 2018, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:

September 30, 2019 | < 12 continuous months |  | ≥ 12 continuous months |  | Total securities in a loss position
(in thousands) | Fair value | Unrealized loss |  | Fair value | Unrealized loss |  | Fair value | Unrealized loss
Held-to-maturity: |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 9,063 |  | $ | (24 | ) |  | $ | 23,799 |  | $ | (191 | ) |  | $ | 32,862 |  | $ | (215 | )
CMOs issued by FHLMC | — |  | — |  |  | 1,866 |  | (10 | ) |  | 1,866 |  | (10 | )
Total held-to-maturity | 9,063 |  | (24 | ) |  | 25,665 |  | (201 | ) |  | 34,728 |  | (225 | )
Available-for-sale: |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 269 |  | (1 | ) |  | 7,628 |  | (46 | ) |  | 7,897 |  | (47 | )
SBA-backed securities | — |  | — |  |  | 2,785 |  | (61 | ) |  | 2,785 |  | (61 | )
CMOs issued by FNMA | — |  | — |  |  | — |  | — |  |  | — |  | — |
CMOs issued by FHLMC | 7,735 |  | (13 | ) |  | 9,722 |  | (25 | ) |  | 17,457 |  | (38 | )
CMOs issued by GNMA | — |  | — |  |  | 130 |  | (1 | ) |  | 130 |  | (1 | )
Privately issued CMOs | 79 |  | (1 | ) |  | — |  | — |  |  | 79 |  | (1 | )
Obligations of state and political subdivisions | 6,936 |  | (49 | ) |  | 966 |  | (4 | ) |  | 7,902 |  | (53 | )
Corporate bonds | — |  | — |  |  | 504 |  | (1 | ) |  | 504 |  | (1 | )
Total available-for-sale | 15,019 |  | (64 | ) |  | 21,735 |  | (138 | ) |  | 36,754 |  | (202 | )
Total temporarily impaired securities | $ | 24,082 |  | $ | (88 | ) |  | $ | 47,400 |  | $ | (339 | ) |  | $ | 71,482 |  | $ | (427 | )

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December 31, 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 | $ | 198 |  | $ | (9 | ) |  | $ | 83,990 |  | $ | (2,800 | ) |  | $ | 84,188 |  | $ | (2,809 | )
CMOs issued by FNMA | — |  | — |  |  | 11,327 |  | (120 | ) |  | 11,327 |  | (120 | )
CMOs issued by FHLMC | 2,880 |  | (3 | ) |  | 28,171 |  | (567 | ) |  | 31,051 |  | (570 | )
Obligations of state and political subdivisions | — |  | — |  |  | 3,565 |  | (23 | ) |  | 3,565 |  | (23 | )
Total held-to-maturity | 3,078 |  | (12 | ) |  | 127,053 |  | (3,510 | ) |  | 130,131 |  | (3,522 | )
Available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 19,971 |  | (128 | ) |  | 50,077 |  | (1,102 | ) |  | 70,048 |  | (1,230 | )
SBA-backed securities | 13,175 |  | (122 | ) |  | 20,123 |  | (284 | ) |  | 33,298 |  | (406 | )
CMOs issued by FNMA | 2,345 |  | (8 | ) |  | 16,138 |  | (322 | ) |  | 18,483 |  | (330 | )
CMOs issued by FHLMC | 24,094 |  | (330 | ) |  | 74,243 |  | (1,267 | ) |  | 98,337 |  | (1,597 | )
CMOs issued by GNMA | 1,666 |  | (7 | ) |  | 9,112 |  | (267 | ) |  | 10,778 |  | (274 | )
Debentures of government- sponsored agencies | 4,992 |  | (8 | ) |  | 11,349 |  | (115 | ) |  | 16,341 |  | (123 | )
Obligations of state and political subdivisions | 15,290 |  | (54 | ) |  | 52,804 |  | (1,166 | ) |  | 68,094 |  | (1,220 | )
Corporate Bonds | — |  | — |  |  | 1,004 |  | (14 | ) |  | 1,004 |  | (14 | )
Total available-for-sale | 81,533 |  | (657 | ) |  | 234,850 |  | (4,537 | ) |  | 316,383 |  | (5,194 | )
Total temporarily impaired securities | $ | 84,611 |  | $ | (669 | ) |  | $ | 361,903 |  | $ | (8,047 | ) |  | $ | 446,514 |  | $ | (8,716 | )

As of September 30, 2019, the investment portfolio included 25 investment securities that had been in a continuous loss position for twelve months or more and 12 investment securities that had been in a loss position for less than twelve months.
Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.
Other temporarily impaired securities, including obligations of state and political subdivisions and corporate bonds, were deemed credit worthy after our internal analyses of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements. Based on our comprehensive analyses, we determined that the decline in the fair values of these securities was primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At September 30, 2019, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more likely than not that we will not be required to sell any of the securities with unrealized losses before recovery of their amortized cost. Therefore, we do not consider these investment securities to be other-than-temporarily impaired at September 30, 2019.
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 $11.7 million and $11.1 million of FHLB stock included in other assets on the consolidated statements of condition at September 30, 2019 and December 31, 2018, respectively. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at September 30, 2019 and December 31, 2018. On October 24, 2019, FHLB announced a cash dividend for the second quarter of 2019 at an annualized dividend rate of 7.00% to be distributed in mid-November 2019. Cash dividends paid on FHLB capital stock are recorded as non-interest income.
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As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at September 30, 2019 and December 31, 2018. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6228 at September 30, 2019 and 1.6298 at December 31, 2018, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $2.9 million and $2.2 million at September 30, 2019 and December 31, 2018, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.
We invest in low-income housing tax credit funds as a limited partner, which totaled $4.2 million and $4.6 million recorded in other assets as of September 30, 2019 and December 31, 2018, respectively. In the first nine months of 2019, we recognized $480 thousand of low-income housing tax credits and other tax benefits, offset by $381 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, 2019, our unfunded commitments for these low-income housing tax credit funds totaled $2.8 million. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2019 or 2018, 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 September 30, 2019 and December 31, 2018.

Loan Aging Analysis by Class
(in thousands) | Commercial and industrial |  | Commercial real estate, owner-occupied |  | Commercial real estate, investor |  | Construction |  | Home equity |  | Other residential |  | Installment and other consumer |  | Total |
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
30-59 days past due | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 440 |  | $ | — |  | $ | 153 |  | $ | 593 |
60-89 days past due | — |  | — |  | — |  | — |  | 94 |  | — |  | — |  | 94 |
90 days or more past due | 20 |  | — |  | — |  | — |  | 73 |  | — |  | — |  | 93 |
Total past due | 20 |  | — |  | — |  | — |  | 607 |  | — |  | 153 |  | 780 |
Current | 260,808 |  | 310,486 |  | 896,066 |  | 50,254 |  | 121,207 |  | 130,781 |  | 28,308 |  | 1,797,910 |
Total loans 2 | $ | 260,828 |  | $ | 310,486 |  | $ | 896,066 |  | $ | 50,254 |  | $ | 121,814 |  | $ | 130,781 |  | $ | 28,461 |  | $ | 1,798,690 |
Non-accrual loans 1 | $ | 195 |  | $ | — |  | $ | — |  | $ | — |  | $ | 167 |  | $ | — |  | $ | 60 |  | $ | 422 |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
30-59 days past due | $ | 5 |  | $ | — |  | $ | 1,004 |  | $ | — |  | $ | — |  | $ | — |  | $ | 112 |  | $ | 1,121 |
60-89 days past due | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
90 days or more past due | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total past due | 5 |  | — |  | 1,004 |  | — |  | — |  | — |  | 112 |  | 1,121 |
Current | 230,734 |  | 313,277 |  | 872,406 |  | 76,423 |  | 124,696 |  | 117,847 |  | 27,360 |  | 1,762,743 |
Total loans 2 | $ | 230,739 |  | $ | 313,277 |  | $ | 873,410 |  | $ | 76,423 |  | $ | 124,696 |  | $ | 117,847 |  | $ | 27,472 |  | $ | 1,763,864 |
Non-accrual loans 1 | $ | 319 |  | $ | — |  | $ | — |  | $ | — |  | $ | 313 |  | $ | — |  | $ | 65 |  | $ | 697 |

1 Includes no purchased credit impaired ("PCI") loans at September 30, 2019 and December 31, 2018. Amounts exclude accreting PCI loans with carrying values totaling $2.1 million at September 30, 2019 and December 31, 2018, as we have a reasonable expectation about future cash flows to be collected and we continue to recognize accretable yield on these loans in interest income. There were no accruing loans past due more than ninety days at September 30, 2019 or December 31, 2018.
2 Amounts include net deferred loan origination costs of $980 thousand and $635 thousand at September 30, 2019 and December 31, 2018, respectively. Amounts are also net of unaccreted purchase discounts on non-PCI loans of $669 thousand and $708 thousand at September 30, 2019 and December 31, 2018, respectively.
We generally make commercial loans to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing
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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, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.
Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loan borrowers provide for interest reserves that are used for the payment of interest during the development and marketing periods. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.
Consumer loans primarily consist of home equity lines of credit, other residential loans and floating homes, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios.
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:
Pass and Watch: Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.
Special Mention: Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.
Substandard: Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.
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Doubtful: Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.
We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.
The following table represents an analysis of the carrying amount in loans, net of deferred fees and costs and purchase premiums or discounts, by internally assigned risk grades, including PCI loans, at September 30, 2019 and December 31, 2018.

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 |
September 30, 2019 |  |  |  |  |  |  |  |  |
Pass | $ | 219,346 |  | $ | 290,074 |  | $ | 893,574 |  | $ | 50,254 |  | $ | 120,400 |  | $ | 130,781 |  | $ | 28,313 |  | $ | 2,059 |  | $ | 1,734,801 |
Special Mention | 41,092 |  | 10,198 |  | 1,664 |  | — |  | 1,000 |  | — |  | — |  | — |  | 53,954 |
Substandard | 386 |  | 9,061 |  | — |  | — |  | 340 |  | — |  | 148 |  | — |  | 9,935 |
Total loans | $ | 260,824 |  | $ | 309,333 |  | $ | 895,238 |  | $ | 50,254 |  | $ | 121,740 |  | $ | 130,781 |  | $ | 28,461 |  | $ | 2,059 |  | $ | 1,798,690 |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 219,625 |  | $ | 299,998 |  | $ | 870,443 |  | $ | 73,735 |  | $ | 122,844 |  | $ | 117,847 |  | $ | 27,312 |  | $ | 2,112 |  | $ | 1,733,916 |
Special Mention | 9,957 |  | 4,106 |  | 2,156 |  | — |  | 1,121 |  | — |  | — |  | — |  | 17,340 |
Substandard | 1,126 |  | 7,986 |  | — |  | 2,688 |  | 648 |  | — |  | 160 |  | — |  | 12,608 |
Total loans | $ | 230,708 |  | $ | 312,090 |  | $ | 872,599 |  | $ | 76,423 |  | $ | 124,613 |  | $ | 117,847 |  | $ | 27,472 |  | $ | 2,112 |  | $ | 1,763,864 |

Troubled Debt Restructuring
Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after Management considers the borrower’s sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance.
We may remove a loan from TDR designation if it meets all of the following conditions:

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

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

• | Performance on the loan is reasonably assured; and

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

The same Management level that approved the loan classification upgrade must approve the removal of TDR status. After meeting all of the conditions above, there was one commercial loan with a recorded investment of $3 thousand removed from TDR designation during the nine months ended September 30, 2019. There were one TIC loan and one home equity loan with recorded investments totaling $247 thousand removed from TDR designation during the nine months ended September 30, 2018.
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The following table summarizes the carrying amount of TDR loans by loan class as of September 30, 2019 and December 31, 2018.

(in thousands) |
Recorded Investment in Troubled Debt Restructurings 1 | September 30, 2019 |  | December 31, 2018 |
Commercial and industrial | $ | 1,139 |  | $ | 1,506 |
Commercial real estate, owner-occupied | 6,999 |  | 6,993 |
Commercial real estate, investor | 1,786 |  | 1,821 |
Construction | 880 |  | 2,688 |
Home equity | 251 |  | 251 |
Other residential | 454 |  | 462 |
Installment and other consumer | 653 |  | 685 |
Total | $ | 12,162 |  | $ | 14,406 |

1There were no acquired TDR loans as of September 30, 2019 or December 31, 2018. TDR loans on non-accrual status totaled $233 thousand and $65 thousand at September 30, 2019 and December 31, 2018, respectively.
The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the recorded investment in the loans prior to modification, and the recorded investment in the loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented.

(dollars in thousands) | Number of Contracts Modified |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment at Period End |
TDRs during the three months ended September 30, 2019: |  |  |  |
None | — |  | $ | — |  | $ | — |  | $ | — |
TDRs during the three months ended September 30, 2018: |  |  |  |  |  |  |  |
None | — |  | $ | — |  | $ | — |  | $ | — |

TDRs during the nine months ended September 30, 2019: |  |  |  |
Commercial and industrial | 1 |  | $ | 298 |  | $ | 298 |  | $ | 173 |
TDRs during the nine months ended September 30, 2018: |  |  |  |  |  |  |
Commercial and industrial | 2 |  | $ | 254 |  | $ | 245 |  | $ | 235 |

The loan modified during the nine months ended September 30, 2019 reflected a maturity extension and interest rate concession. The two loans modified during the nine months ended September 30, 2018 were to the same borrower and included maturity extensions and other changes in loan terms. During the nine months ended September 30, 2019 and 2018, 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.
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(in thousands) | Commercial and industrial |  | Commercial real estate, owner-occupied |  | Commercial real estate, investor |  | Construction |  | Home equity |  | Other residential |  | Installment and other consumer |  | Total |
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recorded investment in impaired loans: |  |  |  |  |  |
With no specific allowance recorded | $ | 375 |  | $ | — |  | $ | — |  | $ | — |  | $ | 168 |  | $ | 454 |  | $ | 101 |  | $ | 1,098 |
With a specific allowance recorded | 785 |  | 6,999 |  | 1,786 |  | 880 |  | 251 |  | — |  | 552 |  | 11,253 |
Total recorded investment in impaired loans | $ | 1,160 |  | $ | 6,999 |  | $ | 1,786 |  | $ | 880 |  | $ | 419 |  | $ | 454 |  | $ | 653 |  | $ | 12,351 |
Unpaid principal balance of impaired loans | $ | 1,140 |  | $ | 6,993 |  | $ | 1,776 |  | $ | 876 |  | $ | 417 |  | $ | 453 |  | $ | 652 |  | $ | 12,307 |
Specific allowance | 183 |  | 85 |  | 45 |  | 12 |  | 5 |  | — |  | 59 |  | 389 |
Average recorded investment in impaired loans during the quarter ended September 30, 2019 | 1,324 |  | 7,000 |  | 1,791 |  | 684 |  | 413 |  | 456 |  | 659 |  | 12,327 |
Interest income recognized on impaired loans during the quarter ended September 30, 20191 | 16 |  | 67 |  | 20 |  | 400 |  | 9 |  | 4 |  | 6 |  | 522 |
Average recorded investment in impaired loans during the nine months ended September 30, 2019 | 1,495 |  | 6,998 |  | 1,804 |  | 1,687 |  | 497 |  | 458 |  | 670 |  | 13,609 |
Interest income recognized on impaired loans during the nine months ended September 30, 20191 | 56 |  | 199 |  | 59 |  | 456 |  | 42 |  | 14 |  | 18 |  | 844 |
Average recorded investment in impaired loans during the quarter ended September 30, 2018 | 1,840 |  | 7,000 |  | 1,837 |  | 2,690 |  | 651 |  | 987 |  | 700 |  | 15,705 |
Interest income recognized on impaired loans during the quarter ended September 30, 20181 | 31 |  | 67 |  | 20 |  | 39 |  | 5 |  | 13 |  | 7 |  | 182 |
Average recorded investment in impaired loans during the nine months ended September 30, 2018 | 2,019 |  | 7,002 |  | 1,925 |  | 2,831 |  | 698 |  | 1,029 |  | 708 |  | 16,212 |
Interest income recognized on impaired loans during the nine months ended September 30, 20181 | 214 |  | 199 |  | 63 |  | 114 |  | 15 |  | 38 |  | 22 |  | 665 |

1 Interest income recognized on a cash basis of $393 thousand and $416 thousand during the respective three and nine months ended September 30, 2019 was related to a principal payment applied to interest collected but unrecognized on a former non-accrual land development loan and the pay-off of three non-accruals. Interest income recognized on a cash basis of $6 thousand and $134 thousand during the three and nine months ended September 30, 2018 was related to the pay-off of three non-accrual commercial PCI loans.

(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, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Recorded investment in impaired loans: |  |  |  |  |  |  |  |  |  |  |  |
With no specific allowance recorded | $ | 303 |  | $ | — |  | $ | — |  | $ | 2,688 |  | $ | 313 |  | $ | 462 |  | $ | 111 |  | $ | 3,877 |
With a specific allowance recorded | 1,522 |  | 6,993 |  | 1,821 |  | — |  | 251 |  | — |  | 574 |  | 11,161 |
Total recorded investment in impaired loans | $ | 1,825 |  | $ | 6,993 |  | $ | 1,821 |  | $ | 2,688 |  | $ | 564 |  | $ | 462 |  | $ | 685 |  | $ | 15,038 |
Unpaid principal balance of impaired loans | $ | 1,813 |  | $ | 6,993 |  | $ | 1,812 |  | $ | 2,688 |  | $ | 562 |  | $ | 461 |  | $ | 684 |  | $ | 15,013 |
Specific allowance | $ | 466 |  | $ | 189 |  | $ | 45 |  | $ | — |  | $ | 5 |  | $ | — |  | $ | 73 |  | $ | 778 |

Management monitors delinquent loans continuously and identifies problem loans, generally loans graded Substandard or worse, loans on non-accrual status and loans modified in a TDR, to be evaluated individually for impairment testing. Generally, the recorded investment in impaired loans is net of any charge-offs from estimated losses related to specifically-identified impaired loans when they are deemed uncollectible. There were no charged-off amounts on impaired loans at September 30, 2019 or December 31, 2018. In addition, the recorded investment in impaired loans is net of purchase discounts or premiums on acquired loans and deferred fees and costs. At September 30, 2019 and December 31, 2018, unused commitments to extend credit on impaired loans, including performing loans to borrowers whose terms have been modified in TDRs, totaled $699 thousand and $1.1 million, respectively.
The following tables disclose activity in the allowance for loan losses ("ALLL") and the recorded investment in loans by class, as well as the related ALLL disaggregated by impairment evaluation method.
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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 September 30, 2019 |  |  |  |  |  |  |
Beginning balance | $ | 2,368 |  | $ | 2,321 |  | $ | 7,721 |  | $ | 619 |  | $ | 907 |  | $ | 849 |  | $ | 323 |  | $ | 727 |  | $ | 15,835 |
Provision (reversal) | 326 |  | 21 |  | 211 |  | (117 | ) | (28 | ) | 56 |  | (28 | ) | (41 | ) | 400 |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Recoveries | 5 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | 5 |
Ending balance | $ | 2,699 |  | $ | 2,342 |  | $ | 7,932 |  | $ | 502 |  | $ | 879 |  | $ | 905 |  | $ | 295 |  | $ | 686 |  | $ | 16,240 |
Three months ended September 30, 2018 |  |  |  |  |  |  |
Beginning balance | $ | 2,597 |  | $ | 2,339 |  | $ | 7,390 |  | $ | 508 |  | $ | 952 |  | $ | 746 |  | $ | 325 |  | $ | 956 |  | $ | 15,813 |
Provision (reversal) | (245 | ) | 83 |  | 46 |  | 157 |  | (39 | ) | 35 |  | 5 |  | (42 | ) | — |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Recoveries | 4 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | 4 |
Ending balance | $ | 2,356 |  | $ | 2,422 |  | $ | 7,436 |  | $ | 665 |  | $ | 913 |  | $ | 781 |  | $ | 330 |  | $ | 914 |  | $ | 15,817 |

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 |
Nine months ended September 30, 2019 |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |
Beginning balance | $ | 2,436 |  | $ | 2,407 |  | $ | 7,703 |  | $ | 756 |  | $ | 915 |  | $ | 800 |  | $ | 310 |  | $ | 494 |  | $ | 15,821 |
Provision (reversal) | 256 |  | (65 | ) | 217 |  | (254 | ) | (36 | ) | 105 |  | (15 | ) | 192 |  | 400 |
Charge-offs | (9 | ) | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (9 | )
Recoveries | 16 |  | — |  | 12 |  | — |  | — |  | — |  | — |  | — |  | 28 |
Ending balance | $ | 2,699 |  | $ | 2,342 |  | $ | 7,932 |  | $ | 502 |  | $ | 879 |  | $ | 905 |  | $ | 295 |  | $ | 686 |  | $ | 16,240 |
Nine months ended September 30, 2018 |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |
Beginning balance | $ | 3,654 |  | $ | 2,294 |  | $ | 6,475 |  | $ | 681 |  | $ | 1,031 |  | $ | 536 |  | $ | 378 |  | $ | 718 |  | $ | 15,767 |
Provision (reversal) | (1,308 | ) | 128 |  | 961 |  | (16 | ) | (118 | ) | 245 |  | (88 | ) | 196 |  | — |
Charge-offs | (3 | ) | — |  | — |  | — |  | — |  | — |  | (2 | ) | — |  | (5 | )
Recoveries | 13 |  | — |  | — |  | — |  | — |  | — |  | 42 |  | — |  | 55 |
Ending balance | $ | 2,356 |  | $ | 2,422 |  | $ | 7,436 |  | $ | 665 |  | $ | 913 |  | $ | 781 |  | $ | 330 |  | $ | 914 |  | $ | 15,817 |

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 |
September 30, 2019
Ending ALLL related to loans collectively evaluated for impairment | $ | 2,516 |  | $ | 2,257 |  | $ | 7,887 |  | $ | 490 |  | $ | 874 |  | $ | 905 |  | $ | 236 |  | $ | 686 |  | $ | 15,851 |
Ending ALLL related to loans individually evaluated for impairment | 183 |  | 85 |  | 45 |  | 12 |  | 5 |  | — |  | 59 |  | — |  | 389 |
Ending ALLL related to PCI loans | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Ending balance | $ | 2,699 |  | $ | 2,342 |  | $ | 7,932 |  | $ | 502 |  | $ | 879 |  | $ | 905 |  | $ | 295 |  | $ | 686 |  | $ | 16,240 |
Recorded Investment: |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment | $ | 259,664 |  | $ | 302,334 |  | $ | 893,452 |  | $ | 49,374 |  | $ | 121,321 |  | $ | 130,327 |  | $ | 27,808 |  | $ | — |  | $ | 1,784,280 |
Individually evaluated for impairment | 1,160 |  | 6,999 |  | 1,786 |  | 880 |  | 419 |  | 454 |  | 653 |  | — |  | 12,351 |
PCI loans | 4 |  | 1,153 |  | 828 |  | — |  | 74 |  | — |  | — |  | — |  | 2,059 |
Total | $ | 260,828 |  | $ | 310,486 |  | $ | 896,066 |  | $ | 50,254 |  | $ | 121,814 |  | $ | 130,781 |  | $ | 28,461 |  | $ | — |  | $ | 1,798,690 |
Ratio of allowance for loan losses to total loans | 1.03 | % | 0.75 | % | 0.89 | % | 1.00 | % | 0.72 | % | 0.69 | % | 1.04 | % | NM |  | 0.90 | %
Allowance for loan losses to non-accrual loans | 1,384 | % | NM |  | NM |  | NM |  | 526 | % | NM |  | 492 | % | NM |  | 3,848 | %

NM - Not Meaningful
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Allowance for Loan Losses and Recorded Investment in Loans
(dollars in thousands) | Commercial and industrial |  | Commercial real estate, owner-occupied |  | Commercial real estate, investor |  | Construction |  | Home equity |  | Other residential |  | Installment and other consumer |  | Unallocated |  | Total |
December 31, 2018
Ending ALLL related to loans collectively evaluated for impairment | $ | 1,970 |  | $ | 2,218 |  | $ | 7,658 |  | $ | 756 |  | $ | 910 |  | $ | 800 |  | $ | 237 |  | $ | 494 |  | $ | 15,043 |
Ending ALLL related to loans individually evaluated for impairment | 466 |  | 189 |  | 45 |  | — |  | 5 |  | — |  | 73 |  | — |  | 778 |
Ending ALLL related to purchased credit-impaired loans | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Ending balance | $ | 2,436 |  | $ | 2,407 |  | $ | 7,703 |  | $ | 756 |  | $ | 915 |  | $ | 800 |  | $ | 310 |  | $ | 494 |  | $ | 15,821 |
Recorded Investment: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment | $ | 228,883 |  | $ | 305,097 |  | $ | 870,778 |  | $ | 73,735 |  | $ | 124,049 |  | $ | 117,385 |  | $ | 26,787 |  | $ | — |  | $ | 1,746,714 |
Individually evaluated for impairment | 1,825 |  | 6,993 |  | 1,821 |  | 2,688 |  | 564 |  | 462 |  | 685 |  | — |  | 15,038 |
Purchased credit-impaired | 31 |  | 1,187 |  | 811 |  | — |  | 83 |  | — |  | — |  | — |  | 2,112 |
Total | $ | 230,739 |  | $ | 313,277 |  | $ | 873,410 |  | $ | 76,423 |  | $ | 124,696 |  | $ | 117,847 |  | $ | 27,472 |  | $ | — |  | $ | 1,763,864 |
Ratio of allowance for loan losses to total loans | 1.06 | % | 0.77 | % | 0.88 | % | 0.99 | % | 0.73 | % | 0.68 | % | 1.13 | % | NM |  | 0.90 | %
Allowance for loan losses to non-accrual loans | 764 | % | NM |  | NM |  | NM |  | 292 | % | NM |  | NM |  | NM |  | 2,270 | %

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

PCI Loans | September 30, 2019 | December 31, 2018
(in thousands) | Unpaid Principal Balance |  | Carrying Value |  | Unpaid Principal Balance |  | Carrying Value |
Commercial and industrial | $ | 48 |  | $ | 4 |  | $ | 89 |  | $ | 31 |
Commercial real estate, owner occupied | 1,208 |  | 1,153 |  | 1,247 |  | 1,187 |
Commercial real estate, investor | 1,009 |  | 828 |  | 1,033 |  | 811 |
Home equity | 194 |  | 74 |  | 210 |  | 83 |
Total purchased credit-impaired loans | $ | 2,459 |  | $ | 2,059 |  | $ | 2,579 |  | $ | 2,112 |

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 | Nine months ended
(in thousands) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018
Balance at beginning of period | $ | 819 |  | $ | 1,059 |  | $ | 934 |  | $ | 1,254 |
Accretion | (55 | ) | (63 | ) | (170 | ) | (258 | )
Balance at end of period | $ | 764 |  | $ | 996 |  | $ | 764 |  | $ | 996 |

Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1,083.2 million and $1,027.4 million at September 30, 2019 and December 31, 2018, respectively. In addition, we pledge eligible TIC loans, which totaled $111.5 million and $94.5 million at September 30,
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2019 and December 31, 2018, 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 $9.0 million at September 30, 2019, compared to $10.6 million at December 31, 2018. In addition, undisbursed commitments to related parties totaled $9.1 million at September 30, 2019 and December 31, 2018.
Note 6: Borrowings and Other Obligations
Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $92.0 million at September 30, 2019 and December 31, 2018. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at September 30, 2019 or December 31, 2018.
Federal Home Loan Bank Borrowings – As of September 30, 2019 and December 31, 2018, the Bank had lines of credit with the FHLB totaling $615.9 million and $629.4 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at September 30, 2019. There were $7.0 million FHLB overnight borrowings at an overnight rate of 2.56% on December 31, 2018.
Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans. At September 30, 2019 and December 31, 2018, the Bank had borrowing capacity under this line totaling $76.5 million and $69.7 million, respectively, and had no outstanding borrowings with the FRBSF.
Subordinated Debentures – As part of an acquisition, Bancorp assumed subordinated debentures due to NorCal Community Bancorp Trusts I and II, established for the sole purpose of issuing trust preferred securities. The trust preferred securities were sold and issued in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. On October 7, 2018, Bancorp redeemed in full the subordinated debentures due to NorCal Community Bancorp Trust I, resulting in $916 thousand accelerated accretion. The Trust II subordinated debentures were recorded at fair value totaling $2.14 million at acquisition date with a contractual balance of $4.12 million. The difference between the contractual balance and the fair value at acquisition date is accreted into interest expense over the life of the debentures. Accretion on the subordinated debentures totaled $51 thousand (Trust II) and $92 thousand (Trusts I and II) for the nine months ended September 30, 2019 and 2018, respectively. 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 event of default. In the event of interest deferral, dividends to Bancorp common stockholders are prohibited. Bancorp has guaranteed, on a subordinated basis, distributions and other payments due on trust preferred securities totaling $4.0 million issued by Trust II, which have identical maturity, repricing and payment terms as the subordinated debentures. Subordinated debentures due to NorCal Community Bancorp Trust II on March 15, 2036 with interest payable quarterly, (repricing quarterly, based on 3-month LIBOR plus 1.40%, or 3.52% as of September 30, 2019), are redeemable in whole or in part on any interest payment date.
Other Obligations – The Bank leases certain equipment under finances leases, which are included in borrowings and other obligations in the consolidated statement of conditions. See Note 8, Commitment and Contingencies, for additional information.
Note 7: Stockholders' Equity
Dividends and Stock Split
On October 18, 2019, Bancorp declared a $0.21 per share cash dividend, payable on November 8, 2019 to shareholders of record at the close of business on November 1, 2019. All share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
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Share-Based Payments
The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the intrinsic value, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate stock-based compensation expense when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of stock options, which are based on the scheduled vesting period.
Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.
We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.
The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.
Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the nine months ended September 30, 2019, we withheld 7,795 shares totaling $326 thousand at a weighted-average price of $41.84 for cashless exercises. During the nine months ended September 30, 2018, we withheld 41,962 shares totaling $1.5 million at a weighted-average price of $35.68 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
We adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $638 thousand from AOCI to retained earnings. This amount represented the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017.
Share Repurchase Program
On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020.
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.
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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 nine months ended September 30, 2019, Bancorp repurchased 313,651 shares totaling $13.2 million for a cumulative 484,868 shares totaling $20.2 million repurchased from May 1, 2018 through September 30, 2019.
Note 8: Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.
Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on Management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.
The contractual amount of undrawn loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:

(in thousands) | September 30, 2019 |  | December 31, 2018 |
Commercial lines of credit | $ | 239,465 |  | $ | 238,361 |
Revolving home equity lines | 190,230 |  | 189,971 |
Undisbursed construction loans | 40,101 |  | 46,229 |
Personal and other lines of credit | 9,888 |  | 14,109 |
Standby letters of credit | 2,014 |  | 2,636 |
Total commitments and standby letters of credit | $ | 481,698 |  | $ | 491,306 |

We record an allowance for losses on these off-balance sheet commitments based on an estimate of probabilities of the utilization of these commitments according to our historical experience on different types of commitments and expected loss. The allowance for losses on off-balance sheet commitments totaled $1.1 million and $958 thousand as of September 30, 2019 and December 31, 2018, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition.
Leases
We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 13 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.
We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.
The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities as of September 30, 2019.
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(in thousands) | September 30, 2019 |
Operating leases: |
Operating lease right-of-use assets | $ | 11,934 |
Operating lease liabilities | $ | 13,665 |
Finance leases: |
Finance lease right-of-use assets | $ | 379 |
Accumulated amortization | (127 | )
Finance lease right-of-use assets, net1 | $ | 252 |
Finance lease liabilities2 | $ | 255 |
1 Included in premises and equipment in the consolidated statements of condition.
2 Included in borrowings and other obligations in the consolidated statements of condition.

The following table shows supplemental disclosures of noncash investing and financing activities for the period presented. There were no lease-related noncash investing and financing activities for the nine months ended September 30, 2018.

| Nine months ended
(in thousands) | September 30, 2019
Right-of-use assets obtained in exchange for operating lease liabilities | $ | 1,661 |
Right-of-use assets obtained in exchange for finance lease liabilities | $ | 31 |
Reclassification of deferred rent and unamortized lease incentives from other liabilities to operating lease right-of-use assets upon adoption of ASC 842 | $ | 1,967 |

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

| Three months ended | Nine months ended
(in thousands) | September 30, 2019 | September 30, 2019
Operating lease cost1 | $ | 1,051 |  | $ | 3,123 |
Finance lease cost: |  |
Amortization of right-of-use assets2 | $ | 43 |  | $ | 128 |
Interest on finance lease liabilities3 | 2 |  | 7 |
Total finance lease cost | $ | 45 |  | $ | 135 |
Total lease cost | $ | 1,096 |  | $ | 3,258 |
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income. |
2 Included in depreciation and amortization in the consolidated statements of comprehensive income. |
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income. |

Operating lease rent expense totaled $1.1 million and $3.5 million, respectively, for the three and nine months ended September 30, 2018.
The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of September 30, 2019. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.
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(in thousands) | September 30, 2019
Year | Operating Leases |  |  | Finance Leases |
2019 | $ | 1,139 |  |  | $ | 45 |
2020 | 4,469 |  |  | 170 |
2021 | 2,806 |  |  | 36 |
2022 | 1,952 |  |  | 8 |
2023 | 1,464 |  |  | 1 |
Thereafter | 2,884 |  |  | — |
Total minimum lease payments | 14,714 |  |  | 260 |
Amounts representing interest (present value discount) | (1,049 | ) |  | (5 | )
Present value of net minimum lease payments (lease liability) | $ | 13,665 |  |  | $ | 255 |
Weighted average remaining term (in years) | 5.0 |  |  | 1.6 |
Weighted average discount rate | 2.78 | % |  | 2.87 | %

Litigation Matters
Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's Management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.
The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.
In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. On September 17, 2018, Visa signed an amended settlement agreement with the putative class action plaintiffs of the U.S. interchange multidistrict litigation that superseded the 2012 settlement agreement. Visa's share of the settlement amount under the amended class settlement agreement increased to $4.1 billion. On January 24, 2019, the district court granted preliminary approval of the amended class settlement agreement, which was moved for final approval on June 7, 2019. Certain merchants chose to opt out of the class settlement agreement and a final settlement approval hearing is scheduled for November 7, 2019. On September 27, 2019, Visa deposited an additional $300 million into the litigation escrow account. The escrow balance combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.
The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate might change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.
Note 9: Derivative Financial Instruments and Hedging Activities
We entered into interest rate swap agreements, primarily as an 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
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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 September 30, 2019, we had five interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, August 2037 and October 2037. All 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 $4 thousand at September 30, 2019 and $3 thousand at December 31, 2018. Information on our interest rate swaps is shown in the derivative tables below:

| Asset Derivatives |  | Liability Derivatives
(in thousands) | September 30, 2019 | December 31, 2018 |  | September 30, 2019 | December 31, 2018
Fair value hedges: |  |  |  |  |
Interest rate contracts notional amount | $ | — |  | $ | 8,895 |  |  | $ | 17,199 |  | $ | 9,016 |
Interest rate contracts fair value1 | $ | — |  | $ | 161 |  |  | $ | 1,603 |  | $ | 375 |

1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of September 30, 2019 and December 31, 2018:

| Carrying Amounts of Hedged Assets |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands) | September 30, 2019 | December 31, 2018 |  | September 30, 2019 | December 31, 2018
Loans | $ | 18,564 |  | $ | 17,917 |  |  | $ | 1,365 |  | $ | 6 |

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

| Three months ended | Nine months ended
(in thousands) | September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018
Interest and fees on loans 1 | $ | 21,525 |  | $ | 20,284 |  | $ | 63,208 |  | $ | 58,795 |
(Decrease) increase in value of designated interest rate swaps due to LIBOR interest rate movements | $ | (485 | ) | $ | 222 |  | $ | (1,389 | ) | $ | 939 |
Payment on interest rate swaps | (23 | ) | (32 | ) | (49 | ) | (127 | )
Increase (decrease) in value of hedged loans | 424 |  | (231 | ) | 1,359 |  | (924 | )
Decrease in value of yield maintenance agreement | (3 | ) | (4 | ) | (10 | ) | (11 | )
Net losses on fair value hedging relationships recognized in interest income | $ | (87 | ) | $ | (45 | ) | $ | (89 | ) | $ | (123 | )

1 Represents the income line item in the statement of comprehensive income in which the effects of fair value hedges are recorded.
Our derivative transactions with counterparties are under International Swaps and Derivative Association (“ISDA”) master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.
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Information on financial instruments that are eligible for offset in the consolidated statements of condition follows:

Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in |
| Gross Amounts | Offset in the | Assets Presented | the Statements of Condition |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral |
(in thousands) | Assets | Condition | of Condition | Instruments | Received | Net Amount
September 30, 2019 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
Total | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
December 31, 2018 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | 161 |  | $ | — |  | $ | 161 |  | $ | (161 | ) | $ | — |  | $ | — |
Total | $ | 161 |  | $ | — |  | $ | 161 |  | $ | (161 | ) | $ | — |  | $ | — |

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) | Liabilities1 | Condition | of Condition1 | Instruments | Pledged | Net Amount
September 30, 2019 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | 1,603 |  | $ | — |  | $ | 1,603 |  | $ | — |  | $ | (1,603 | ) | $ | — |
Total | $ | 1,603 |  | $ | — |  | $ | 1,603 |  | $ | — |  | $ | (1,603 | ) | $ | — |
December 31, 2018 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | 375 |  | $ | — |  | $ | 375 |  | $ | (161 | ) | $ | — |  | $ | 214 |
Total | $ | 375 |  | $ | — |  | $ | 375 |  | $ | (161 | ) | $ | — |  | $ | 214 |

1 Amounts exclude accrued interest totaling $4 thousand at September 30, 2019 and $3 thousand at December 31, 2018.
For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2018 Form 10-K filed with the SEC on March 14, 2019.
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 2018 Annual Report on Form 10-K. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.
Forward-Looking Statements
This discussion of financial results includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "1934 Act"). Those sections of the 1933 Act and 1934 Act provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.
Our forward-looking statements include descriptions of plans or objectives of Management for future operations, products or services, and forecasts of revenues, earnings or other measures of economic performance. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words "believe," "expect," "intend," "estimate" or words of similar meaning, or future or conditional verbs preceded by "will," "would," "should," "could" or "may."
Forward-looking statements are based on Management's current expectations regarding economic, legislative, and regulatory issues that may affect our earnings in future periods. A number of factors, many of which are beyond Management’s control, could cause future results to vary materially from current Management expectations. Such factors include, but are not limited to, general economic conditions and the economic uncertainty in the United States
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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 wildfires and earthquakes in our area); adverse weather conditions; interruptions of utility service in our markets for sustained periods; and other economic, competitive, governmental, regulatory and technological factors (including external fraud and cybersecurity threats) affecting 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 2018 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 2018 Form 10-K filed with the SEC on March 14, 2019 and Note 2, Recently Adopted and Issued Accounting Standards, to the Consolidated Financial Statements in this Form 10-Q.
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Executive Summary
Earnings in the third quarter of 2019 totaled $9.4 million, compared to $8.7 million in the third quarter of 2018. Diluted earnings per share were $0.69 in the third quarter of 2019, compared to $0.62 (adjusted for stock split) in the same quarter a year ago. Earnings for the first nine months of 2019 totaled $25.2 million, compared to $23.0 million in the same period last year. Diluted earnings per share were $1.82 and $1.64 (adjusted for stock-split) in the first nine months of 2019 and 2018, respectively.
The following are highlights of our operating and financial performance for the periods presented:

• | Loans totaled $1,798.7 million at September 30, 2019, compared to $1,763.9 million at December 31, 2018. New loan originations of $156.1 million in the first nine months of 2019 was partially offset by payoffs of $107.8 million, and combined with changes in lines of credit utilization and amortization on existing loans, resulted in the net increase of $34.8 million. For the third quarter of 2019, loan originations of $77.3 million compared with third quarter 2018 loan originations of $52.6 million. Loan payoffs of $38.5 million in the third quarter of 2019, were lower than payoffs of $52.0 million the same period a year ago.

• | Strong credit quality remains a cornerstone of the Bank's consistent performance. Non-accrual loans totaled $422 thousand, or 0.02% of the loan portfolio at September 30, 2019, compared to $697 thousand, or 0.04% at December 31, 2018. Classified loans totaled $9.9 million at September 30, 2019, compared to $12.6 million at December 31, 2018. Accruing loans past due 30 to 89 days totaled $574 thousand at September 30, 2019, compared to $1.1 million at December 31, 2018. A $400 thousand provision for loan losses was recorded in the first nine months of 2019. There was no provision for loan losses recorded in 2018.

• | Total deposits increased $49.7 million in the first nine months of 2019 to $2,224.5 million at September 30, 2019. The increase was primarily due to normal cash fluctuations in some of our large business accounts. Non-interest bearing deposits increased $35.2 million from December 31, 2018 and represented 50% of total deposits at September 30, 2019. The annualized cost of total deposits for the first nine months of 2019 was 0.20%. Total deposits increased $122.5 million in the third quarter of 2019, compared to $75.1 million in the third quarter of 2018.

• | All capital ratios were above regulatory requirements to be considered well-capitalized. The total risk-based capital ratio for Bancorp was 15.3% at September 30, 2019, compared to 14.9% at December 31, 2018.

• | Return on assets was 1.49% for the quarter ended September 30, 2019, compared to 1.38% for the quarter ended September 30, 2018. Return on assets was 1.33% for the nine months ended September 30, 2019, compared to 1.24% for the nine months ended September 30, 2018. Return on equity was 11.34% for the quarter ended September 30, 2019, compared to 11.20% for the quarter ended September 30, 2018. Return on equity was 10.40% for the nine months ended September 30, 2019, compared to 10.17% for the nine months ended September 30, 2018.

• | Earnings were positively impacted by a benefit collected on bank-owned-life insurance ("BOLI") policies and an adjustment to the income tax provision related to a deferred tax liability true-up. These items positively impacted diluted earnings per share by approximately $0.06 for the quarter and first nine months of 2019.

• | The Board of Directors declared a cash dividend of $0.21 per share on October 18, 2019. This represents the 58th consecutive quarterly dividend paid by Bank of Marin Bancorp, a 30% payout ratio and 2% dividend yield based on the September 30, 2019 share price. The dividend is payable on November 8, 2019, to shareholders of record at the close of business on November 1, 2019.

For the remainder of 2019 and looking forward into 2020, 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.
Our strong liquidity and capital support our organic growth as well as possible acquisitions. This gives us a great deal of flexibility as we seek opportunities that add value to the Bank.
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RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:

(dollars in thousands) | September 30, 2019 | December 31, 2018
Selected financial condition data: |  |
Total assets | $ | 2,592,071 |  | $ | 2,520,892 |
Loans, net | 1,782,450 |  | 1,748,043 |
Deposits | 2,224,524 |  | 2,174,840 |
Borrowings and other obligations | 2,946 |  | 9,640 |
Stockholders' equity | 333,065 |  | 316,407 |
Asset quality ratios: |  |
Allowance for loan losses to total loans | 0.90 | % | 0.90 | %
Allowance for loan losses to non-accrual loans | 38.45x |  | 22.71x |
Non-accrual loans to total loans | 0.02 | % | 0.04 | %
Capital ratios: |  |
Equity to total assets ratio | 12.85 | % | 12.55 | %
Tangible common equity to tangible assets 1 | 11.70 | % | 11.30 | %
Total capital (to risk-weighted assets) | 15.31 | % | 14.93 | %
Tier 1 capital (to risk-weighted assets) | 14.46 | % | 14.10 | %
Tier 1 capital (to average assets) | 11.92 | % | 11.54 | %
Common equity Tier 1 capital (to risk weighted assets) | 14.33 | % | 13.98 | %

| Three months ended |  | Nine months ended
(dollars in thousands, except per share data) | September 30, 2019 | September 30, 2018 |  | September 30, 2019 | September 30, 2018
Selected operating data: |  |  |  |  |
Net interest income | $ | 24,151 |  | $ | 23,539 |  |  | $ | 71,786 |  | $ | 68,272 |
Non-interest income | 2,721 |  | 2,236 |  |  | 6,766 |  | 6,716 |
Non-interest expense | 14,200 |  | 13,971 |  |  | 44,644 |  | 44,561 |
Net income | 9,448 |  | 8,680 |  |  | 25,162 |  | 22,960 |
Net income per common share: 4 |  |  |  |  |
Basic | $ | 0.70 |  | $ | 0.63 |  |  | $ | 1.84 |  | $ | 1.66 |
Diluted | $ | 0.69 |  | $ | 0.62 |  |  | $ | 1.82 |  | $ | 1.64 |
Performance and other financial ratios: |  |  |  |  |
Return on average assets | 1.49 | % | 1.38 | % |  | 1.33 | % | 1.24 | %
Return on average equity | 11.34 | % | 11.20 | % |  | 10.40 | % | 10.17 | %
Tax-equivalent net interest margin 2 | 4.04 | % | 3.97 | % |  | 4.03 | % | 3.91 | %
Efficiency ratio | 52.84 | % | 54.20 | % |  | 56.83 | % | 59.42 | %
Cash dividend payout ratio on common stock 3 | 30.00 | % | 25.60 | % |  | 32.07 | % | 27.79 | %

1 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $298 million and $281 million at September 30, 2019 and December 31, 2018, respectively, includes common stock, retained earnings and unrealized gains (losses) on available-for sale securities, net of tax, less goodwill and intangible assets. Tangible assets exclude goodwill and intangible assets of $35.0 million and $35.7 million at September 30, 2019 and December 31, 2018, respectively.
2 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets.
3 Calculated as dividends on common shares divided by basic net income per common share.
4 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
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Net Interest Income
Net interest income is the difference between the interest earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in the net interest income and/or margin due to an imbalance in the timing of repricing and maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. For more information, refer to Item 3. Quantitative and Qualitative Disclosure about Market Risk in this Form 10-Q.
Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity.
Average Statements of Condition and Analysis of Net Interest Income
The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for each period reported.

|  | Three months ended |  | Three months ended
|  | September 30, 2019 |  | September 30, 2018
|  |  | Interest |  |  |  | Interest |
|  | Average | Income/ | Yield/ |  | Average | Income/ | Yield/
(dollars in thousands) | Balance | Expense | Rate |  | Balance | Expense | Rate
Assets |  |  |  |  |  |  |
| Interest-bearing due from banks 1 | $ | 77,467 |  | $ | 425 |  | 2.15 | % |  | $ | 79,674 |  | $ | 400 |  | 1.96 | %
| Investment securities 2, 3 | 506,023 |  | 3,443 |  | 2.72 | % |  | 558,741 |  | 3,624 |  | 2.59 | %
| Loans 1, 3, 4 | 1,780,325 |  | 21,719 |  | 4.77 | % |  | 1,715,295 |  | 20,504 |  | 4.68 | %
| Total interest-earning assets 1 | 2,363,815 |  | 25,587 |  | 4.24 | % |  | 2,353,710 |  | 24,528 |  | 4.08 | %
| Cash and non-interest-bearing due from banks | 38,434 |  |  |  |  | 41,316 |  |  |
| Bank premises and equipment, net | 6,713 |  |  |  |  | 7,866 |  |  |
| Interest receivable and other assets, net | 114,537 |  |  |  |  | 86,039 |  |  |
Total assets | $ | 2,523,499 |  |  |  |  | $ | 2,488,931 |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |
| Interest-bearing transaction accounts | $ | 137,861 |  | $ | 101 |  | 0.29 | % |  | $ | 134,293 |  | $ | 58 |  | 0.17 | %
| Savings accounts | 170,166 |  | 17 |  | 0.04 | % |  | 179,429 |  | 18 |  | 0.04 | %
| Money market accounts | 661,131 |  | 855 |  | 0.51 | % |  | 609,821 |  | 337 |  | 0.22 | %
| Time accounts including CDARS | 101,404 |  | 147 |  | 0.57 | % |  | 132,588 |  | 130 |  | 0.39 | %
| Borrowings and other obligations 1 | 599 |  | 4 |  | 2.69 | % |  | 112 |  | 1 |  | 2.06 | %
| Subordinated debentures 1 | 2,682 |  | 57 |  | 8.27 | % |  | 5,815 |  | 125 |  | 8.43 | %
| Total interest-bearing liabilities | 1,073,843 |  | 1,181 |  | 0.44 | % |  | 1,062,058 |  | 669 |  | 0.25 | %
| Demand accounts | 1,088,903 |  |  |  |  | 1,101,288 |  |  |
| Interest payable and other liabilities | 30,268 |  |  |  |  | 18,022 |  |  |
| Stockholders' equity | 330,485 |  |  |  |  | 307,563 |  |  |
Total liabilities & stockholders' equity | $ | 2,523,499 |  |  |  |  | $ | 2,488,931 |  |  |
Tax-equivalent net interest income/margin 1 |  | $ | 24,406 |  | 4.04 | % |  |  | $ | 23,859 |  | 3.97 | %
Reported net interest income/margin 1 |  | $ | 24,151 |  | 4.00 | % |  |  | $ | 23,539 |  | 3.91 | %
Tax-equivalent net interest rate spread |  |  | 3.80 | % |  |  |  | 3.83 | %

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|  | Nine months ended |  | Nine months ended
|  | September 30, 2019 |  | September 30, 2018
|  |  | Interest |  |  |  | Interest |
|  | Average | Income/ | Yield/ |  | Average | Income/ | Yield/
(in thousands; unaudited) | Balance | Expense | Rate |  | Balance | Expense | Rate
Assets |  |  |  |  |  |  |
| Interest-bearing due from banks 1 | $ | 43,896 |  | $ | 754 |  | 2.27 | % |  | $ | 82,304 |  | $ | 1,088 |  | 1.74 | %
| Investment securities 2, 3 | 564,050 |  | 11,477 |  | 2.71 | % |  | 555,414 |  | 10,512 |  | 2.52 | %
| Loans 1, 3, 4 | 1,765,260 |  | 63,786 |  | 4.76 | % |  | 1,697,093 |  | 59,475 |  | 4.62 | %
| Total interest-earning assets 1 | 2,373,206 |  | 76,017 |  | 4.22 | % |  | 2,334,811 |  | 71,075 |  | 4.01 | %
| Cash and non-interest-bearing due from banks | 34,634 |  |  |  |  | 42,488 |  |  |
| Bank premises and equipment, net | 7,108 |  |  |  |  | 8,188 |  |  |
| Interest receivable and other assets, net | 108,806 |  |  |  |  | 87,403 |  |  |
Total assets | $ | 2,523,754 |  |  |  |  | $ | 2,472,890 |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |
| Interest-bearing transaction accounts | $ | 130,109 |  | $ | 269 |  | 0.28 | % |  | $ | 148,141 |  | $ | 158 |  | 0.14 | %
| Savings accounts | 174,837 |  | 52 |  | 0.04 | % |  | 179,543 |  | 54 |  | 0.04 | %
| Money market accounts | 665,167 |  | 2,406 |  | 0.48 | % |  | 601,896 |  | 789 |  | 0.18 | %
| Time accounts including CDARS | 109,978 |  | 441 |  | 0.54 | % |  | 142,563 |  | 426 |  | 0.40 | %
| Borrowings and other obligations 1 | 3,848 |  | 75 |  | 2.57 | % |  | 115 |  | 2 |  | 1.92 | %
| Subordinated debentures 1 | 2,664 |  | 175 |  | 8.66 | % |  | 5,785 |  | 362 |  | 8.25 | %
| Total interest-bearing liabilities | 1,086,603 |  | 3,418 |  | 0.42 | % |  | 1,078,043 |  | 1,791 |  | 0.22 | %
| Demand accounts | 1,083,260 |  |  |  |  | 1,074,778 |  |  |
| Interest payable and other liabilities | 30,344 |  |  |  |  | 18,127 |  |  |
| Stockholders' equity | 323,547 |  |  |  |  | 301,942 |  |  |
Total liabilities & stockholders' equity | $ | 2,523,754 |  |  |  |  | $ | 2,472,890 |  |  |
Tax-equivalent net interest income/margin 1 |  | $ | 72,599 |  | 4.03 | % |  |  | $ | 69,284 |  | 3.91 | %
Reported net interest income/margin 1 |  | $ | 71,786 |  | 3.99 | % |  |  | $ | 68,272 |  | 3.86 | %
Tax-equivalent net interest rate spread |  |  | 3.80 | % |  |  |  | 3.79 | %
1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable.
2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly.
3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21%.
4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.

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Analysis of Changes in Tax-Equivalent Net Interest Income
The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.

| Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
(in thousands) | Volume |  | Yield/Rate |  | Mix |  | Total |  | Volume |  | Yield/Rate |  | Mix |  | Total |
Interest-bearing due from banks | $ | (11 | ) | $ | 37 |  | $ | (1 | ) | $ | 25 |  | $ | (508 | ) | $ | 326 |  | $ | (152 | ) | $ | (334 | )
Investment securities 1 | (342 | ) | 177 |  | (16 | ) | (181 | ) | 163 |  | 789 |  | 13 |  | 965 |
Loans 1 | 777 |  | 422 |  | 16 |  | 1,215 |  | 2,389 |  | 1,849 |  | 73 |  | 4,311 |
Total interest-earning assets | 424 |  | 636 |  | (1 | ) | 1,059 |  | 2,044 |  | 2,964 |  | (66 | ) | 4,942 |
Interest-bearing transaction accounts | 2 |  | 41 |  | — |  | 43 |  | (19 | ) | 148 |  | (18 | ) | 111 |
Savings accounts | (1 | ) | 1 |  | (1 | ) | (1 | ) | (1 | ) | — |  | (1 | ) | (2 | )
Money market accounts | 28 |  | 452 |  | 38 |  | 518 |  | 83 |  | 1,388 |  | 146 |  | 1,617 |
Time accounts, including CDARS | (30 | ) | 62 |  | (15 | ) | 17 |  | (97 | ) | 146 |  | (34 | ) | 15 |
Borrowings and other obligations | 3 |  | — |  | — |  | 3 |  | 54 |  | 1 |  | 18 |  | 73 |
Subordinated debentures | (67 | ) | (2 | ) | 1 |  | (68 | ) | (195 | ) | 18 |  | (10 | ) | (187 | )
Total interest-bearing liabilities | (65 | ) | 554 |  | 23 |  | 512 |  | (175 | ) | 1,701 |  | 101 |  | 1,627 |
Changes in tax-equivalent net interest income | $ | 489 |  | $ | 82 |  | $ | (24 | ) | $ | 547 |  | $ | 2,219 |  | $ | 1,263 |  | $ | (167 | ) | $ | 3,315 |
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%.

Third Quarter of 2019 Compared to Third Quarter of 2018
Net interest income totaled $24.2 million in the third quarter of 2019, compared to $23.5 million in the same quarter a year ago. The $612 thousand increase was reflective of higher average loan balances, higher yields across earning asset categories, and a land development loan interest recovery, partially offset by higher rates on deposits.
The reported net interest margin was 4.00% in the third quarter of 2019 compared to 3.91% in the same quarter of the previous year. The 9 basis points increase compared to the third quarter of 2018 was related to higher yields, loan growth, and the land development loan interest recovery (6 basis points), partially offset by an increase in rates on deposit accounts.
First Nine Months of 2019 Compared to First Nine Months of 2018
Net interest income totaled $71.8 million in the first nine months of 2019, compared to $68.3 million in the same period a year ago. The $3.5 million increase primarily relates to higher average loan balances and higher yields across earning asset categories, partially offset by higher rates on deposits.
The reported net interest margin was 3.99% in the first nine months of 2019, compared to 3.86% in the same period of 2018. The 13 basis points increase was related to higher yields, higher loan balances, and the land development loan interest recovery (2 basis points), partially offset by an increase in rates on deposit accounts.
Market Interest Rates
Market interest rates are, in part, influenced by the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) set by the Federal Reserve Open Market Committee ("FOMC"). During 2018, the FOMC made four 25-basis-point increases to a range of 2.25% to 2.50% as of December 2018, where it remained during the first half of 2019. In each of its July, September and October 2019 meetings, the FOMC lowered the federal funds rate by 0.25% to a range of 1.50% to 1.75% as of October 31, 2019. Because the Bank is asset sensitive, falling
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interest rates could put pressure on net interest margin. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.
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 $12.4 million at September 30, 2019 and $15.0 million at December 31, 2018, with specific valuation allowances of $389 thousand and $778 thousand for the same respective dates. Loans graded special mention totaled $54.0 million at September 30, 2019 and $17.3 million at December 31, 2018. Contributing to the change in special mention during 2019 were four new loans that warranted the designation due to unique circumstances. These loans are either well-secured or have strong sponsorship and are not indicative of deteriorating credit quality in the loan portfolio. Classified assets (loans with substandard or doubtful risk grades) decreased to $9.9 million at September 30, 2019, from $12.6 million at December 31, 2018. The $2.7 million decrease was primarily due to a substantial pay down on a substandard classified land development loan in the second quarter, which was upgraded to a pass risk rating due to the borrower’s improved financial condition and low loan-to-value ratio. There were no loans with doubtful risk grades at September 30, 2019 or December 31, 2018.
A $400 thousand provision for loan losses was recorded in the quarter ended September 30, 2019, which was consistent with loan growth. There was no provision for loan losses recorded in the three and nine months ended September 30, 2018. Net recoveries in the third quarter of 2019 totaled $6 thousand, compared to net recoveries of $4 thousand in the same quarter a year ago. Net recoveries totaled $19 thousand in the first nine months of 2019, compared to net recoveries of $50 thousand in the same period a year ago.
The ratio of loan loss reserves to total loans was 0.90% at September 30, 2019 and December 31, 2018. Non-accrual loans totaled $422 thousand, or 0.02% of total loans, at September 30, 2019, compared to $697 thousand, or 0.04%, at December 31, 2018.
For more information, refer to Note 5 to the Consolidated Financial Statements in this Form 10-Q.
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Non-interest Income
The following table details the components of non-interest income.

| Three months ended |  | Amount |  | Percent
(dollars in thousands) | September 30, 2019 | September 30, 2018 |  | Increase (Decrease) |  | Increase (Decrease)
Service charges on deposit accounts | $ | 439 |  | $ | 475 |  |  | $ | (36 | ) |  | (7.6 | )%
Wealth Management and Trust Services | 495 |  | 490 |  |  | 5 |  |  | 1.0 | %
Debit card interchange fees, net | 406 |  | 402 |  |  | 4 |  |  | 1.0 | %
Merchant interchange fees, net | 79 |  | 99 |  |  | (20 | ) |  | (20.2 | )%
Earnings on bank-owned life insurance, net | 795 |  | 227 |  |  | 568 |  |  | 250.2 | %
Dividends on FHLB stock | 202 |  | 194 |  |  | 8 |  |  | 4.1 | %
(Losses) on investment securities, net | — |  | (90 | ) |  | 90 |  |  | (100.0 | )%
Other income | 305 |  | 439 |  |  | (134 | ) |  | (30.5 | )%
Total non-interest income | $ | 2,721 |  | $ | 2,236 |  |  | $ | 485 |  |  | 21.7 | %
| Nine months ended |  | Amount |  | Percent
(dollars in thousands) | September 30, 2019 | September 30, 2018 |  | Increase (Decrease) |  | Increase (Decrease)
Service charges on deposit accounts | $ | 1,403 |  | 1,407 |  |  | $ | (4 | ) |  | (0.3 | )%
Wealth Management and Trust Services | 1,406 |  | 1,493 |  |  | (87 | ) |  | (5.8 | )%
Debit card interchange fees, net | 1,200 |  | 1,158 |  |  | 42 |  |  | 3.6 | %
Merchant interchange fees, net | 253 |  | 297 |  |  | (44 | ) |  | (14.8 | )%
Earnings on bank-owned life insurance, net | 970 |  | 685 |  |  | 285 |  |  | 41.6 | %
Dividends on FHLB stock | 591 |  | 582 |  |  | 9 |  |  | 1.5 | %
Gains (losses) on investment securities, net | 55 |  | (79 | ) |  | 134 |  |  | NM |
Other income | 888 |  | 1,173 |  |  | (285 | ) |  | (24.3 | )%
Total non-interest income | $ | 6,766 |  | $ | 6,716 |  |  | $ | 50 |  |  | 0.7 | %
NM- Not Meaningful |  |  |  |  |  |

Third Quarter of 2019 Compared to Third Quarter of 2018
Non-interest income increased by $485 thousand in the third quarter of 2019 to $2.7 million, compared to $2.2 million in the same quarter a year ago. The increase in earnings on BOLI was primarily attributed to a $562 thousand benefit collected on BOLI policies. The decrease in other income was primarily due to lower fee income from one-way deposit sales to third-party deposit networks. Additionally, there was a net loss on investments securities in the same quarter a year ago due to the sale of municipal securities.
First Nine Months of 2019 Compared to First Nine Months of 2018
Non-interest income increased by $50 thousand in the first nine months of 2019 to $6.8 million, compared to $6.7 million in the same period a year ago. The increase in earnings on bank-owned life insurance was primarily due to the benefit mentioned above (partially offset by $283 thousand non-refundable underwriting costs associated with two new bank-owned life insurance policies purchased in the first quarter of 2019). The sale of securities resulted in a net gain in the first nine months of 2019, contrary to the net loss experienced in the same period a year ago. The decrease in other income was primarily due to the decrease in deposit network income discussed above. The decrease in wealth management and trust services income was primarily attributed to the exit of a high-risk, high balance trust client and multiple large estate asset distributions in mid-2018, and the loss of a large agency client in June of 2019 due to death. These losses were partially offset by new clients in late 2018 and early 2019.
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Non-interest Expense
The following table details the components of non-interest expense.

| Three months ended |  | Amount |  | Percent
(dollars in thousands) | September 30, 2019 |  | September 30, 2018 |  | Increase (Decrease) |  | Increase (Decrease)
Salaries and related benefits | $ | 8,412 |  |  | $ | 8,069 |  |  | $ | 343 |  |  | 4.3 | %
Occupancy and equipment | 1,507 |  |  | 1,444 |  |  | 63 |  |  | 4.4 | %
Depreciation and amortization | 573 |  |  | 532 |  |  | 41 |  |  | 7.7 | %
Federal Deposit Insurance Corporation insurance | 1 |  |  | 186 |  |  | (185 | ) |  | (99.5 | )%
Data processing | 923 |  |  | 950 |  |  | (27 | ) |  | (2.8 | )%
Professional services | 580 |  |  | 727 |  |  | (147 | ) |  | (20.2 | )%
Directors' expense | 189 |  |  | 173 |  |  | 16 |  |  | 9.2 | %
Information technology | 279 |  |  | 262 |  |  | 17 |  |  | 6.5 | %
Core deposit intangible amortization | 222 |  |  | 230 |  |  | (8 | ) |  | (3.5 | )%
Other non-interest expense |  |  |  |  |  |  |  |
Advertising | 183 |  |  | 118 |  |  | 65 |  |  | 55.1 | %
Other expense | 1,331 |  |  | 1,280 |  |  | 51 |  |  | 4.0 | %
Total other non-interest expense | 1,514 |  |  | 1,398 |  |  | 116 |  |  | 8.3 | %
Total non-interest expense | $ | 14,200 |  |  | $ | 13,971 |  |  | $ | 229 |  |  | 1.6 | %
| Nine months ended |  | Amount |  | Percent
(dollars in thousands) | September 30, 2019 |  | September 30, 2018 |  | Increase (Decrease) |  | Increase (Decrease)
Salaries and related benefits | $ | 26,426 |  |  | $ | 25,402 |  |  | $ | 1,024 |  |  | 4.0 | %
Occupancy and equipment | 4,616 |  |  | 4,462 |  |  | 154 |  |  | 3.5 | %
Depreciation and amortization | 1,701 |  |  | 1,625 |  |  | 76 |  |  | 4.7 | %
Federal Deposit Insurance Corporation insurance | 354 |  |  | 568 |  |  | (214 | ) |  | (37.7 | )%
Data processing | 2,942 |  |  | 3,354 |  |  | (412 | ) |  | (12.3 | )%
Professional services | 1,701 |  |  | 2,836 |  |  | (1,135 | ) |  | (40.0 | )%
Directors' expense | 555 |  |  | 530 |  |  | 25 |  |  | 4.7 | %
Information technology | 822 |  |  | 795 |  |  | 27 |  |  | 3.4 | %
Core deposit intangible amortization | 665 |  |  | 691 |  |  | (26 | ) |  | (3.8 | )%
Provision for losses on off-balance sheet commitments | 129 |  |  | — |  |  | 129 |  |  | 100.0 | %
Other non-interest expense |  |  |  |  |  |  |
Advertising | 588 |  |  | 426 |  |  | 162 |  |  | 38.0 | %
Other expense | 4,145 |  |  | 3,872 |  |  | 273 |  |  | 7.1 | %
Total other non-interest expense | 4,733 |  |  | 4,298 |  |  | 435 |  |  | 10.1 | %
Total non-interest expense | $ | 44,644 |  |  | $ | 44,561 |  |  | $ | 83 |  |  | 0.2 | %

Third Quarter of 2019 Compared to Third Quarter of 2018
Non-interest expense increased by $229 thousand to $14.2 million in the third quarter of 2019, compared to $14.0 million the same quarter a year ago. The increase was primarily due to $343 thousand more in salaries and related benefits due to six additional full-time equivalent ("FTE") staff and annual merit increases, partially offset by a reversal of Federal Deposit Insurance Corporation ("FDIC") deposit insurance expense when notified that the June 30, 2019 FDIC Deposit Insurance Fund reserve exceeded its billing threshold. Additionally, there were fewer fees associated with professional services in the third quarter of 2019 (primarily due to core processing system contract negotiation costs in 2018).
First Nine Months of 2019 Compared to First Nine Months of 2018
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Non-interest expense increased by $83 thousand to $44.6 million in the first nine months of 2019, compared to $44.56 million in the same period a year ago. In the first nine months of 2019, we incurred $1.0 million more in salaries and related benefits due to four additional FTE staff, personnel severance, and annual merit increases. In contrast, $1.1 million more in core processing system contract negotiation costs and $954 thousand Bank of Napa acquisition related expenses were incurred in 2018. The alleviation of data processing costs (mostly attributed to Bank of Napa conversion fees in 2018) and FDIC insurance expense reversal mentioned above, are more than offset by a $129 thousand provision for losses on off-balance sheet commitments and higher costs associated with the normal course of business in the first nine months of 2019.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, and low-income housing tax credits) as well as transactions with discrete tax effects (such as the exercise of stock options, the disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
The provision for income taxes for the third quarter of 2019 totaled $2.8 million at an effective tax rate of 23.0%, compared to $3.1 million at an effective tax rate of 26.5% in the same quarter last year. The decrease reflected higher tax exempt BOLI income from death benefits (discussed in Non-Interest Income, above) and a $327 thousand deferred tax liability true-up adjustment in 2019.
The provision for income taxes for the first nine months of 2019 totaled $8.3 million at an effective tax rate of 24.9%, compared to $7.5 million at an effective tax rate of 24.5% for the first nine months of 2018. The increase in the provision reflected the higher level of pre-tax income and lower tax-exempt interest income. The increase in the effective tax rate in the first nine months of 2019 compared to the first nine months of 2018 was primarily due to a higher level of discrete tax benefits in 2018 from the exercise of stock options and vesting of restricted stock. These discrete tax benefits reduced the effective tax rate approximately 50 basis points in the first nine months of 2019 versus 150 basis points in the same period a year ago. Discrete tax benefits were higher in the first nine months of 2018 due to higher nonqualified stock option exercise activity from former employees of Bank of Napa post-acquisition. The increase in the effective tax rate was partially offset by approximately 100 basis points due to the deferred tax liability true-up adjustment.
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 September 30, 2019, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.
FINANCIAL CONDITION SUMMARY
At September 30, 2019, assets totaled $2,592.1 million, an increase of $71.2 million, from December 31, 2018, mainly reflecting an increase in loans, deposit inflows and cash flows from our securities portfolio as discussed below.
Investment Securities
The investment securities portfolio totaled $500.9 million at September 30, 2019, a decrease of $118.7 million from December 31, 2018. The decrease reflects calls, paydowns, maturities and sales totaling $150.5 million, partially offset by purchases of $18.9 million in 2019 and increase in fair value of available-for-sale securities in 2019. We sold $66 million in lower yielding, shorter term securities in early 2019 to manage our interest rate spread and cash position.
The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2019 and December 31, 2018.
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|  | September 30, 2019 |  | December 31, 2018
(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 | $ | 4,603 |  | $ | 4,828 |  | 8.2 | % |  | $ | 14,438 |  | $ | 14,418 |  | 16.0 | %
| Revenue bonds | 2,930 |  | 2,980 |  | 5.2 |  |  | 7,109 |  | 7,108 |  | 7.9 |
| Tax allocation bonds | 3,886 |  | 3,978 |  | 6.9 |  |  | 4,541 |  | 4,601 |  | 5.0 |
Total within California | 11,419 |  | 11,786 |  | 20.3 |  |  | 26,088 |  | 26,127 |  | 28.9 |
Outside California: |  |  |  |  |  |  |
| General obligation bonds | 39,476 |  | 40,409 |  | 70.5 |  |  | 56,186 |  | 55,199 |  | 62.3 |
| Revenue bonds | 5,140 |  | 5,172 |  | 9.2 |  |  | 7,883 |  | 7,850 |  | 8.8 |
Total outside California | 44,616 |  | 45,581 |  | 79.7 |  |  | 64,069 |  | 63,049 |  | 71.1 |
Total obligations of state and political subdivisions | $ | 56,035 |  | $ | 57,367 |  | 100.0 | % |  | $ | 90,157 |  | $ | 89,176 |  | 100.0 | %

The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are Texas (28.2%), Florida (9.7%), and Washington (8.3%). 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 $34.8 million and totaled $1,798.7 million at September 30, 2019. New loan originations of $156.1 million in the first nine months of 2019 were distributed across Commercial Banking and Consumer Banking. Loan payoffs totaled $107.8 million in the first nine months. The largest portion of payoffs in 2019 reflected the sale of assets underlying loans and the successful completion of construction projects.
Liabilities
During the first nine months of 2019, total liabilities increased by $54.5 million to $2,259.0 million. Deposits increased $49.7 million in the first nine months of 2019. Non-interest bearing deposits increased $35.2 million in the first nine months of 2019 to $1,101.3 million, and represented 49.5% of total deposits at September 30, 2019, compared to 49.0% at December 31, 2018. We repaid a $7.0 million overnight borrowing from FHLB at year end of 2018. Liabilities as of September 30, 2019 included operating lease liabilities totaling $13.7 million that were recorded in 2019 after the adoption of the new lease accounting standard, as discussed in Notes 2 and 8 to the consolidated financial statements.
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,
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we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of June 30, 2019. There are no conditions or events since that notification that Management believes have changed the Bank’s categories and we expect the Bank to remain well capitalized for prompt corrective action purposes.
In July 2013, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency ("Agencies") finalized regulatory capital rules known as “Basel III.” Fully phased in on January 1, 2019, Basel III required the Bank to maintain (i) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 8.5%, and (ii) a minimum ratio of common equity Tier 1 capital to risk-weighted assets of at least 7.0%, both inclusive of a 2.50% “capital conservation buffer." The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was phased in over a four-year period (increasing by 0.625% each subsequent January 1, until it reached 2.50% on January 1, 2019). In August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion. As a result, Bancorp is no longer subject to separate minimum capital requirements. However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to minimum capital requirements.
The Bancorp’s and Bank’s capital adequacy ratios as of September 30, 2019 and December 31, 2018 are presented in the following tables. Bancorp's Tier 1 capital includes the subordinated debentures, which are not included at the Bank level.

Capital Ratios for Bancorp (dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold1 | Ratio to be a Well Capitalized Bank Holding Company
September 30, 2019 | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
Total Capital (to risk-weighted assets) | $ | 312,801 |  | 15.31 | % | ≥ $ | 204,365 |  | ≥ 10.00 | % | ≥ $ | 204,365 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 295,474 |  | 14.46 | % | ≥ $ | 163,492 |  | ≥ 8.00 | % | ≥ $ | 163,492 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 295,474 |  | 11.92 | % | ≥ $ | 123,958 |  | ≥ 5.00 | % | ≥ $ | 123,958 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 292,783 |  | 14.33 | % | ≥ $ | 132,837 |  | ≥ 6.50 | % | ≥ $ | 132,837 |  | ≥ 6.50 | %
December 31, 2018 |  |  |  |  |  |  |  |  |
Total Capital (to risk-weighted assets) | $ | 305,224 |  | 14.93 | % | ≥ $ | 201,943 |  | ≥ 9.875 | % | ≥ $ | 204,499 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 288,445 |  | 14.10 | % | ≥ $ | 161,043 |  | ≥ 7.875 | % | ≥ $ | 163,599 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 288,445 |  | 11.54 | % | ≥ $ | 100,011 |  | ≥ 4.000 | % | ≥ $ | 125,013 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 285,805 |  | 13.98 | % | ≥ $ | 130,368 |  | ≥ 6.375 | % | ≥ $ | 132,925 |  | ≥ 6.50 | %

1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.
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Capital Ratios for the Bank (dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold1 | Ratio to be Well Capitalized under Prompt Corrective Action Provisions
September 30, 2019 | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |
Total Capital (to risk-weighted assets) | $ | 298,291 |  | 14.60 | % | ≥ $ | 204,347 |  | ≥ 10.00 | % | ≥ $ | 204,347 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 280,964 |  | 13.75 | % | ≥ $ | 163,478 |  | ≥ 8.00 | % | ≥ $ | 163,478 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 280,964 |  | 11.33 | % | ≥ $ | 123,945 |  | ≥ 5.00 | % | ≥ $ | 123,945 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 280,964 |  | 13.75 | % | ≥ $ | 132,826 |  | ≥ 6.50 | % | ≥ $ | 132,826 |  | ≥ 6.50 | %
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Total Capital (to risk-weighted assets) | $ | 285,969 |  | 13.98 | % | ≥ $ | 201,297 |  | ≥ 9.875 | % | ≥ $ | 204,483 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 269,191 |  | 13.16 | % | ≥ $ | 161,031 |  | ≥ 7.875 | % | ≥ $ | 163,587 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 269,191 |  | 10.77 | % | ≥ $ | 99,994 |  | ≥ 4.000 | % | ≥ $ | 124,992 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 269,191 |  | 13.16 | % | ≥ $ | 130,358 |  | ≥ 6.375 | % | ≥ $ | 132,914 |  | ≥ 6.50 | %

1 The adequately capitalized threshold includes the capital conservation buffer that was effective in 2018 and fully phased-in on January 1, 2019.
Liquidity
The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as discussed in Note 6 to the Consolidated Financial Statements in ITEM 1 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the President and Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. ALCO has adopted a contingency 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 (including local government agencies) may cause short-term fluctuations in their deposit balances held with us.
At September 30, 2019 our liquid assets, which included unencumbered available-for-sale securities and cash, totaled $471.0 million, an increase of $37.8 million from December 31, 2018. Our cash and cash equivalents increased $148.3 million from December 31, 2018. Significant sources of liquidity during the first nine months of 2019 included $150.5 million in paydowns, maturities and sales of investment securities, an increase in deposits of $49.7 million, and $30.6 million net cash provided by operating activities. Significant uses of liquidity during the first nine months of 2019 included $32.9 in loan originations net of collections, $18.9 million in investment securities purchased, $13.3 million in common stock repurchases, $7.0 million repayment of borrowing from FHLB, $8.1 million in cash dividends paid on common stock to our shareholders, and $1.9 million in purchases of bank-owned life insurance policies. Refer to the Consolidated Statement of Cash Flows in this Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base will provide adequate liquidity to fund our operations.
Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $481.7 million at September 30, 2019. 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, $62.9 million of time deposits will mature. We expect new deposits to replace these funds. Our emphasis on local deposits combined with our equity position, provides a very stable funding base.
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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 $14.3 million of cash at September 30, 2019. The cash level at Bancorp is deemed sufficient to cover Bancorp's operational needs, share repurchases, and cash dividends to shareholders through mid 2020. Management anticipates that the Bank will continue to have sufficient earnings to provide dividends to Bancorp to meet its funding requirements going forward.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant form of market risk is interest rate risk, which is inherent in our investment, borrowing, lending and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.
To mitigate interest rate risk, the structure of 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 in different interest rate environments.
From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. See Note 9 to the Consolidated Financial Statements in this Form 10-Q.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, Management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At September 30, 2019, interest rate risk was within policy guidelines established by ALCO and the Board. One set of interest rates modeled and evaluated against flat interest rates is a series of immediate parallel shifts in the yield curve. These are provided in the following table as an example rather than an expectation of likely interest rate movements.

Immediate Changes in Interest Rates (in basis points) | Estimated Change in Net Interest Income in Year 1, as percent of Net Interest Income |  | Estimated Change in Net Interest Income in Year 2, as percent of Net Interest Income |
up 400 | (1.7 | )% | 8.7 | %
up 300 | (1.0 | )% | 7.4 | %
up 200 | (0.4 | )% | 5.9 | %
up 100 | — | % | 3.7 | %
down 100 | (4.2 | )% | (8.9 | )%
down 200 | (7.9 | )% | (15.9 | )%

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change. Further, the actual rates and timing of prepayments on loans and
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investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, of the 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 quarter ended September 30, 2019, there were no significant changes that materially affected, or are reasonably likely to affect, our internal control over financial reporting. The term internal control over financial reporting, as defined by Rule 15d-15(f) of the Act, is a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings
Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our 2018 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 2018 Form 10-K. Refer to "Risk Factors" in Item 1A of our 2018 Form 10-K, pages 11 through 18.
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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, which the Board subsequently extended to February 28, 2020. For additional information, refer to Note 7 to the Consolidated Financial Statements in this Form 10-Q.
During the three months ended September 30, 2019, Bancorp repurchased 65,127 shares at an average price of $41.79 per share for a total cost of $2.7 million. The following table reflects repurchases 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
July 1-31, 2019 | 19,070 |  | $ | 42.62 |  | 19,070 |  | $ | 6,730 |
August 1-31, 2019 | 26,019 |  | 41.21 |  | 26,019 |  | 5,657 |
September 1-30, 2019 | 20,038 |  | 41.76 |  | 20,038 |  | 4,819 |
Total | 65,127 |  | $ | 41.79 |  | 65,127 |  |

ITEM 3 Defaults upon Senior Securities
None.
ITEM 4 Mine Safety Disclosures
Not applicable.
ITEM 5 Other Information
None.
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ITEM 6 Exhibits
The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.

|  | Incorporated by Reference |
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith
2.01 | Agreement to Merger and Plan of Reorganization with Bank of Napa, dated July 31, 2017 | 8-K | 001-33572 | 2.1 | August 2, 2017 |
3.01 | Articles of Incorporation, as amended | 10-Q | 001-33572 | 3.01 | November 7, 2007 |
3.02 | Bylaws | 10-Q | 001-33572 | 3.02 | May 9, 2011 |
3.02a | Bylaw Amendment | 8-K | 001-33572 | 3.03 | July 6, 2015 |
4.01 | Rights Agreement, dated July 6, 2017 | 8-A12B | 001-33572 | 4.1 | July 7, 2017 |
10.01 | Employee Stock Ownership Plan | S-8 | 333-218274 | 4.1 | May 26, 2017 |
10.02 | 2017 Employee Stock Purchase Plan | S-8 | 333-221219 | 4.1 | October 30, 2017 |
10.03 | 2017 Equity Plan, as amended | S-8 | 333-227840 | 4.1 | October 15, 2018 |
10.04 | 2010 Director Stock Plan | S-8 | 333-167639 | 4.1 | June 21, 2010 |
10.05 | Form of Indemnification Agreement for Directors and Executive Officers, dated August 9, 2007 | 10-Q | 001-33572 | 10.06 | November 7, 2007 |
10.06 | Form of Employment Agreement, dated January 23, 2009 | 8-K | 001-33572 | 10.1 | January 26, 2009 |
10.07 | 2010 Annual Individual Incentive Compensation Plan | 8-K | 001-33572 | 99.1 | October 21, 2010 |
10.08 | Salary Continuation Agreement for executive officer Russell Colombo, Chief Executive Officer, dated January 1, 2011 | 8-K | 001-33572 | 10.1 | January 6, 2011 |
10.09 | Salary Continuation Agreement for executive officer Peter Pelham, Director of Retail Banking, dated January 1, 2011 | 8-K | 001-33572 | 10.4 | January 6, 2011 |
10.10 | Salary Continuation Agreement for executive officer Tani Girton, Chief Financial Officer, dated October 18, 2013 | 8-K | 001-33572 | 10.2 | November 4, 2014 |
10.11 | Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014 | 8-K | 001-33572 | 10.3 | November 4, 2014 |
10.12 | Salary Continuation Agreement for executive officer Timothy Myers, Executive Vice President and Commercial Banking Manager, dated May 28, 2015 | 8-K | 001-33572 | 10.4 | June 2, 2015 |
10.13 | 2007 Form of Change in Control Agreement | 8-K | 001-33572 | 10.1 | October 31, 2007 |
10.14 | Waiver and Release Agreement by and between James Kimball and Bank of Marin, dated as of July 25, 2019. | 8-K | 001-33572 | 10.1 | July 26, 2019 |
11.01 | Earnings Per Share Computation - included in Note 1 to the Consolidated Financial Statements |  |  |  |  | Filed
31.01 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |  |  |  | Filed
31.02 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  |  |  |  | Filed
32.01 | Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 |  |  |  |  | Filed
101.INS | Inline XBRL Instance Document |  |  |  |  | Filed
101.SCH | Inline XBRL Taxonomy Extension Schema Document |  |  |  |  | Filed
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  |  |  |  | Filed
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |  |  |  |  | Filed
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  |  |  |  | Filed
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |  |  |  |  | Filed

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  |  | Bank of Marin Bancorp
|  |  | (registrant)
| November 8, 2019 |  | /s/ Russell A. Colombo
| Date |  | Russell A. Colombo
|  |  | President &
|  |  | Chief Executive Officer
|  |  | (Principal Executive Officer)
| November 8, 2019 |  | /s/ Tani Girton
| Date |  | Tani Girton
|  |  | Executive Vice President &
|  |  | Chief Financial Officer
|  |  | (Principal Financial Officer)
| November 8, 2019 |  | /s/ David A. Merck
| Date |  | David A. Merck
|  |  | Vice President &
|  |  | Financial Reporting Manager
|  |  | (Principal Accounting Officer)

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