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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 March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)

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

Registrant’s telephone number, including area code: (415) 763-4520
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ |  | Accelerated filer | ☒
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐
Emerging growth company | ☐ |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of April 30, 2021, there were 13,210,129 shares of common stock outstanding.

TABLE OF CONTENTS

PART I | FINANCIAL INFORMATION | 3
ITEM 1. | Financial Statements | 3
| Consolidated Statements of Condition | 3
| Consolidated Statements of Comprehensive Income | 4
| Consolidated Statements of Changes in Stockholders' Equity | 5
| Consolidated Statements of Cash Flows | 6
| Notes to Consolidated Financial Statements | 7
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 28
ITEM 3. | Quantitative and Qualitative Disclosure about Market Risk | 40
ITEM 4. | Controls and Procedures | 41
PART II | OTHER INFORMATION | 41
ITEM 1. | Legal Proceedings | 41
ITEM 1A. | Risk Factors | 42
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 42
ITEM 3. | Defaults Upon Senior Securities | 42
ITEM 4. | Mine Safety Disclosures | 42
ITEM 5. | Other Information | 42
ITEM 6. | Exhibits | 43
SIGNATURES |

Page-2

PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CONDITION March 31, 2021 and December 31, 2020

(in thousands, except share data; unaudited) | March 31, 2021 | December 31, 2020
Assets |  |
Cash, cash equivalents and restricted cash | $ | 142,819 |  | $ | 200,320 |
Investment securities: |  |
Held-to-maturity, at amortized cost (net of zero allowance for credit losses at March 31, 2021 and December 31, 2020 ) | 151,970 |  | 109,036 |
Available-for-sale, at fair value (net of zero allowance for credit losses at March 31, 2021 and December 31, 2020 ) | 518,568 |  | 392,351 |
Total investment securities | 670,538 |  | 501,387 |
Loans, at amortized cost | 2,121,772 |  | 2,088,556 |
Allowance for credit losses | (19,958) |  | (22,874) |
Loans, net of allowance for credit losses | 2,101,814 |  | 2,065,682 |
Bank premises and equipment, net | 4,604 |  | 4,919 |
Goodwill | 30,140 |  | 30,140 |
Core deposit intangible | 3,627 |  | 3,831 |
Operating lease right-of-use assets | 24,559 |  | 25,612 |
Interest receivable and other assets | 80,032 |  | 80,035 |
Total assets | $ | 3,058,133 |  | $ | 2,911,926 |
Liabilities and Stockholders' Equity |  |
Liabilities |  |
Deposits |  |
Non-interest bearing | $ | 1,445,282 |  | $ | 1,354,650 |
Interest bearing |  |
Transaction accounts | 176,390 |  | 183,552 |
Savings accounts | 224,748 |  | 201,507 |
Money market accounts | 714,824 |  | 667,107 |
Time accounts | 94,955 |  | 97,433 |
Total deposits | 2,656,199 |  | 2,504,249 |
Borrowings and other obligations | 30 |  | 58 |
Subordinated debenture | — |  | 2,777 |
Operating lease liabilities | 25,993 |  | 27,062 |
Interest payable and other liabilities | 25,619 |  | 19,527 |
Total liabilities | 2,707,841 |  | 2,553,673 |
Stockholders' Equity |  |
Preferred stock, no par value, Authorized - 5,000,000 shares, none issued | — |  | — |
Common stock, no par value, Authorized - 30,000,000 shares; issued and outstanding - 13,326,509 and 13,500,453 at March 31, 2021 and December 31, 2020, respectively | 118,386 |  | 125,905 |
Retained earnings | 225,600 |  | 219,747 |
Accumulated other comprehensive income, net of taxes | 6,306 |  | 12,601 |
Total stockholders' equity | 350,292 |  | 358,253 |
Total liabilities and stockholders' equity | $ | 3,058,133 |  | $ | 2,911,926 |

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

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| Three months ended |  |  |
(in thousands, except per share amounts; unaudited) | March 31, 2021 | March 31, 2020 |  |  |  |
Interest income |  |  |  |  |  |
Interest and fees on loans | $ | 20,661 |  | $ | 20,887 |  |  |  |  |
Interest on investment securities | 3,129 |  | 4,165 |  |  |  |  |
Interest on federal funds sold and due from banks | 42 |  | 332 |  |  |  |  |
Total interest income | 23,832 |  | 25,384 |  |  |  |  |
Interest expense |  |  |  |  |  |
Interest on interest-bearing transaction accounts | 39 |  | 66 |  |  |  |  |
Interest on savings accounts | 19 |  | 16 |  |  |  |  |
Interest on money market accounts | 286 |  | 971 |  |  |  |  |
Interest on time accounts | 96 |  | 161 |  |  |  |  |
Interest on borrowings and other obligations | — |  | 2 |  |  |  |  |
Interest on subordinated debenture | 1,361 |  | 49 |  |  |  |  |
Total interest expense | 1,801 |  | 1,265 |  |  |  |  |
Net interest income | 22,031 |  | 24,119 |  |  |  |  |
(Reversal of) provision for credit losses on loans | (2,929) |  | 2,200 |  |  |  |  |
Net interest income after (reversal of) provision for credit losses | 24,960 |  | 21,919 |  |  |  |  |
Non-interest income |  |  |  |  |  |
Wealth Management and Trust Services | 488 |  | 504 |  |  |  |  |
Debit card interchange fees | 366 |  | 360 |  |  |  |  |
Service charges on deposit accounts | 281 |  | 451 |  |  |  |  |
Earnings on bank-owned life insurance, net | 257 |  | 275 |  |  |  |  |
Dividends on Federal Home Loan Bank stock | 149 |  | 208 |  |  |  |  |
Merchant interchange fees | 57 |  | 73 |  |  |  |  |
Gains on sale of investment securities, net | — |  | 800 |  |  |  |  |
Other income | 228 |  | 449 |  |  |  |  |
Total non-interest income | 1,826 |  | 3,120 |  |  |  |  |
Non-interest expense |  |  |  |  |  |
Salaries and related benefits | 9,208 |  | 9,477 |  |  |  |  |
Occupancy and equipment | 1,751 |  | 1,663 |  |  |  |  |
Professional services | 863 |  | 544 |  |  |  |  |
Data processing | 819 |  | 786 |  |  |  |  |
Depreciation and amortization | 459 |  | 526 |  |  |  |  |
Information technology | 313 |  | 250 |  |  |  |  |
Amortization of core deposit intangible | 204 |  | 213 |  |  |  |  |
Federal Deposit Insurance Corporation insurance | 179 |  | 2 |  |  |  |  |
Directors' expense | 175 |  | 174 |  |  |  |  |
Charitable contributions | 31 |  | 167 |  |  |  |  |
(Reversal of) provision for credit losses on unfunded loan commitments | (590) |  | 102 |  |  |  |  |
Other expense | 1,410 |  | 1,565 |  |  |  |  |
Total non-interest expense | 14,822 |  | 15,469 |  |  |  |  |
Income before provision for income taxes | 11,964 |  | 9,570 |  |  |  |  |
Provision for income taxes | 3,017 |  | 2,342 |  |  |  |  |
Net income | $ | 8,947 |  | $ | 7,228 |  |  |  |  |
Net income per common share: |  |  |  |  |  |
Basic | $ | 0.67 |  | $ | 0.53 |  |  |  |  |
Diluted | $ | 0.66 |  | $ | 0.53 |  |  |  |  |
Weighted average shares: |  |  |  |  |  |
Basic | 13,363 |  | 13,525 |  |  |  |  |
Diluted | 13,469 |  | 13,656 |  |  |  |  |
Comprehensive income (loss): |  |  |  |  |  |
Net income | $ | 8,947 |  | $ | 7,228 |  |  |  |  |
Other comprehensive (loss) income |  |  |  |  |  |
Change in net unrealized gains on available-for-sale securities | (9,082) |  | 9,812 |  |  |  |  |
Reclassification adjustment for (gains) on available-for-sale securities included in net income | — |  | (800) |  |  |  |  |
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity | 143 |  | 110 |  |  |  |  |
Other comprehensive (loss) income, before tax | (8,939) |  | 9,122 |  |  |  |  |
Deferred tax (benefit) expense | (2,644) |  | 2,697 |  |  |  |  |
Other comprehensive (loss) income, net of tax | (6,295) |  | 6,425 |  |  |  |  |
Total comprehensive income | $ | 2,652 |  | $ | 13,653 |  |  |  |  |

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

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2021 and 2020

(in thousands, except share data; unaudited) | Common Stock | Retained Earnings | Accumulated Other Comprehensive Income, Net of Taxes | Total
Shares | Amount
| Three months ended March 31, 2021
Balance at January 1, 2021 | 13,500,453 |  | $ | 125,905 |  | $ | 219,747 |  | $ | 12,601 |  | $ | 358,253 |
Net income | — |  | — |  | 8,947 |  | — |  | 8,947 |
Other comprehensive loss | — |  | — |  | — |  | (6,295) |  | (6,295) |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 17,180 |  | 38 |  | — |  | — |  | 38 |
Stock issued under employee stock purchase plan | 778 |  | 28 |  | — |  | — |  | 28 |
Stock issued under employee stock ownership plan | 9,000 |  | 332 |  | — |  | — |  | 332 |
Restricted stock granted | 27,054 |  | — |  | — |  | — |  | — |
Restricted stock surrendered for tax withholdings upon vesting | (3,961) |  | (156) |  | — |  | — |  | (156) |
Restricted stock forfeited / cancelled | (3,848) |  | — |  | — |  | — |  | — |
Stock-based compensation - stock options | — |  | 172 |  | — |  | — |  | 172 |
Stock-based compensation - restricted stock | — |  | 443 |  | — |  | — |  | 443 |
Cash dividends paid on common stock ($0.23 per share) | — |  | — |  | (3,094) |  | — |  | (3,094) |
Stock purchased by directors under director stock plan | 519 |  | 18 |  | — |  | — |  | 18 |
Stock issued in payment of director fees | 3,347 |  | 117 |  | — |  | — |  | 117 |
Stock repurchased, net of commissions | (224,013) |  | (8,511) |  | — |  | — |  | (8,511) |
Balance at March 31, 2021 | 13,326,509 |  | $ | 118,386 |  | $ | 225,600 |  | $ | 6,306 |  | $ | 350,292 |
| Three months ended March 31, 2020
Balance at January 1, 2020 | 13,577,008 |  | $ | 129,058 |  | $ | 203,227 |  | $ | 4,503 |  | $ | 336,788 |
Net income | — |  | — |  | 7,228 |  | — |  | 7,228 |
Other comprehensive income | — |  | — |  | — |  | 6,425 |  | 6,425 |
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings | 49,055 |  | 824 |  | — |  | — |  | 824 |
Stock issued under employee stock purchase plan | 547 |  | 16 |  | — |  | — |  | 16 |
Stock issued under employee stock ownership plan | 7,900 |  | 324 |  | — |  | — |  | 324 |
Restricted stock granted | 29,100 |  | — |  | — |  | — |  | — |
Restricted stock surrendered for tax withholdings upon vesting | (2,200) |  | (73) |  | — |  | — |  | (73) |
Restricted stock forfeited / cancelled | (5,787) |  | — |  | — |  | — |  | — |
Stock-based compensation - stock options | — |  | 169 |  | — |  | — |  | 169 |
Stock-based compensation - restricted stock | — |  | 461 |  | — |  | — |  | 461 |
Cash dividends paid on common stock ($0.23 per share) | — |  | — |  | (3,127) |  | — |  | (3,127) |
Stock purchased by directors under director stock plan | 400 |  | 18 |  | — |  | — |  | 18 |
Stock issued in payment of director fees | 2,610 |  | 117 |  | — |  | — |  | 117 |
Stock repurchased, net of commissions | (92,664) |  | (3,230) |  | — |  | — |  | (3,230) |
Balance at March 31, 2020 | 13,565,969 |  | $ | 127,684 |  | $ | 207,328 |  | $ | 10,928 |  | $ | 345,940 |

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

Page-5

BANK OF MARIN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2021 and 2020

(in thousands; unaudited) | March 31, 2021 |  | March 31, 2020
Cash Flows from Operating Activities: |  |  |
Net income | $ | 8,947 |  |  | $ | 7,228 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
(Reversal of) provision for credit losses on loans | (2,929) |  |  | 2,200 |
(Reversal of) provision for credit losses on unfunded loan commitments | (590) |  |  | 102 |
Noncash contribution expense to employee stock ownership plan | 332 |  |  | 324 |
Noncash director compensation expense | 162 |  |  | 75 |
Stock-based compensation expense | 615 |  |  | 630 |
Amortization of core deposit intangible | 204 |  |  | 213 |
Amortization of investment security premiums, net of accretion of discounts | 685 |  |  | (93) |
Accretion of (discounts) premiums on acquired loans | (33) |  |  | 11 |
Accretion of discount on subordinated debenture | 1,347 |  |  | 17 |
Net change in deferred loan origination costs/fees | 2,658 |  |  | (225) |
Gain on sale of investment securities | — |  |  | (800) |
Depreciation and amortization | 459 |  |  | 526 |
Earnings on bank-owned life insurance policies | (257) |  |  | (275) |
Net changes in: |  |  |
Interest receivable and other assets | 2,901 |  |  | 293 |
Interest payable and other liabilities | (2,065) |  |  | (701) |
Total adjustments | 3,489 |  |  | 2,297 |
Net cash provided by operating activities | 12,436 |  |  | 9,525 |
Cash Flows from Investing Activities: |  |  |
Purchase of held-to-maturity securities | (41,607) |  |  | — |
Purchase of available-for-sale securities | (151,828) |  |  | (54,902) |
Proceeds from sale of available-for-sale securities | — |  |  | 27,442 |
Proceeds from paydowns/maturities of held-to-maturity securities | 8,600 |  |  | 6,217 |
Proceeds from paydowns/maturities of available-for-sale securities | 16,060 |  |  | 20,924 |
Loans originated and principal collected, net | (36,543) |  |  | 1,117 |
Purchase of bank-owned life insurance policies | — |  |  | (941) |
Purchase of premises and equipment | (144) |  |  | (146) |
Cash paid for low income housing tax credit investment | (313) |  |  | (1,251) |
Net cash used in investing activities | (205,775) |  |  | (1,540) |
Cash Flows from Financing Activities: |  |  |
Net increase (decrease) in deposits | 151,950 |  |  | (29,379) |
Proceeds from stock options exercised | 38 |  |  | 824 |
Payment of tax withholdings for vesting of restricted stock | (156) |  |  | (73) |
Proceeds from stock issued under employee and director stock purchase plans | 46 |  |  | 34 |
Stock repurchased, net of commissions | (8,792) |  |  | (3,333) |
Repayment of subordinated debenture including execution costs | (4,126) |  |  | — |
Repayment of finance lease obligations | (28) |  |  | (45) |
Cash dividends paid on common stock | (3,094) |  |  | (3,127) |
Net cash provided by (used in) financing activities | 135,838 |  |  | (35,099) |
Net decrease in cash, cash equivalents and restricted cash | (57,501) |  |  | (27,114) |
Cash, cash equivalents and restricted cash at beginning of period | 200,320 |  |  | 183,388 |
Cash, cash equivalents and restricted cash at end of period | $ | 142,819 |  |  | $ | 156,274 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid in interest | $ | 492 |  |  | $ | 1,260 |
Cash paid in income taxes | $ | — |  |  | $ | — |
Supplemental disclosure of noncash investing and financing activities: |  |  |
Change in net unrealized gain or loss on available-for-sale securities | $ | (9,082) |  |  | $ | 9,812 |
Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity | $ | 143 |  |  | $ | 110 |
Purchase of investment security not yet settled | $ | 10,000 |  |  | $ | — |
Stock issued to employee stock ownership plan | $ | 332 |  |  | $ | 324 |
Stock issued in payment of director fees | $ | 117 |  |  | $ | 117 |
Repurchase of stock not yet settled | $ | 132 |  |  | $ | — |
Restricted cash 1 | $ | — |  |  | $ | — |

1 Restricted cash includes reserve requirements held with the Federal Reserve Bank of San Francisco. In response to the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement ratios to zero percent effective March 26, 2020.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).
Page-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of 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. Certain items in prior financial statements have been reclassified to conform to the current presentation. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.
The NorCal Community Bancorp Trust II (the "Trust") was formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trust (a variable interest entity), therefore the Trust is not consolidated in our consolidated financial statements, but rather the subordinated debenture is shown as a liability on our consolidated statements of condition. Bancorp's investment in the securities of the Trust is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for additional information on the subordinated debenture due to NorCal Community Bancorp Trust II and the early redemption that occurred on March 15, 2021.
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.

| Three months ended |  |
(in thousands, except per share data) | March 31, 2021 | March 31, 2020 |  |  |
Weighted average basic common shares outstanding | 13,363 |  | 13,525 |  |  |  |
Potentially dilutive common shares related to: |  |  |  |  |
Stock options | 81 |  | 106 |  |  |  |
Unvested restricted stock awards | 25 |  | 25 |  |  |  |
Weighted average diluted shares outstanding | 13,469 |  | 13,656 |  |  |  |
Net income | $ | 8,947 |  | $ | 7,228 |  |  |  |
Basic EPS | $ | 0.67 |  | $ | 0.53 |  |  |  |
Diluted EPS | $ | 0.66 |  | $ | 0.53 |  |  |  |
Weighted average anti-dilutive common shares not included in the calculation of diluted EPS | 80 |  | 70 |  |  |  |

Page-7

Note 2: Recently Adopted and Issued Accounting Standards
Accounting Standards Adopted in 2021
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (ASC Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to reduce the cost and complexity related to accounting for income taxes by removing certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and simplifying aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (ASC Topic 321), Investments - Equity Method and Joint Ventures (ASC Topic 323), and Derivatives and Hedging (ASC Topic 815) - Clarifying the Interactions between ASC 321, ASC 323, and ASC 815. Among other things, this ASU clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ASC 323, for the purposes of applying the measurement alternative in accordance with ASC 321. We adopted this ASU prospectively on January 1, 2021, which did not have a material impact on our financial condition or results of operations.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. This ASU was issued as part of the Board's ongoing project to improve codification or correct unintended application. This ASU adds clarification to ASU 2017-08, which the Bank early-adopted in 2017, and delineates whether an entity with callable debt securities that have multiple call dates should amortize the amount above that which is repayable, to the next call date. We adopted this ASU prospectively on January 1, 2021. Because this ASU was narrow in scope and for clarification purposes, it did not have a material impact on our financial condition and results of operations.
Accounting Standards Not Yet Effective
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden of accounting for, or recognizing the effects of reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in this update at an interim period subsequent to March 12, 2020 with adoption methods varying based on transaction type. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The main amendments in this ASU are intended to clarify certain optional expedients and scope of derivative instruments. The amendments are elective and effective immediately upon issuance of this ASU. Amendments may be elected through December 31, 2022. We have not elected to apply amendments at this time, however, will assess the applicability of this ASU to us as we continue to monitor guidance for reference rate reform from FASB and its impact on our financial condition and results of operations.
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.
Page-8

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant management judgment and estimation.
The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.

(in thousands) Description of Financial Instruments | Carrying Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Measurement Categories: Changes in Fair Value Recorded In 1
March 31, 2021 |  |  |  |  |
Securities available-for-sale: |  |  |  |  |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 287,323 |  | $ | — |  | $ | 287,323 |  | $ | — |  | OCI
SBA-backed securities | 29,218 |  | — |  | 29,218 |  | — |  | OCI
Debentures of government sponsored agencies | 74,473 |  | — |  | 74,473 |  | — |  | OCI
Obligations of state and political subdivisions | 121,765 |  | — |  | 121,765 |  | — |  | OCI
Corporate bonds | 5,789 |  | — |  | 5,789 |  | — |  | OCI
Derivative financial liabilities (interest rate contracts) | 1,193 |  | — |  | 1,193 |  | — |  | NI
December 31, 2020 |  |  |  |  |
Securities available-for-sale: |  |  |  |  |
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies | $ | 228,651 |  | $ | — |  | $ | 228,651 |  | $ | — |  | OCI
SBA-backed securities | 32,862 |  | — |  | 36,286 |  | — |  | OCI
Debentures of government sponsored agencies | 20,186 |  | — |  | 20,186 |  | — |  | OCI
Obligations of state and political subdivisions | 110,652 |  | — |  | 110,652 |  | — |  | OCI
Derivative financial liabilities (interest rate contracts) | 1,912 |  | — |  | 1,912 |  | — |  | NI

1 Other comprehensive income ("OCI") or net income ("NI").
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. 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 March 31, 2021 and December 31, 2020, there were no Level 1 or Level 3 securities.
Held-to-maturity securities may be written down to fair value as a result of impairment through a provision for credit losses in investments securities. We did not record any write-downs during the three months ended March 31, 2021 or March 31, 2020. Fair value of held-to-maturity securities is determined using the same techniques discussed above for available-for-sale securities.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap
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("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals. Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements. We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using OIS curves as of the measurement date. When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties. We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). As of March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we held shares of Federal Home Loan Bank ("FHLB") of San Francisco stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of March 31, 2021 or December 31, 2020. The values are discussed in Note 4, Investment Securities.

| March 31, 2021 |  | December 31, 2020
(in thousands) | Carrying Amounts | Fair Value | Fair Value Hierarchy |  | Carrying Amounts | Fair Value | Fair Value Hierarchy
Financial assets (recorded at amortized cost) |  |  |  |  |  |
Cash and cash equivalents | $ | 142,819 |  | $ | 142,819 |  | Level 1 |  | $ | 200,320 |  | $ | 200,320 |  | Level 1
Investment securities held-to-maturity | 151,970 |  | 156,756 |  | Level 2 |  | 109,036 |  | 115,185 |  | Level 2
Loans, net | 2,101,814 |  | 2,114,691 |  | Level 3 |  | 2,065,682 |  | 2,089,192 |  | Level 3
Interest receivable | 10,589 |  | 10,589 |  | Level 2 |  | 10,922 |  | 10,922 |  | Level 2
Financial liabilities (recorded at amortized cost) |  |  |  |  |  |
Time deposits | 94,955 |  | 95,241 |  | Level 2 |  | 97,433 |  | 97,769 |  | Level 2
Subordinated debenture | — |  | — |  | Level 3 |  | 2,777 |  | 3,115 |  | Level 3
Interest payable | 59 |  | 59 |  | Level 2 |  | 97 |  | 97 |  | Level 2

Fair value of loans is based on exit price techniques and obtained from an independent third-party that uses its proprietary valuation model and methodology and may not reflect actual or prospective market valuations. The discounted cash flow valuation approach reflects key inputs and assumptions such as loan probability of default, loss given default, prepayment speed, and market discount rates.
Fair value of fixed-rate time deposits is estimated by discounting future contractual cash flows using discount rates that reflect the current market rates offered for time deposits of similar remaining maturities.
Fair value of the subordinated debenture is estimated using a discounted cash flow approach based on current interest rates for similar financial instruments adjusted for credit and liquidity spreads.
The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of March 31, 2021 or December 31, 2020.
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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 enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table.
A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of March 31, 2021 and December 31, 2020 is presented below.

Held-to-maturity: | Amortized Cost 1 | Allowance for Credit Losses | Net Carrying Amount | Gross Unrealized | Fair Value |
(in thousands) | Gains | (Losses) |
March 31, 2021 |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 78,227 |  | $ | — |  | $ | 78,227 |  | $ | 3,283 |  | $ | — |  | $ | 81,510 |  |
CMOs issued by FHLMC | 30,207 |  | — |  | 30,207 |  | 1,105 |  | (189) |  | 31,123 |  |
CMOs issued by FNMA | 7,305 |  | — |  | 7,305 |  | 347 |  | — |  | 7,652 |  |
SBA-backed securities | 5,699 |  | — |  | 5,699 |  | 227 |  | — |  | 5,926 |  |
Debentures of government-sponsored agencies | 29,950 |  | — |  | 29,950 |  | — |  | — |  | 29,950 |  |
Obligations of state and political subdivisions | 582 |  | — |  | 582 |  | 13 |  | — |  | 595 |  |
Total held-to-maturity | $ | 151,970 |  | $ | — |  | $ | 151,970 |  | $ | 4,975 |  | $ | (189) |  | $ | 156,756 |  |
December 31, 2020 |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 65,579 |  | $ | — |  | $ | 65,579 |  | $ | 3,924 |  | $ | — |  | $ | 69,503 |  |
CMOs issued by FHLMC | 27,201 |  | — |  | 27,201 |  | 1,441 |  | — |  | 28,642 |  |
CMOs issued by FNMA | 8,042 |  | — |  | 8,042 |  | 363 |  | — |  | 8,405 |  |
SBA-backed securities | 6,547 |  | — |  | 6,547 |  | 400 |  | — |  | 6,947 |  |
Obligations of state and political subdivisions | 1,667 |  | — |  | 1,667 |  | 21 |  | — |  | 1,688 |  |
Total held-to-maturity | $ | 109,036 |  | $ | — |  | $ | 109,036 |  | $ | 6,149 |  | $ | — |  | $ | 115,185 |  |
1 Amortized cost and fair values exclude accrued interest receivable of $295 thousand and $366 thousand at March 31, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. |

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected.
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The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions by Moody's and/or Standard & Poor's bond ratings as of March 31, 2021.

(in thousands) | Obligations of state and political subdivisions |  |  |  |
AA | $ | 377 |  |  |  |  |
A | 205 |  |  |  |  |
Total | $ | 582 |  |  |  |  |

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

Available-for-sale: | Amortized Cost 1 | Gross Unrealized | Allowance for Credit Losses | Fair Value
(in thousands) | Gains | (Losses)
March 31, 2021 |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 65,871 |  | $ | 2,199 |  | $ | (56) |  | $ | — |  | $ | 68,014 |
CMOs issued by FHLMC | 168,589 |  | 5,525 |  | (948) |  | — |  | 173,166 |
CMOs issued by FNMA | 21,663 |  | 537 |  | (31) |  | — |  | 22,169 |
CMOs issued by GNMA | 23,738 |  | 236 |  | — |  | — |  | 23,974 |
SBA-backed securities | 28,059 |  | 1,212 |  | (53) |  | — |  | 29,218 |
Debentures of government- sponsored agencies | 76,313 |  | 201 |  | (2,041) |  | — |  | 74,473 |
Obligations of state and political subdivisions | 118,118 |  | 3,842 |  | (195) |  | — |  | 121,765 |
Corporate bonds | 5,986 |  | — |  | (197) |  | — |  | 5,789 |
Total available-for-sale | $ | 508,337 |  | $ | 13,752 |  | $ | (3,521) |  | $ | — |  | $ | 518,568 |
December 31, 2020 |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 50,686 |  | $ | 2,530 |  | $ | — |  | $ | — |  | $ | 53,216 |
CMOs issued by FHLMC | 143,267 |  | 7,925 |  | (1) |  | — |  | 151,191 |
CMOs issued by FNMA | 16,450 |  | 580 |  | — |  | — |  | 17,030 |
CMOs issued by GNMA | 6,863 |  | 351 |  | — |  | — |  | 7,214 |
SBA-backed securities | 30,941 |  | 1,976 |  | (55) |  | — |  | 32,862 |
Debentures of government- sponsored agencies | 19,944 |  | 266 |  | (24) |  | — |  | 20,186 |
Obligations of state and political subdivisions | 104,887 |  | 5,765 |  | — |  | — |  | 110,652 |
Total available-for-sale | $ | 373,038 |  | $ | 19,393 |  | $ | (80) |  | $ | — |  | $ | 392,351 |
1 Amortized cost and fair value exclude accrued interest receivable of $1.9 million at both March 31, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.

The amortized cost a nd fair value of investment debt securities by contractual maturity at March 31, 2021 and December 31, 2020 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.

| March 31, 2021 |  | December 31, 2020
| Held-to-Maturity |  | Available-for-Sale |  | Held-to-Maturity |  | Available-for-Sale
(in thousands) | Amortized Cost | Fair Value |  | Amortized Cost | Fair Value |  | Amortized Cost | Fair Value |  | Amortized Cost | Fair Value
Within one year | $ | 246 |  | $ | 248 |  |  | $ | 15,013 |  | $ | 15,219 |  |  | $ | 246 |  | $ | 250 |  |  | $ | 11,530 |  | $ | 11,687 |
After one but within five years | 8,847 |  | 9,284 |  |  | 55,101 |  | 57,955 |  |  | 7,550 |  | 7,961 |  |  | 59,028 |  | 62,397 |
After five years through ten years | 62,415 |  | 65,241 |  |  | 193,424 |  | 198,301 |  |  | 52,113 |  | 55,872 |  |  | 144,908 |  | 154,089 |
After ten years | 80,462 |  | 81,983 |  |  | 244,799 |  | 247,093 |  |  | 49,127 |  | 51,102 |  |  | 157,572 |  | 164,178 |
Total | $ | 151,970 |  | $ | 156,756 |  |  | $ | 508,337 |  | $ | 518,568 |  |  | $ | 109,036 |  | $ | 115,185 |  |  | $ | 373,038 |  | $ | 392,351 |

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

| Three months ended |  |
(in thousands) | March 31, 2021 | March 31, 2020 |  |  |
Available-for-sale: |  |  |  |  |
Sales proceeds | $ | — |  | $ | 27,442 |  |  |  |
Gross realized gains | — |  | 800 |  |  |  |

Pledged investment securities are shown in the following table:

(in thousands) | March 31, 2021 | December 31, 2020
Pledged to the State of California: |  |
Secure public deposits in compliance with the Local Agency Security Program | $ | 123,085 |  | $ | 131,051 |
Collateral for trust deposits | 735 |  | 751 |
Total investment securities pledged to the State of California | 123,820 |  | 131,802 |
Collateral for Wealth Management and Trust Services checking account | 614 |  | 629 |
Total pledged investment securities | $ | 124,434 |  | $ | 132,431 |

There were 29 and 10 securities in unrealized loss positions at March 31, 2021 and December 31, 2020, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:

March 31, 2021 | < 12 continuous months |  | ≥ 12 continuous months |  | Total securities in a loss position
(in thousands) | Fair value | Unrealized loss |  | Fair value | Unrealized loss |  | Fair value | Unrealized loss
Held-to-maturity: |  |  |  |  |  |  |  |
CMOs issued by FHLMC | $ | 4,235 |  | $ | (189) |  |  | $ | — |  | $ | — |  |  | $ | 4,235 |  | $ | (189) |
Total held-to-maturity | 4,235 |  | (189) |  |  | — |  | — |  |  | 4,235 |  | (189) |
Available-for-sale: |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 10,013 |  | (56) |  |  | — |  | — |  |  | 10,013 |  | (56) |
SBA-backed securities | — |  | — |  |  | 1,699 |  | (53) |  |  | 1,699 |  | (53) |
CMOs issued by FNMA | 7,304 |  | (31) |  |  | — |  | — |  |  | 7,304 |  | (31) |
CMOs issued by FHLMC | 32,658 |  | (948) |  |  | — |  | — |  |  | 32,658 |  | (948) |
Debentures of government- sponsored agencies | 53,289 |  | (2,041) |  |  | — |  | — |  |  | 53,289 |  | (2,041) |
Obligations of state and political subdivisions | 28,529 |  | (195) |  |  | — |  | — |  |  | 28,529 |  | (195) |
Corporate bonds | 5,789 |  | (197) |  |  | — |  | — |  |  | 5,789 |  | (197) |
Total available-for-sale | 137,582 |  | (3,468) |  |  | 1,699 |  | (53) |  |  | 139,281 |  | (3,521) |
Total temporarily impaired securities | $ | 141,817 |  | $ | (3,657) |  |  | $ | 1,699 |  | $ | (53) |  |  | $ | 143,516 |  | $ | (3,710) |

December 31, 2020 | < 12 continuous months |  | ≥ 12 continuous months |  | Total securities in a loss position
(in thousands) | Fair value | Unrealized loss |  | Fair value | Unrealized loss |  | Fair value | Unrealized loss
Available-for-sale: |  |  |  |  |  |  |  |
SBA-backed securities | $ | — |  | $ | — |  |  | $ | 1,790 |  | $ | (55) |  |  | $ | 1,790 |  | $ | (55) |
CMOs issued by FHLMC | 5,975 |  | (1) |  |  | — |  | — |  |  | 5,975 |  | (1) |
Debentures of government- sponsored agencies | 3,943 |  | (24) |  |  | — |  | — |  |  | 3,943 |  | (24) |
Total available-for-sale | 9,918 |  | (25) |  |  | 1,790 |  | (55) |  |  | 11,708 |  | (80) |
Total temporarily impaired securities | $ | 9,918 |  | $ | (25) |  |  | $ | 1,790 |  | $ | (55) |  |  | $ | 11,708 |  | $ | (80) |

As of March 31, 2021, the investment portfolio included 5 investment securities that had been in a continuous loss position for twelve months or more and 24 investment securities that had been in a loss position for less than twelve months.
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Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.
Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements.
At March 31, 2021, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. Therefore, no allowances for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2021.
Non-Marketable Securities Included in Other Assets
FHLB Capital Stock
As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $11.9 million of FHLB stock included in other assets on the consolidated statements of condition at both March 31, 2021 and December 31, 2020. 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 March 31, 2021 and December 31, 2020. On April 29, 2021, FHLB announced a cash dividend for the first quarter of 2021 at an annualized dividend rate of 6.00% to be distributed in mid-May 2021. Cash dividends paid on FHLB capital stock are recorded as non-interest income.
VISA Inc. Class B Common Stock
As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at March 31, 2021 and December 31, 2020. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6228 both at March 31, 2021 and December 31, 2020, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $3.6 million and $3.7 million at March 31, 2021 and December 31, 2020, respectively. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.
Low Income Housing Tax Credits
We invest in low-income housing tax credit funds as a limited partner, which totaled $3.4 million and $3.5 million recorded in other assets as of March 31, 2021 and December 31, 2020, respectively. In the first three months of 2021, we recognized $160 thousand of low-income housing tax credits and other tax benefits, offset by $135 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31, 2021, our unfunded commitments for these low-income housing tax credit funds totaled $508 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first three months of 2021 or 2020, as the value of the future tax benefits exceeds the carrying value of the investments.
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Note 5: Loans and Allowance for Credit Losses
Under the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard form January 1, 2020 to December 31, 2020. Upon adoption we used a modified retrospective method effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings. The cumulative adjustment to retained earnings was recorded, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019. Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the CECL accounting standards and have not been included below. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for for additional information regarding the adoption of CECL. In addition, refer to Note 5 under Part I, Item 1, of our March 31, 2020 Form 10-Q for prior period information.
The following table presents the amortized cost of loans by class as of March 31, 2021 and December 31, 2020.

(in thousands) | March 31, 2021 | December 31, 2020
Commercial and industrial | $ | 545,069 |  | $ | 498,408 |
Real estate: |  |
Commercial owner-occupied | 308,266 |  | 304,963 |
Commercial investor-owned | 955,021 |  | 961,208 |
Construction | 71,066 |  | 73,046 |
Home equity | 96,575 |  | 104,813 |
Other residential | 124,383 |  | 123,395 |
Installment and other consumer loans | 21,392 |  | 22,723 |
Total loans, at amortized cost 1 | 2,121,772 |  | 2,088,556 |
Allowance for credit losses on loans | (19,958) |  | (22,874) |
Total loans, net | $ | 2,101,814 |  | $ | 2,065,682 |

1 Amortized cost includes net deferred loan origination fees of $(6.7) million and $(4.9) million at March 31, 2021 and December 31, 2020, respectively. Amounts are also net of unrecognized purchase discounts of $782 thousand and $815 thousand at March 31, 2021 and December 31, 2020, respectively. Amortized cost excludes accrued interest, which totaled $8.5 million and $8.8 million at March 31, 2021 and December 31, 2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition.
Lending Risks
Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans.
In April 2020, the Bank began participating in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). As of March 31, 2021, there were 2,513 PPP loans outstanding. PPP loans totaling $365.0 million (net of $8.0 million in unrecognized fees and costs) and $291.6 million (net of $5.4 million in unrecognized fees and costs) as of March 31, 2021 and December 31, 2020, respectively, were included in commercial and industrial loan balances. Of the PPP loans outstanding as of March 31, 2021, 841 loans totaling $119.5 million funded during the first quarter of 2021 under the second round of the PPP stimulus plan. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully
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guaranteed by the SBA and have virtually no risk of loss. We expect the vast majority of the PPP loans to be fully forgiven by the SBA.
Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow 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 downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio.
Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project.
Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans 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.
Credit Quality Indicators
We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows:
Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period.
Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification.
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
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loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies.
Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent.
We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly.
The following tables present the loan portfolio by loan class, origination year and internal risk rating as of March 31, 2021 and December 31, 2020. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.

(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost |
March 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total
Commercial and industrial: |  |  |  |  |  |  |  |
Pass | $ | 116,598 |  | $ | 264,838 |  | $ | 21,201 |  | $ | 11,692 |  | $ | 4,111 |  | $ | 36,865 |  | $ | 76,742 |  | $ | 532,047 |
Special Mention | — |  | — |  | 812 |  | 598 |  | 115 |  | 8 |  | 8,954 |  | 10,487 |
Substandard | — |  | 1,649 |  | 390 |  | — |  | — |  | — |  | 496 |  | 2,535 |
Total commercial and industrial | $ | 116,598 |  | $ | 266,487 |  | $ | 22,403 |  | $ | 12,290 |  | $ | 4,226 |  | $ | 36,873 |  | $ | 86,192 |  | $ | 545,069 |
Commercial real estate, owner-occupied: |  |  |  |  |  |  |  |
Pass | $ | 10,035 |  | $ | 30,459 |  | $ | 27,147 |  | $ | 41,816 |  | $ | 41,962 |  | $ | 110,896 |  | $ | — |  | $ | 262,315 |
Special Mention | — |  | — |  | — |  | 2,363 |  | 17,076 |  | 12,863 |  | — |  | 32,302 |
Substandard | — |  | 7,147 |  | 297 |  | — |  | — |  | 6,205 |  | — |  | 13,649 |
Total commercial real estate, owner-occupied | $ | 10,035 |  | $ | 37,606 |  | $ | 27,444 |  | $ | 44,179 |  | $ | 59,038 |  | $ | 129,964 |  | $ | — |  | $ | 308,266 |
Commercial real estate, investor-owned: |  |  |  |  |  |  |  |
Pass | $ | 29,585 |  | $ | 161,213 |  | $ | 146,537 |  | $ | 170,153 |  | $ | 87,813 |  | $ | 336,840 |  | $ | 110 |  | $ | 932,251 |
Special Mention | — |  | — |  | 6,808 |  | — |  | 1,811 |  | 4,581 |  | — |  | 13,200 |
Substandard | — |  | — |  | 2,715 |  | 4,428 |  | — |  | 2,427 |  | — |  | 9,570 |
Total commercial real estate, investor-owned | $ | 29,585 |  | $ | 161,213 |  | $ | 156,060 |  | $ | 174,581 |  | $ | 89,624 |  | $ | 343,848 |  | $ | 110 |  | $ | 955,021 |
Construction: |  |  |  |  |  |  |  |
Pass | $ | 6,533 |  | $ | 29,510 |  | $ | 26,108 |  | $ | 8,915 |  | $ | — |  | $ | — |  | $ | — |  | $ | 71,066 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total construction | $ | 6,533 |  | $ | 29,510 |  | $ | 26,108 |  | $ | 8,915 |  | $ | — |  | $ | — |  | $ | — |  | $ | 71,066 |
Home equity: |  |  |  |  |  |  |  |
Pass | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 793 |  | $ | 95,115 |  | $ | 95,908 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | 388 |  | 279 |  | 667 |
Total home equity | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 1,181 |  | $ | 95,394 |  | $ | 96,575 |
Other residential: |  |  |  |  |  |  |  |
Pass | $ | 5,524 |  | $ | 33,498 |  | $ | 29,371 |  | $ | 23,363 |  | $ | 10,520 |  | $ | 22,107 |  | $ | — |  | $ | 124,383 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total other residential | $ | 5,524 |  | $ | 33,498 |  | $ | 29,371 |  | $ | 23,363 |  | $ | 10,520 |  | $ | 22,107 |  | $ | — |  | $ | 124,383 |
Installment and other consumer: |  |  |  |  |  |  |  |
Pass | $ | 1,757 |  | $ | 2,169 |  | $ | 3,334 |  | $ | 3,076 |  | $ | 1,260 |  | $ | 8,111 |  | $ | 1,685 |  | $ | 21,392 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total installment and other consumer | $ | 1,757 |  | $ | 2,169 |  | $ | 3,334 |  | $ | 3,076 |  | $ | 1,260 |  | $ | 8,111 |  | $ | 1,685 |  | $ | 21,392 |

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(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost |
March 31, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total
Total loans: |  |  |  |  |  |  |  |
Pass | $ | 170,032 |  | $ | 521,687 |  | $ | 253,698 |  | $ | 259,015 |  | $ | 145,666 |  | $ | 515,612 |  | $ | 173,652 |  | $ | 2,039,362 |
Total Special Mention | $ | — |  | $ | — |  | $ | 7,620 |  | $ | 2,961 |  | $ | 19,002 |  | $ | 17,452 |  | $ | 8,954 |  | $ | 55,989 |
Total Substandard | $ | — |  | $ | 8,796 |  | $ | 3,402 |  | $ | 4,428 |  | $ | — |  | $ | 9,020 |  | $ | 775 |  | $ | 26,421 |
Totals | $ | 170,032 |  | $ | 530,483 |  | $ | 264,720 |  | $ | 266,404 |  | $ | 164,668 |  | $ | 542,084 |  | $ | 183,381 |  | $ | 2,121,772 |

(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost |
December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total
Commercial and industrial: |  |  |  |  |  |  |  |
Pass | $ | 308,237 |  | $ | 22,589 |  | $ | 12,596 |  | $ | 4,508 |  | $ | 5,915 |  | $ | 34,282 |  | $ | 85,889 |  | $ | 474,016 |
Special Mention | — |  | 2,034 |  | 1,318 |  | 141 |  | 11 |  | 49 |  | 19,092 |  | 22,645 |
Substandard | 1,747 |  | — |  | — |  | — |  | — |  | — |  | — |  | 1,747 |
Total commercial and industrial | $ | 309,984 |  | $ | 24,623 |  | $ | 13,914 |  | $ | 4,649 |  | $ | 5,926 |  | $ | 34,331 |  | $ | 104,981 |  | $ | 498,408 |
Commercial real estate, owner-occupied: |  |  |  |  |  |  |  |
Pass | $ | 31,029 |  | $ | 27,581 |  | $ | 32,603 |  | $ | 43,843 |  | $ | 12,768 |  | $ | 101,014 |  | $ | — |  | $ | 248,838 |
Special Mention | — |  | — |  | 11,764 |  | 17,062 |  | 7,343 |  | 6,601 |  | — |  | 42,770 |
Substandard | 7,147 |  | — |  | — |  | — |  | 6,208 |  | — |  | — |  | 13,355 |
Total commercial real estate, owner-occupied | $ | 38,176 |  | $ | 27,581 |  | $ | 44,367 |  | $ | 60,905 |  | $ | 26,319 |  | $ | 107,615 |  | $ | — |  | $ | 304,963 |
Commercial real estate, investor-owned: |  |  |  |  |  |  |  |
Pass | $ | 162,300 |  | $ | 144,751 |  | $ | 173,955 |  | $ | 100,842 |  | $ | 94,862 |  | $ | 253,611 |  | $ | 117 |  | $ | 930,438 |
Special Mention | — |  | 10,695 |  | — |  | 1,819 |  | — |  | 8,124 |  | — |  | 20,638 |
Substandard | — |  | 2,716 |  | 4,435 |  | — |  | 1,553 |  | 1,428 |  | — |  | 10,132 |
Total commercial real estate, investor-owned | $ | 162,300 |  | $ | 158,162 |  | $ | 178,390 |  | $ | 102,661 |  | $ | 96,415 |  | $ | 263,163 |  | $ | 117 |  | $ | 961,208 |
Construction: |  |  |  |  |  |  |  |
Pass | $ | 31,654 |  | $ | 30,150 |  | $ | 11,242 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 73,046 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total construction | $ | 31,654 |  | $ | 30,150 |  | $ | 11,242 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 73,046 |
Home equity: |  |  |  |  |  |  |  |
Pass | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 128 |  | $ | 694 |  | $ | 102,614 |  | $ | 103,436 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | 799 |  | 799 |
Substandard | — |  | — |  | — |  | — |  | — |  | 391 |  | 187 |  | 578 |
Total home equity | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 128 |  | $ | 1,085 |  | $ | 103,600 |  | $ | 104,813 |
Other residential: |  |  |  |  |  |  |  |
Pass | $ | 34,447 |  | $ | 31,079 |  | $ | 23,673 |  | $ | 10,574 |  | $ | 6,035 |  | $ | 17,587 |  | $ | — |  | $ | 123,395 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total other residential | $ | 34,447 |  | $ | 31,079 |  | $ | 23,673 |  | $ | 10,574 |  | $ | 6,035 |  | $ | 17,587 |  | $ | — |  | $ | 123,395 |
Installment and other consumer: |  |  |  |  |  |  |  |
Pass | $ | 2,361 |  | $ | 4,382 |  | $ | 3,483 |  | $ | 1,543 |  | $ | 3,423 |  | $ | 4,921 |  | $ | 2,593 |  | $ | 22,706 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Substandard | — |  | — |  | — |  | 17 |  | — |  | — |  | — |  | 17 |
Total installment and other consumer | $ | 2,361 |  | $ | 4,382 |  | $ | 3,483 |  | $ | 1,560 |  | $ | 3,423 |  | $ | 4,921 |  | $ | 2,593 |  | $ | 22,723 |
Total loans: |  |  |  |  |  |  |  |
Pass | $ | 570,028 |  | $ | 260,532 |  | $ | 257,552 |  | $ | 161,310 |  | $ | 123,131 |  | $ | 412,109 |  | $ | 191,213 |  | $ | 1,975,875 |
Total Special Mention | $ | — |  | $ | 12,729 |  | $ | 13,082 |  | $ | 19,022 |  | $ | 7,354 |  | $ | 14,774 |  | $ | 19,891 |  | $ | 86,852 |
Total Substandard | $ | 8,894 |  | $ | 2,716 |  | $ | 4,435 |  | $ | 17 |  | $ | 7,761 |  | $ | 1,819 |  | $ | 187 |  | $ | 25,829 |
Totals | $ | 578,922 |  | $ | 275,977 |  | $ | 275,069 |  | $ | 180,349 |  | $ | 138,246 |  | $ | 428,702 |  | $ | 211,291 |  | $ | 2,088,556 |

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

Loan Aging Analysis by Class
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Total
March 31, 2021 |  |  |  |  |  |  |  |
30-59 days past due | $ | — |  | $ | — |  | $ | 791 |  | $ | — |  | $ | 120 |  | $ | — |  | $ | 136 |  | $ | 1,047 |
60-89 days past due | — |  | — |  | — |  | — |  | 96 |  | — |  | — |  | 96 |
90 days or more past due | — |  | — |  | 878 |  | — |  | — |  | — |  | — |  | 878 |
Total past due | — |  | — |  | 1,669 |  | — |  | 216 |  | — |  | 136 |  | 2,021 |
Current | 545,069 |  | 308,266 |  | 953,352 |  | 71,066 |  | 96,359 |  | 124,383 |  | 21,256 |  | 2,119,751 |
Total loans 1 | $ | 545,069 |  | $ | 308,266 |  | $ | 955,021 |  | $ | 71,066 |  | $ | 96,575 |  | $ | 124,383 |  | $ | 21,392 |  | $ | 2,121,772 |
Non-accrual loans 2 | $ | — |  | $ | 7,147 |  | $ | 1,603 |  | $ | — |  | $ | 455 |  | $ | — |  | $ | — |  | $ | 9,205 |
Non-accrual loans with no allowance | $ | — |  | $ | 7,147 |  | $ | 1,603 |  | $ | — |  | $ | 455 |  | $ | — |  | $ | — |  | $ | 9,205 |
December 31, 2020 |  |  |  |  |  |  |  |
30-59 days past due | $ | — |  | $ | — |  | $ | 1,673 |  | $ | — |  | $ | 274 |  | $ | — |  | $ | 136 |  | $ | 2,083 |
60-89 days past due | — |  | — |  | — |  | — |  | — |  | — |  | 622 |  | 622 |
90 days or more past due | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total past due | — |  | — |  | 1,673 |  | — |  | 274 |  | — |  | 758 |  | 2,705 |
Current | 498,408 |  | 304,963 |  | 959,535 |  | 73,046 |  | 104,539 |  | 123,395 |  | 21,965 |  | 2,085,851 |
Total loans 1 | $ | 498,408 |  | $ | 304,963 |  | $ | 961,208 |  | $ | 73,046 |  | $ | 104,813 |  | $ | 123,395 |  | $ | 22,723 |  | $ | 2,088,556 |
Non-accrual loans 2 | $ | — |  | $ | 7,147 |  | $ | 1,610 |  | $ | — |  | $ | 459 |  | $ | — |  | $ | 17 |  | $ | 9,233 |
Non-accrual loans with no allowance | $ | — |  | $ | 7,147 |  | $ | 1,610 |  | $ | — |  | $ | 459 |  | $ | — |  | $ | 17 |  | $ | 9,233 |

1 There were no loans past due more than ninety days accruing interest at March 31, 2021 or December 31, 2020.
2 None of the non-accrual loans as of March 31, 2021 or December 31, 2020 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three months ended March 31, 2021 and 2020. There were no new loans placed on non accrual status during the three months ended March 31, 2021. Accrued interest of $13 thousand was reversed from interest income for loans that were placed on non-accrual status during the three months ended March 31, 2020.
Collateral Dependent Loans
The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at March 31, 2021 and December 31, 2020.

| Amortized Cost by Collateral Type |
(in thousands) | Commercial Real Estate | Residential Real Estate |  | Other | Total | Allowance for Credit Losses
March 31, 2021 |  |  |  |  |  |
Commercial real estate, owner-occupied | $ | 7,147 |  | $ | — |  |  | $ | — |  | $ | 7,147 |  | $ | — |
Commercial real estate, investor-owned | 1,603 |  | — |  |  | — |  | 1,603 |  | — |
Home equity | — |  | 454 |  |  | — |  | 454 |  | — |
Total | $ | 8,750 |  | $ | 454 |  |  | $ | — |  | $ | 9,204 |  | $ | — |
December 31, 2020 |  |  |  |  |  |
Commercial real estate, owner-occupied | $ | 7,147 |  | $ | — |  |  | $ | — |  | $ | 7,147 |  | $ | — |
Commercial real estate, investor-owned | 1,610 |  | — |  |  | — |  | 1,610 |  | — |
Home equity | — |  | 459 |  |  | — |  | 459 |  | — |
Installment and other consumer | — |  | — |  |  | 17 |  | 17 |  | — |
Total | $ | 8,757 |  | $ | 459 |  |  | $ | 17 |  | $ | 9,233 |  | $ | — |

No collateral-dependent loans were in process of foreclosure at March 31, 2021 or December 31, 2020. In addition, the weighted average loan-to-value of collateral dependent loans was approximately 59.2% at both March 31, 2021 and December 31, 2020.
Troubled Debt Restructuring
Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to
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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.
There were no loans removed from TDR designation during the three months ended March 31, 2021 and 2020.
In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing GAAP. As of March 31, 2021, 13 borrowing relationships with 20 loans totaling $65.4 million were continuing to benefit from payment relief. Subsequent to quarter end and prior to the filing of this report, two relationships with three loans totaling $6.2 million transitioned out of the payment relief program and began making normal contractual payments. The weighted average loan-to-value ratio of the remaining payment relief loans was 40%. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.
The following table summarizes the carrying amount of TDR loans by loan class as of March 31, 2021 and December 31, 2020.

(in thousands) |
Recorded Investment in Troubled Debt Restructurings 1 | March 31, 2021 | December 31, 2020
Commercial and industrial | $ | 854 |  | $ | 1,021 |
Commercial real estate, owner-occupied | 7,147 |  | 7,147 |
Commercial real estate, investor-owned | 1,741 |  | 3,305 |
Home equity | 277 |  | 281 |
Installment and other consumer | 756 |  | 752 |
Total | $ | 10,775 |  | $ | 12,506 |

1 TDR loans on non-accrual status totaled $7.4 million at both March 31, 2021 and December 31, 2020. Unfunded commitments for TDR loans totaled $845 thousand a s of March 31, 2021
The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the recorded investment in the loans prior to modification, and the recorded investment in the loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented, if applicable.

(dollars in thousands) | Number of Contracts Modified | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment at Period End
TDRs during the three months ended March 31, 2021: |  |  |  |
None | — | $ | — |  | $ | — |  | $ | — |
TDRs during the three months ended March 31, 2020: |  |  |  |
Commercial and industrial | 1 | $ | 170 |  | $ | 162 |  | $ | 144 |
Installment and other consumer | 2 | 103 |  | 103 |  | 103 |
Total | 3 | $ | 273 |  | $ | 265 |  | $ | 247 |

The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications. During the three months ended March 31, 2021 and 2020, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due.
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The following table discloses activity in the allowance for credit losses for the periods presented.

Allowance for Credit Losses Rollforward
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total
Three months ended March 31, 2021 |  |  |  |  |  |  |
Beginning balance | $ | 2,530 |  | $ | 2,778 |  | $ | 12,682 |  | $ | 1,557 |  | $ | 738 |  | $ | 998 |  | $ | 291 |  | $ | 1,300 |  | $ | 22,874 |
Provision (reversal) - CECL | (880) |  | (474) |  | (1,826) |  | (254) |  | (218) |  | (241) |  | (36) |  | 1,000 |  | (2,929) |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Recoveries | 4 |  | — |  | — |  | 9 |  | — |  | — |  | — |  | — |  | 13 |
Ending balance | $ | 1,654 |  | $ | 2,304 |  | $ | 10,856 |  | $ | 1,312 |  | $ | 520 |  | $ | 757 |  | $ | 255 |  | $ | 2,300 |  | $ | 19,958 |
Three months ended March 31, 2020 |  |  |  |  |  |  |
Beginning balance | $ | 2,334 |  | $ | 2,462 |  | $ | 8,483 |  | $ | 638 |  | $ | 850 |  | $ | 973 |  | $ | 284 |  | $ | 653 |  | $ | 16,677 |
Provision - incurred loss | 446 |  | 335 |  | 742 |  | 86 |  | 132 |  | 125 |  | 79 |  | 255 |  | 2,200 |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Recoveries | 4 |  | — |  | — |  | 3 |  | — |  | — |  | — |  | — |  | 7 |
Ending balance | $ | 2,784 |  | $ | 2,797 |  | $ | 9,225 |  | $ | 727 |  | $ | 982 |  | $ | 1,098 |  | $ | 363 |  | $ | 908 |  | $ | 18,884 |

We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020. During the first three months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans.
Pledged Loans
Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.103 billion and $1.165 billion at March 31, 2021 and December 31, 2020, respectively. In addition, we pledge eligible TIC loans, which totaled $112.4 million and $113.6 million at March 31, 2021 and December 31, 2020, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). Also, see Note 6, Borrowings.
Related Party Loans
The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $5.9 million at March 31, 2021 and $6.4 million at December 31, 2020. In addition, undisbursed commitments to related parties totaled $9.1 million at March 31, 2021 and December 31, 2020.
Note 6: Borrowings and Other Obligations
Federal Funds Purchased – The Bank had unsecured lines of credit with correspondent banks for overnight borrowings totaling $135.0 million at March 31, 2021 and December 31, 2020. In general, interest rates on these lines approximate the federal funds target rate. We had no overnight borrowings under these credit facilities at March 31, 2021 or December 31, 2020.
Federal Home Loan Bank Borrowings – As of March 31, 2021 and December 31, 2020, the Bank had lines of credit with the FHLB totaling $634.2 million and $642.5 million, respectively, based on eligible collateral of certain loans. There were no FHLB overnight borrowings at March 31, 2021 or December 31, 2020.
Federal Reserve Line of Credit – The Bank has a line of credit with the FRBSF secured by certain residential loans. At March 31, 2021 and December 31, 2020, the Bank had borrowing capacity under this line totaling $77.5 million and $78.7 million, respectively, and had no outstanding borrowings with the FRBSF.
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Subordinated Debenture – As part of an acquisition in 2013, Bancorp assumed a subordinated debenture with a contractual balance of $4.1 million due to NorCal Community Bancorp Trust II (the "Trust"), established for the sole purpose of issuing trust preferred securities. On March 15, 2021, Bancorp redeemed in full the $2.8 million (book value) subordinated debenture due to the Trust, which had an effective interest rate of 5.7% in 2020. The higher effective rate in the first quarter of 2021 included accelerated accretion of the $1.3 million remaining purchase discount due to the early redemption. Accretion was $17 thousand for the three months ended March 31, 2020.
Other Obligations – The Bank leases certain equipment under finance leases, which are included in borrowings and other obligations in the consolidated statements of condition. See Note 8, Commitments and Contingencies, for additional information.
Note 7: Stockholders' Equity
Dividends
On April 16, 2021, Bancorp declared a $0.23 per share cash dividend, payable on May 7, 2021 to shareholders of record at the close of business on April 30, 2021.
Share-Based Payments
The fair value of stock options as of the grant date is recorded as stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting period, with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards. The grant-date fair value of the restricted stock awards, which equals the grant date price, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Beginning in 2018, stock option and restricted stock awards issued include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate the recording of stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the vesting of restricted stock or the exercisability of the stock options, which are based on the scheduled vesting period.
Performance-based stock awards (restricted stock) are issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.
We record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable.
The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense.
Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During the three months ended March 31, 2021, we withheld 27,547 shares totaling $1.1 million at a weighted-average price of $38.87 for cashless exercises. During the three months ended March 31, 2020, we withheld 8,409 shares totaling $346 thousand at a weighted-average price of $41.17 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.
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Share Repurchase Program
On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019. Bancorp's Board of Directors subsequently extended the Share Repurchase Program through February 28, 2020. After expiration of this Share Repurchase Program, our new Share Repurchase Program began on March 1, 2020. The new program was approved on January 24, 2020 by Bancorp Board of Directors, allowing Bancorp to repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. The new share repurchase program, which began on March 1, 2020, was suspended by the Board of Directors on March 20, 2020 in response to the COVID-19 pandemic. The program was reactivated by the Board of Directors on October 23, 2020.
Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock.
As part of the Share Repurchase Program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.
During the three months ended March 31, 2021, Bancorp repurchased 224,013 shares totaling $8.5 million for a cumulative 393,594 shares amounting to $14.3 million under the $25.0 million share repurchase program that was approved by the Board of Directors on January 24, 2020.
Note 8: Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.
Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.
The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:

(in thousands) | March 31, 2021 | December 31, 2020
Commercial lines of credit | $ | 309,469 |  | $ | 287,533 |
Revolving home equity lines | 199,332 |  | 189,035 |
Undisbursed construction loans | 89,605 |  | 41,033 |
Personal and other lines of credit | 10,431 |  | 9,567 |
Standby letters of credit | 1,917 |  | 1,964 |
Total commitments and standby letters of credit | $ | 610,754 |  | $ | 529,132 |

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We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $2.2 million and $2.8 million as of March 31, 2021 and December 31, 2020, respectively, which is recorded in interest payable and other liabilities in the consolidated statements of condition. We adopted the CECL accounting standard on December 31, 2020. We applied the incurred loss method under previous GAAP in determining the allowance for credit losses on unfunded commitments for the three month period ended March 31, 2020. We recorded a $590 thousand reversal of the allowance for credit losses on unfunded commitments for the three months ended March 31, 2021, compared to a $102 thousand provision for credit losses on unfunded commitments for the three month period ended March 31, 2020.
Leases
We lease premises under long-term non-cancelable operating leases with remaining terms of 1 year to 12 years, most of which include escalation clauses and one or more options to extend the lease term, and some of which contain lease termination clauses. Lease terms may include certain renewal options that were considered reasonably certain to be exercised.
We lease certain equipment under finance leases with initial terms of 3 years to 5 years. The equipment finance leases do not contain renewal options, bargain purchase options or residual value guarantees.
The following table shows the balances of operating and finance lease right-of-use assets and lease liabilities.

(in thousands) | March 31, 2021 | December 31, 2020
Operating leases: |  |
Operating lease right-of-use assets | $ | 24,559 |  | $ | 25,612 |
Operating lease liabilities | $ | 25,993 |  | $ | 27,062 |
Finance leases: |  |
Finance lease right-of-use assets | $ | 62 |  | $ | 365 |
Accumulated amortization | (31) |  | (307) |
Finance lease right-of-use assets, net 1 | $ | 31 |  | $ | 58 |
Finance lease liabilities 2 | $ | 30 |  | $ | 58 |
1 Included in premises and equipment in the consolidated statements of condition. |
2 Included in borrowings and other obligations in the consolidated statements of condition. |

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

| Three months ended
(in thousands) | March 31, 2021 | March 31, 2020
Right-of-use assets obtained in exchange for operating lease liabilities | $ | — |  | $ | 12,178 |
Right-of-use assets obtained in exchange for finance lease liabilities | $ | — |  | $ | 18 |

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

| Three months ended |  |
(in thousands) | March 31, 2021 | March 31, 2020 |  |  |
Operating lease cost | $ | 1,164 |  | $ | 1,055 |  |  |  |
Variable lease cost | — |  | 2 |  |  |  |
Total operating lease cost 1 | $ | 1,164 |  | $ | 1,057 |  |  |  |
Finance lease cost: |  |  |  |  |
Amortization of right-of-use assets 2 | $ | 27 |  | $ | 44 |  |  |  |
Interest on finance lease liabilities 3 | — |  | 1 |  |  |  |
Total finance lease cost | 27 |  | 45 |  |  |  |
Total lease cost | $ | 1,191 |  | $ | 1,102 |  |  |  |
1 Included in occupancy and equipment expense in the consolidated statements of comprehensive income.
2 Included in depreciation and amortization in the consolidated statements of comprehensive income.
3 Included in interest on borrowings and other obligations in the consolidated statements of comprehensive income.

The following table shows the future minimum lease payments, weighted average remaining lease terms, and weighted average discount rates under operating and finance lease arrangements as of March 31, 2021. The discount rates used to calculate the present value of lease liabilities were based on the collateralized FHLB borrowing rates that were commensurate with lease terms and minimum payments on the later of the date we adopted the new lease accounting standards or lease commencement date.

(in thousands) | March 31, 2021
Year | Operating Leases | Finance Leases
2021 | $ | 3,431 |  | $ | 13 |
2022 | 4,424 |  | 14 |
2023 | 4,004 |  | 4 |
2024 | 3,300 |  | — |
2025 | 2,876 |  | — |
Thereafter | 9,867 |  | — |
Total minimum lease payments | 27,902 |  | 31 |
Amounts representing interest (present value discount) | (1,909) |  | (1) |
Present value of net minimum lease payments (lease liability) | $ | 25,993 |  | $ | 30 |
Weighted average remaining term (in years) | 7.6 | 2.0
Weighted average discount rate | 1.79 | % | 1.93 | %

Litigation Matters
Bancorp may be party to legal actions that arise from time to time in the normal course of business. Bancorp's management is not aware of any pending legal proceedings to which either it or the Bank may be a party or has recently been a party that will have a material adverse effect on the financial condition or results of operations of Bancorp or the Bank.
The Bank is responsible for a proportionate share of certain litigation indemnifications provided to Visa U.S.A. ("Visa") by its member banks in connection with Visa's lawsuits related to anti-trust charges and interchange fees ("Covered Litigation"). Our proportionate share of the litigation indemnification liability does not change or transfer upon the sale of our Class B Visa shares to member banks. Visa established an escrow account to pay for settlements or judgments in the Covered Litigation. Under the terms of the U.S. retrospective responsibility plan, when Visa funds the litigation escrow account, it triggers a conversion rate reduction of the Class B common stock to shares of Class A common stock, effectively reducing the aggregate value of the Class B common stock held by Visa's member banks like us.
In 2012, Visa had reached a $4.0 billion interchange multidistrict litigation class settlement agreement with plaintiffs representing a class of U.S. retailers. The escrow balance of $894 thousand as of March 31, 2021, combined with funds previously deposited with the court, are expected to cover the settlement payment obligations.
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The outcome of the Covered Litigation affects the conversion rate of Visa Class B common stock held by us to Visa Class A common stock, as discussed above and in Note 4, Investment Securities. The final conversion rate is subject to change depending on the final settlement payments, and the full effect on member banks is still uncertain. Litigation is ongoing and until the court approval process is complete, there is no assurance that Visa will resolve the claims as contemplated by the amended class settlement agreement, and additional lawsuits may arise from individual merchants who opted out of the class settlement. However, until the escrow account is fully depleted and the conversion rate of Class B to Class A common stock is reduced to zero, no future cash settlement payments are required by the member banks, such as us, on the Covered Litigation. Therefore, we are not required to record any contingent liabilities for the indemnification related to the Covered Litigation, as we consider the probability of losses to be remote.
Note 9: Derivative Financial Instruments and Hedging Activities
We entered into interest rate swap agreements, primarily as an asset/liability management strategy, in order to mitigate the changes in the fair value of specified long-term fixed-rate loans (or firm commitments to enter into long-term fixed-rate loans) caused by changes in interest rates. These hedges allow us to offer long-term fixed-rate loans to customers without assuming the interest rate risk of a long-term asset. Converting our fixed-rate interest payments to floating-rate interest payments, generally benchmarked to the one-month U.S. dollar LIBOR index, protects us against changes in the fair value of our loans associated with fluctuating interest rates.
Our credit exposure, if any, on interest rate swap asset positions is limited to the fair value (net of any collateral pledged to us) and interest payments of all swaps by each counterparty. Conversely, when an interest rate swap is 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 March 31, 2021, we had four interest rate swap agreements, which are scheduled to mature in June 2031, October 2031, July 2032, and October 2037. All of our derivatives are accounted for as fair value hedges. The notional amounts of the interest rate contracts are equal to the notional amounts of the hedged loans. Our interest rate swap payments are settled monthly with counterparties. Accrued interest on the swaps totaled $11 thousand at both March 31, 2021 and December 31, 2020. Information on our derivatives follows:

| Asset Derivatives |  | Liability Derivatives
(in thousands) | March 31, 2021 | December 31, 2020 |  | March 31, 2021 | December 31, 2020
Fair value hedges: |  |  |  |  |
Interest rate contracts notional amount | $ | — |  | $ | — |  |  | $ | 13,754 |  | $ | 13,991 |
Interest rate contracts fair value 1 | $ | — |  | $ | — |  |  | $ | 1,193 |  | $ | 1,912 |

1 See Note 3, Fair Value of Assets and Liabilities, for valuation methodology.
The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of March 31, 2021 and December 31, 2020.

| Carrying Amounts of Hedged Assets |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Loans
(in thousands) | March 31, 2021 | December 31, 2020 |  | March 31, 2021 | December 31, 2020
Loans | $ | 14,793 |  | $ | 15,745 |  |  | $ | 1,039 |  | $ | 1,753 |

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

| Three months ended |
(in thousands) | March 31, 2021 | March 31, 2020 |  |
Interest and fees on loans 1 | $ | 20,661 |  | $ | 20,887 |  |  |
Increase (decrease) in fair value of designated interest rate swaps due to LIBOR interest rate movements | $ | 719 |  | $ | (1,440) |  |  |
Payment on interest rate swaps | (93) |  | (67) |  |  |
(Decrease) increase in value of hedged loans | (714) |  | 1,470 |  |  |
Decrease in value of yield maintenance agreement | (3) |  | (3) |  |  |
Net losses on fair value hedging relationships recognized in interest income | $ | (91) |  | $ | (40) |  |  |

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

Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in |
| Gross Amounts | Offset in the | Assets Presented | the Statements of Condition |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral |
(in thousands) | Assets | Condition | of Condition | Instruments | Received | Net Amount
March 31, 2021 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
December 31, 2020 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |

Offsetting of Financial Liabilities and Derivative Liabilities
|  | Gross Amounts | Net Amounts of | Gross Amounts Not Offset in |
| Gross Amounts | Offset in the | Liabilities Presented | the Statements of Condition |
| of Recognized | Statements of | in the Statements | Financial | Cash Collateral |
(in thousands) | Liabilities 1 | Condition | of Condition 1 | Instruments | Pledged | Net Amount
March 31, 2021 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | 1,193 |  | $ | — |  | $ | 1,193 |  | $ | — |  | $ | (1,193) |  | $ | — |
December 31, 2020 |  |  |  |  |  |
Derivatives by Counterparty: |  |  |  |  |  |
Counterparty A | $ | 1,912 |  | $ | — |  | $ | 1,912 |  | $ | — |  | $ | (1,912) |  | $ | — |

1 Amounts exclude accrued interest on swaps.
For more information on how we account for our interest rate swaps, refer to Note 1 to the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 13, 2021.
Note 10: Merger Agreement
On April 16, 2021, Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company of American River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and into Bank of Marin (collectively, the "Merger"). The acquisition will expand Bank of Marin's presence throughout the Greater Sacramento, Amador and Sonoma County Regions where ARB has ten branches. Under the terms of the merger agreement, AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp's common stock for each share of AMRB's common stock outstanding upon consummation of the Merger. AMRB had total assets of $916.1 million, total deposits of $788.6 million, and total loans of $475.4 million as of March 31, 2021. These amounts are subject to fair value adjustments upon the close of the Merger. The Merger is expected to be completed in the third quarter of 2021, subject to approval by shareholders of Bancorp and AMRB, receipt of required regulatory and other approvals and satisfaction of customary closing conditions.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related consolidated financial statements in this Form 10-Q and with the audited consolidated financial statements and accompanying notes included in our 2020 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 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 Coronavirus Aid, Relief and Economic Security Act of 2020, as amended, and the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act of 2020); our borrowers’ actual payment performance as loan deferrals related to the COVID-19 pandemic expire, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance; 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.
In addition, events or factors that could cause results or performance to materially differ from those expressed in the forward-looking statements concerning the AMRB acquisition include, but are not limited to:
•the businesses of Bancorp and AMRB may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected;
•expected cost savings from the acquisition may not be fully realized or realized within the expected time frame;
•revenues following the merger may be lower than expected;
•customer and employee relationships and business operations may be disrupted by the acquisition; and
•the ability to obtain required regulatory and shareholder approvals, and the ability to complete the acquisition within the expected timeframe may be more difficult, time-consuming or costly than expected.
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 our 2020 Form 10-K as filed with the SEC, copies of which are available from us at no charge. 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.
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Critical Accounting Policies and Estimates
The SEC requires us to disclose "critical accounting policies" defined as those that are both most important to the presentation of our financial condition and results of operations and require management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and imprecise. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. There have been no material changes to our critical accounting policies, which include: Allowance for Credit Losses on Loans and Unfunded Commitments, Allowance for Credit Losses on Investments Securities, Accounting for Income Taxes, and Fair Value Measurements. For a detailed discussion of these accounting policies, refer to Note 1 to the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021.
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Executive Summary
On April 16, 2021, Bancorp entered into a definitive agreement to acquire American River Bankshares ("AMRB"), parent company of American River Bank ("ARB"), whereby AMRB will merge with and into Bancorp and immediately thereafter ARB will merge with and into Bank of Marin. We expect the transaction to be accretive to Bancorp's earnings, adding to shareholder value. AMRB shareholders will receive a fixed exchange ratio of 0.575 shares of Bancorp common stock for each share of AMRB common stock outstanding. Based on Bancorp's closing stock price of $39.06 on April 16, 2021, the transaction is valued at $134.5 million (with approximately 3.4 million of additional shares of Bancorp common stock to be issued), or $22.46 per share of AMRB common stock, which includes the value of AMRB options being paid in cash. Such value will fluctuate with changes in Bancorp's stock price. The transaction is expected to close in the third quarter of 2021, and based on information currently available, Bank of Marin will have approximately $4.0 billion in assets and operate 31 branches in ten counties (Alameda, Amador, Contra Costa, Marin, Napa, Placer, Sacramento, San Francisco, San Mateo, and Sonoma) upon closing. For other important factors regarding the AMRB acquisition, please see Note 10, Merger Agreement, and the Forward-Looking Statements section of this Form 10-Q.
Net income for the first quarter of 2021 totaled $8.9 million, compared to $7.2 million in the first quarter of 2020. Diluted earnings per share were $0.66 in the first quarter of 2021, compared to $0.53 in the same quarter a year ago.
First quarter 2021 earnings included a $2.9 million reversal of the allowance for credit losses on loans and $590 thousand reversal of allowance for credit losses on unfunded loan commitments. Additionally, the early redemption of our last subordinated debenture generated $1.3 million accelerated discount accretion in interest expense.
The following are highlights of our operating and financial performance for the periods presented:
•Loans totaled $2.122 billion at March 31, 2021, compared to $2.089 billion at December 31, 2020, an increase of $33.2 million, or 1.6%. The increase was attributed to a $73.4 million net increase in PPP loans, partially offset by a $40.2 million decrease in non-PPP loans. Non-PPP-related loan originations of $25.3 million were offset by loan payoffs of $34.6 million and a $27.9 million decrease in line utilization.
•As of March 31, 2021, there were 2,513 PPP loans outstanding totaling $365.0 million (net of $8.0 million in unrecognized fees and costs), which included 841 loans totaling $119.5 million funded during the first quarter of 2021 under the second round of the PPP stimulus plan. Approximately 1,940 loans (or 77%) totaling $89.6 million were less than or equal to $150 thousand and had access to streamlined forgiveness processing. As of March 31, 2021, 142 of the first round PPP loans amounting to $55.6 million had been forgiven and paid off by the SBA. As of May 4, 2021, an additional 866 loans totaling $61.7 million had been forgiven by the SBA and no applications were denied. We expect the forgiveness of the first round of PPP loans to continue to accelerate during the second quarter of 2021.
•As of May 4, 2021, 10 borrowing relationships with 16 loans totaling $56.1 million were benefiting from payment relief. We monitor the financial situation of these clients closely and expect the majority to resume payments as the economy reopens. The following table summarizes these loans by industry or collateral type.

Payment Relief by Type
Industry/Collateral Type (dollars in thousands) | Outstanding Loan Balance | Weighted Average LTV
Education | $ | 17,076 |  | 26 | %
Health Clubs | 13,352 | 49 | %
Office and Mixed Use | 13,794 | 42 | %
Hospitality | 7,135 | 48 | %
Retail Related CRE | 4,760 | 58 | %
Payment Relief Totals | $ | 56,117 |  | 41 | %

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•Credit quality remains strong, with non-accrual loans representing $9.2 million, or 0.43% of total loans at March 31, 2021, compared to $9.2 million, or 0.44% at December 31, 2020. The ratio of allowance for credit losses to total loans was 0.94% at March 31, 2021 and 1.10% at December 31, 2020. Excluding SBA-guaranteed PPP loans, the allowance for credit losses represented 1.14% of total loans as of March 31, 2021, compared to 1.27% as of December 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure).
•Return on average assets ("ROA") and return on average equity ("ROE") were 1.21% and 10.22%, respectively, for the quarter ended March 31, 2021. These reflect meaningful increases as ROA was 1.09% and ROE was 8.54% in the first quarter of 2020.
•Our strong capital and liquidity position afforded us the opportunity to eliminate a high cost funding source. On March 15, 2021 we redeemed a $2.8 million subordinated debenture, which carried an effective rate of approximately 5.7%.
•The tax-equivalent net interest margin was 3.19% and 3.88% in the first quarters of 2021 and 2020, respectively. The decrease from the same quarter a year ago was primarily attributed to the lower interest rate environment and redemption of the subordinated debenture. While the redemption decreased our net interest margin by 18 basis points in the first quarter of 2021, it will serve to improve net interest margin in the future.
•The efficiency ratio was 62.13% for the three months ended March 31, 2021, up from 56.79% in the comparative period a year ago. Without the $1.3 million accelerated discount accretion from the early redemption of the subordinated debenture our efficiency ratio would have been 58.92%.
•Total deposits increased $152.0 million in the first three months of 2021 to $2.656 billion at March 31, 2021. The increase was primarily due to increases in PPP borrower-related balances and normal fluctuations in some of our large business accounts. Non-interest bearing deposits represented 54% of total deposits as of the end of the first quarter of 2021, compared to 49% as of the end of the first quarter of 2020. The cost of average deposits was 0.07% in the first quarter of 2021, a decrease of 14 basis points from the same quarter a year ago.
•All capital ratios were above well capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.7% at March 31, 2021, compared to 16.0% at December 31, 2020. Tangible common equity to tangible assets was 10.5% at March 31, 2021, compared to 11.3% at December 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure). The subordinated debt redemption contributed to the decline in total risk-based capital, and share repurchases were the primary driver of the declines in both total risk-based capital and tangible common equity. The total risk-based capital ratio for the Bank was 14.8% at March 31, 2021, compared to 15.8% at December 31, 2020.
•The Board of Directors declared a cash dividend of $0.23 per share on April 16, 2021. This represents the 64th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on May 7, 2021, to shareholders of record at the close of business on April 30, 2021.
Bank of Marin's strong balance sheet is built from our core values - relationship banking, disciplined fundamentals and commitment to the communities that we serve. For the remainder of 2021, we believe that our robust liquidity and capital positions, high credit quality loan portfolio, excellent credit metrics, and low-cost deposit base as well as our acquisition of AMRB should help us navigate the low interest rate environment.
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RESULTS OF OPERATIONS
Highlights of the financial results are presented in the following tables:

(dollars in thousands) | March 31, 2021 | December 31, 2020
Selected financial condition data: |  |
Total assets | $ | 3,058,133 |  | $ | 2,911,926 |
Loans, net | 2,101,814 |  | 2,065,682 |
Deposits | 2,656,199 |  | 2,504,249 |
Borrowings and other obligations | 30 |  | 58 |
Subordinated debenture | — |  | 2,777 |
Stockholders' equity | 350,292 |  | 358,253 |
Asset quality ratios: |  |
Allowance for credit losses to total loans | 0.94 | % | 1.10 | %
Allowance for credit losses to total loans, excluding SBA PPP loans 1 | 1.14 | % | 1.27 | %
Allowance for credit losses to non-accrual loans | 2.17x | 2.48x
Non-accrual loans to total loans | 0.43 | % | 0.44 | %
Capital ratios: |  |
Equity to total assets ratio | 11.45 | % | 12.30 | %
Tangible common equity to tangible assets 2 | 10.47 | % | 11.27 | %
Total capital (to risk-weighted assets) | 15.68 | % | 16.03 | %
Tier 1 capital (to risk-weighted assets) | 14.63 | % | 14.82 | %
Tier 1 capital (to average assets) | 10.51 | % | 10.80 | %
Common equity Tier 1 capital (to risk weighted assets) | 14.63 | % | 14.69 | %

| Three months ended |  |
(dollars in thousands, except per share data) | March 31, 2021 | March 31, 2020 |  |  |
Selected operating data: |  |  |  |  |
Net interest income | $ | 22,031 |  | $ | 24,119 |  |  |  |
(Reversal of) provision for credit losses on loans | (2,929) |  | 2,200 |  |  |  |
Non-interest income | 1,826 |  | 3,120 |  |  |  |
Non-interest expense | 14,822 |  | 15,469 |  |  |  |
Net income | 8,947 |  | 7,228 |  |  |  |
Net income per common share: |  |  |  |  |
Basic | $ | 0.67 |  | $ | 0.53 |  |  |  |
Diluted | $ | 0.66 |  | $ | 0.53 |  |  |  |
Performance and other financial ratios: |  |  |  |  |
Return on average assets | 1.21 | % | 1.09 | % |  |  |
Return on average equity | 10.22 | % | 8.54 | % |  |  |
Tax-equivalent net interest margin 3 | 3.19 | % | 3.88 | % |  |  |
Cost of deposits | 0.07 | % | 0.21 | % |  |  |
Efficiency ratio | 62.13 | % | 56.79 | % |  |  |
Cash dividend payout ratio on common stock 4 | 34.33 | % | 43.40 | % |  |  |

1 The allowance for credit losses to total loans, excluding SBA-guaranteed PPP loans, is considered a meaningful non-GAAP financial measure, as it represents only those loans that were considered in the calculation of the allowance for credit losses. SBA PPP loans at March 31, 2021 and December 31, 2020 totaled $365.0 million and $291.6 million, respectively.
2 Tangible common equity to tangible assets is considered to be a meaningful non-GAAP financial measure of capital adequacy and is useful for investors to assess Bancorp's ability to absorb potential losses. Tangible common equity of $317 million and $324 million at March 31, 2021 and December 31, 2020, 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 $33.8 million and $34.0 million at March 31, 2021 and December 31, 2020, respectively.
3 Tax-equivalent net interest margin is computed by dividing taxable equivalent net interest income, which is adjusted for taxable equivalent income on tax-exempt loans and securities based on Federal statutory rate of 21 percent, by total average interest-earning assets.
4 Calculated as dividends on common shares divided by basic net income per common share.
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Net Interest Income
Net interest income is the interest earned on loans, investment and other interest-earning assets minus 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
|  | March 31, 2021 |  | March 31, 2020
|  |  | Interest |  |  |  | Interest |
|  | Average | Income/ | Yield/ |  | Average | Income/ | Yield/
(dollars in thousands) | Balance | Expense | Rate |  | Balance | Expense | Rate
Assets |  |  |  |  |  |  |
| Interest-earning deposits with banks 1 | $ | 165,788 |  | $ | 42 |  | 0.10 | % |  | $ | 99,362 |  | $ | 332 |  | 1.32 | %
| Investment securities 2, 3 | 540,970 |  | 3,282 |  | 2.43 | % |  | 556,897 |  | 4,266 |  | 3.06 | %
| Loans 1, 3, 4 | 2,099,847 |  | 20,836 |  | 3.97 | % |  | 1,833,180 |  | 21,066 |  | 4.55 | %
| Total interest-earning assets 1 | 2,806,605 |  | 24,160 |  | 3.44 | % |  | 2,489,439 |  | 25,664 |  | 4.08 | %
| Cash and non-interest-bearing due from banks | 50,931 |  |  |  |  | 40,844 |  |  |
| Bank premises and equipment, net | 4,777 |  |  |  |  | 5,939 |  |  |
| Interest receivable and other assets, net | 133,693 |  |  |  |  | 118,909 |  |  |
Total assets | $ | 2,996,006 |  |  |  |  | $ | 2,655,131 |  |  |
Liabilities and Stockholders' Equity |  |  |  |  |  |  |
| Interest-bearing transaction accounts | $ | 174,135 |  | $ | 39 |  | 0.09 | % |  | $ | 138,395 |  | $ | 66 |  | 0.19 | %
| Savings accounts | 214,049 |  | 19 |  | 0.04 | % |  | 163,439 |  | 16 |  | 0.04 | %
| Money market accounts | 703,577 |  | 286 |  | 0.16 | % |  | 760,616 |  | 971 |  | 0.51 | %
| Time accounts including CDARS | 96,349 |  | 96 |  | 0.40 | % |  | 96,157 |  | 161 |  | 0.67 | %
| Borrowings and other obligations 1 | 36 |  | — |  | 1.99 | % |  | 358 |  | 2 |  | 1.81 | %
| Subordinated debenture 1, 5 | 2,164 |  | 1,361 |  | 251.54 | % |  | 2,715 |  | 49 |  | 7.19 | %
| Total interest-bearing liabilities | 1,190,310 |  | 1,801 |  | 0.61 | % |  | 1,161,680 |  | 1,265 |  | 0.44 | %
| Demand accounts | 1,406,123 |  |  |  |  | 1,119,975 |  |  |
| Interest payable and other liabilities | 44,551 |  |  |  |  | 33,045 |  |  |
| Stockholders' equity | 355,022 |  |  |  |  | 340,431 |  |  |
Total liabilities & stockholders' equity | $ | 2,996,006 |  |  |  |  | $ | 2,655,131 |  |  |
Tax-equivalent net interest income/margin 1 |  | $ | 22,359 |  | 3.19 | % |  |  | $ | 24,399 |  | 3.88 | %
Reported net interest income/margin 1 |  | $ | 22,031 |  | 3.14 | % |  |  | $ | 24,119 |  | 3.83 | %
Tax-equivalent net interest rate spread |  |  | 2.83 | % |  |  |  | 3.64 | %

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. |  |  |
5 First quarter 2021 interest expense includes $1.3 million accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. |

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Analysis of Changes in Net Interest Income
The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the periods indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances, including one more day in the three months ended March 31, 2020.

| Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 |
(in thousands) | Volume | Yield/Rate | Mix | Total |  |  |  |
Interest-earning deposits with banks | $ | 222 |  | $ | (307) |  | $ | (205) |  | $ | (290) |  |  |  |  |
Investment securities 1 | (122) |  | (887) |  | 25 |  | (984) |  |  |  |  |
Loans 1 | 3,064 |  | (2,674) |  | (620) |  | (230) |  |  |  |  |
Total interest-earning assets | 3,164 |  | (3,868) |  | (800) |  | (1,504) |  |  |  |  |
Interest-bearing transaction accounts | 17 |  | (35) |  | (9) |  | (27) |  |  |  |  |
Savings accounts | 5 |  | (2) |  | — |  | 3 |  |  |  |  |
Money market accounts | (73) |  | (658) |  | 46 |  | (685) |  |  |  |  |
Time accounts, including CDARS | — |  | (64) |  | (1) |  | (65) |  |  |  |  |
Borrowings and other obligations | (2) |  | — |  | — |  | (2) |  |  |  |  |
Subordinated debenture | (10) |  | 1,677 |  | (355) |  | 1,312 |  |  |  |  |
Total interest-bearing liabilities | (63) |  | 918 |  | (319) |  | 536 |  |  |  |  |
Changes in tax-equivalent net interest income | $ | 3,227 |  | $ | (4,786) |  | $ | (481) |  | $ | (2,040) |  |  |  |  |
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%.

First Quarter of 2021 Compared to First Quarter of 2020
Net interest income totaled $22.0 million in the first quarter of 2021, compared to $24.1 million in the same quarter a year ago. The $2.1 million decrease from the first quarter of 2020 was primarily caused by lower yields across all interest earning assets stemming from the low interest rate environment, $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture, and lower average commercial and home equity loan balances. These negative variances were partially offset by interest and fees on PPP loans and lower rates on interest-bearing liabilities.
The tax-equivalent net interest margin was 3.19% in the first quarter of 2021 compared to 3.88% in the same quarter of the previous year. The decrease in tax-equivalent net interest margin was primarily attributed to the lower interest rate environment. Additionally, the early redemption of our last subordinated debenture reduced the first quarter of 2021 tax-equivalent net interest margin by approximately 18 basis points, but will improve the net interest margin going forward.
SBA PPP loans lowered first quarter 2021 net interest margin by 1 basis point compared to 13 basis points in the fourth quarter 2020 due to higher fee income accretion in the first quarter of 2021 as more PPP loans were forgiven and paid off by the SBA. There were no PPP loans in the first quarter of 2020. We expect the net interest margin to improve in second quarter of 2021 as more PPP loans are forgiven and paid off by the SBA.
Market Interest Rates
Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each
other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC").
In response to the evolving risks to economic activity posed by the COVID-19 pandemic, the Federal Reserve Open Market Committee ("FOMC") made two emergency cuts totaling 150 basis points to the federal funds rate in March 2020. The federal funds target rate range has resided between 0.0% and 0.25% since March 15, 2020, putting downward pressure on our asset yields and net interest margin. A low interest rate environment will continue to
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put downward pressure on our asset yields and net interest margin. See ITEM 3. Quantitative and Qualitative Disclosure about Market Risk for further information.
Provision for Credit Losses on Loans
Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors including growth of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses is increased by provisions charged to expense and loss recoveries and decreased by loans charged off.
We recorded a $2.9 million reversal of the provision for credit losses in the first quarter of 2021, compared to a $2.5 million provision for credit losses for the same period in 2020. The reversal of the provision in the first quarter of 2021 was primarily due to improvements in the forecasted California unemployment rates over the next four quarters and a $40.2 million decrease in non-PPP loan balances. Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which decreased to 8.2% at March 31, 2021 from 9.1% at December 31, 2020. The provision for credit losses for the first quarter of 2020, which was determined under the incurred loss method (prior to the adoption of the excepted credit loss method on December 31, 2020), was largely due to the uncertainty about the impact of the COVID-19 pandemic on the local and regional economies and our customers at that time.
Loans designated special mention, which is not considered adversely classified, decreased by $30.9 million to $56.0 million at March 31, 2021 from $86.9 million at December 31, 2020. The decrease was largely due to the upgrading of several borrowing relationships totaling approximately $23.7 million because of their improved financial condition and loan reductions and payoffs totaling approximately $6.7 million. Classified assets (loans with substandard or doubtful risk grades) totaled $26.4 million at March 31, 2021, compared to $25.8 million at December 31, 2020. There were no loans with doubtful risk grades at March 31, 2021 or December 31, 2020.
The ratio of allowance for credit losses to total loans was 0.94% at March 31, 2021, compared to 1.10% at December 31, 2020. Excluding SBA-guaranteed PPP loans, the ratio of the allowance for credit losses to total loans was 1.14% and 1.27% at March 31, 2021 and December 31, 2020, respectively (Refer to footnote 1 on page 32 for a definition and reconciliation of this non-GAAP financial measure). Non-accrual loans totaled $9.2 million, or 0.43% of total loans at March 31, 2021, and remained largely unchanged from $9.2 million, or 0.44% of total loans at December 31, 2020.
For more information, refer to Note 5 to the consolidated financial statements in this Form 10-Q.
Non-interest Income
The following table details the components of non-interest income.

| Three months ended |  | Amount |  | Percent
(dollars in thousands) | March 31, 2021 | March 31, 2020 |  | Increase (Decrease) |  | Increase (Decrease)
Wealth Management and Trust Services | $ | 488 |  | $ | 504 |  |  | $ | (16) |  |  | (3.2) | %
Debit card interchange fees | 366 |  | 360 |  |  | 6 |  |  | 1.7 | %
Service charges on deposit accounts | 281 |  | 451 |  |  | (170) |  |  | (37.7) | %
Earnings on bank-owned life insurance, net | 257 |  | 275 |  |  | (18) |  |  | (6.5) | %
Dividends on FHLB stock | 149 |  | 208 |  |  | (59) |  |  | (28.4) | %
Merchant interchange fees | 57 |  | 73 |  |  | (16) |  |  | (21.9) | %
Gains on sale of investment securities, net | — |  | 800 |  |  | (800) |  |  | (100.0) | %
Other income | 228 |  | 449 |  |  | (221) |  |  | (49.2) | %
Total non-interest income | $ | 1,826 |  | $ | 3,120 |  |  | $ | (1,294) |  |  | (41.5) | %

First Quarter of 2021 Compared to First Quarter of 2020
Non-interest income decreased by $1.3 million in the first quarter of 2021 to $1.8 million, compared to $3.1 million in the same quarter a year ago. The decrease was mostly attributed to the absence of gains on sales of investment securities, lower service charges on deposit accounts, and lower fee income from one-way deposit sales to third-party deposit networks in the first quarter of 2021.
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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) | March 31, 2021 |  | March 31, 2020 |  | Increase (Decrease) |  | Increase (Decrease)
Salaries and related benefits | $ | 9,208 |  |  | $ | 9,477 |  |  | $ | (269) |  |  | (2.8) | %
Occupancy and equipment | 1,751 |  |  | 1,663 |  |  | 88 |  |  | 5.3 | %
Professional services | 863 |  |  | 544 |  |  | 319 |  |  | 58.6 | %
Data processing | 819 |  |  | 786 |  |  | 33 |  |  | 4.2 | %
Depreciation and amortization | 459 |  |  | 526 |  |  | (67) |  |  | (12.7) | %
Information technology | 313 |  |  | 250 |  |  | 63 |  |  | 25.2 | %
Amortization of core deposit intangible | 204 |  |  | 213 |  |  | (9) |  |  | (4.2) | %
Federal Deposit Insurance Corporation insurance | 179 |  |  | 2 |  |  | 177 |  |  | 8,850.0 | %
Directors' expense | 175 |  |  | 174 |  |  | 1 |  |  | 0.6 | %
Charitable contributions | 31 |  |  | 167 |  |  | (136) |  |  | (81.4) | %
(Reversal of) provision for credit losses on unfunded loan commitments | (590) |  |  | 102 |  |  | (692) |  |  | (678.4) | %
Other non-interest expense |  |  |  |  |  |  |
Advertising | 239 |  |  | 251 |  |  | (12) |  |  | (4.8) | %
Other expense | 1,171 |  |  | 1,314 |  |  | (143) |  |  | (10.9) | %
Total other non-interest expense | 1,410 |  |  | 1,565 |  |  | (155) |  |  | (9.9) | %
Total non-interest expense | $ | 14,822 |  |  | $ | 15,469 |  |  | $ | (647) |  |  | (4.2) | %

First Quarter of 2021 Compared to First Quarter of 2020
Non-interest expense decreased by $647 thousand to $14.8 million, compared to $15.5 million in the same period a year ago. The decrease was primarily attributed to a $590 thousand reversal of allowance for credit losses on unfunded loan commitments versus a $102 thousand provision for credit losses on unfunded loan commitments in the first quarter a year ago. In addition, salaries and related benefits decreased $269 thousand (mostly attributed to $421 thousand additional deferred loan origination costs from funding the second round of SBA PPP loans), charitable contributions decreased $136 thousand, and other expense included several small declines. These positive variances were partially offset by an increase in professional service expenses due to some pandemic related delays in 2020 activities, and the discontinuation of Federal Deposit Insurance Corporation insurance credits received in 2020. Bank of Marin has been committed to donating at least 1% of net income before tax to nonprofits in our communities each year. In recent years, this has typically been around $500 thousand. In response to the COVID-19 pandemic, we more than doubled our charitable contributions to non-profit organizations in our community to over $1.0 million in 2020. In 2021, we are returning to our typical giving levels of at least $500 thousand with the majority being disbursed in the second quarter of 2021.
Provision for Income Taxes
Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, BOLI, low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).
The provision for income taxes for the first quarter of 2021 totaled $3.0 million at an effective tax rate of 25.2%, compared to $2.3 million at an effective tax rate of 24.5% in the same quarter last year. The increase in the provision in the first quarter of 2021 as compared to the same quarter a year ago was primarily due to higher pre-tax income and lower discrete tax benefits from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options compared to the first quarter of 2020. The 70 bps increase in effective tax rate in the first quarter of 2021 as compared to the same quarter last year was primarily due to a lower level of tax benefits from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options.
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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 March 31, 2021, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits.
FINANCIAL CONDITION SUMMARY
At March 31, 2021, assets totaled $3,058.1 million, an increase of $146.2 million, from $2,911.9 million at December 31, 2020, mainly due to increases in investment securities and loans as we redeploy our excess liquidity from deposit inflows as discussed below.
Cash, Cash Equivalents and Restricted Cash
Total cash, cash equivalents and restricted cash were $142.8 million at March 31, 2021, compared to $200.3 million at December 31, 2020. The reduction was mainly due to increases in investment securities and loans as we redeploy our excess liquidity from deposit inflows, some related to new PPP loan funding. Cash and cash equivalents do not include $180.8 million and $173.4 million in temporary one-way sale transfers of deposits to third-party deposit networks as part of our liquidity management at March 31, 2021 and December 31, 2020, respectively.
Investment Securities
The investment securities portfolio totaled $670.5 million at March 31, 2021, an increase of $169.2 million from December 31, 2020. The increase was primarily due to purchases of $203.4 million to deploy excess cash into interest earning assets in a more favorable interest rate environment, partially offset by paydowns, calls and maturities of $24.7 million. Additionally, the fair value of available-for-sale securities decreased $9.1 million as a result of the higher interest rate environment in the first quarter of 2021. There were no security sales in the first quarter of 2021.
The following table summarizes our investment in obligations of state and political subdivisions at March 31, 2021 and December 31, 2020.

|  | March 31, 2021 |  | December 31, 2020
(dollars in thousands) | Amortized Cost | Fair Value | % of Total State and Political Subdivisions |  | Amortized Cost | Fair Value | % of Total State and Political Subdivisions
Within California: |  |  |  |  |  |  |
| General obligation bonds | $ | 3,321 |  | $ | 3,503 |  | 2.8 | % |  | $ | 3,327 |  | $ | 3,565 |  | 3.1 | %
| Revenue bonds | 2,296 |  | 2,377 |  | 1.9 |  |  | 2,352 |  | 2,448 |  | 2.2 |
| Tax allocation bonds | 1,748 |  | 1,779 |  | 1.5 |  |  | 2,832 |  | 2,876 |  | 2.7 |
Total within California | 7,365 |  | 7,659 |  | 6.2 |  |  | 8,511 |  | 8,889 |  | 8.0 |
Outside California: |  |  |  |  |  |  |
| General obligation bonds | 91,611 |  | 93,957 |  | 77.2 |  |  | 78,299 |  | 82,100 |  | 73.5 |
| Revenue bonds | 19,724 |  | 20,744 |  | 16.6 |  |  | 19,744 |  | 21,351 |  | 18.5 |
Total outside California | 111,335 |  | 114,701 |  | 93.8 |  |  | 98,043 |  | 103,451 |  | 92.0 |
Total obligations of state and political subdivisions | $ | 118,700 |  | $ | 122,360 |  | 100.0 | % |  | $ | 106,554 |  | $ | 112,340 |  | 100.0 | %

The portion of the portfolio outside the state of California is distributed among eleven states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (50.9%), Washington (16.1%) and Maryland (5.7%). Our investment in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF") or backed by revenue sources from essential services (such as utilities and transportation). We have $6.0 million in obligations of Texas school district issuers having high concentrations in oil and gas industry taxpayers and all of them have credit guarantees from PSF. We have little or no exposure to municipal sectors such as higher education or health care that are most vulnerable to credit risks posed by the COVID-19 pandemic.
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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
During the first three months of 2021, loans increased by $33.2 million and totaled $2,121.8 million at March 31, 2021, primarily due to SBA PPP loans which totaled $365.0 million at March 31, 2021, compared to $291.6 million at December 31, 2020. New non-PPP related loan originations totaled $25.3 million in the first three months of 2021. Payoffs totaled $34.6 million and credit line utilization decreased $27.9 million during the first three months of 2021.
Liabilities
During the first three months of 2021, total liabilities increased by $154.2 million to $2,707.8 million. Deposits increased $152.0 million in the first three months of 2021, primarily driven by a combination of PPP loan proceeds and normal fluctuations in some of our larger commercial accounts. Non-interest bearing deposits increased $90.6 million in the first three months of 2021 to $1,445.3 million, and represented 54.4% of total deposits at March 31, 2021, compared to 54.1% at December 31, 2020. Liabilities as of March 31, 2021 included operating lease liabilities totaling $26.0 million, a decrease of 1.1 million from December 31,2020.
Capital Adequacy
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well capitalized” under the regulatory framework for prompt corrective action and Bancorp’s ratios exceed the required minimum ratios to be considered a well-capitalized bank holding company. In addition, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action as of March 31, 2021. 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 August 2018, the Board of Governors of the Federal Reserve System changed the definition of a "Small Bank Holding Company" by increasing the asset threshold from $1.0 billion to $3.0 billion. As a result, Bancorp was not subject to separate minimum capital requirements as of December 31, 2020. However, we disclosed comparative capital ratios for Bancorp, which would have exceeded well-capitalized levels had Bancorp been subject to the same minimum capital requirements in 2020.
The Bancorp’s and Bank’s capital adequacy ratios as of March 31, 2021 and December 31, 2020 are presented in the following tables. As of December 31, 2020, Bancorp's Tier 1 capital included a subordinated debenture, which was not included at the Bank level. On March 15, 2021, Bancorp redeemed in full our last subordinated debenture
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due to NorCal Community Bancorp Trust II. The redemption reduced Bancorp's total risk-based capital ratio by approximately 18 basis points.

Capital Ratios for Bancorp (dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold | Ratio to be a Well Capitalized Bank Holding Company
March 31, 2021 | Amount | Ratio | Amount | Ratio | Amount | Ratio
Total Capital (to risk-weighted assets) | $ | 331,739 |  | 15.68 | % | ≥ $ | 222,195 |  | ≥ 10.50 | % | ≥ $ | 211,614 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 309,592 |  | 14.63 | % | ≥ $ | 179,872 |  | ≥ 8.50 | % | ≥ $ | 169,291 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 309,592 |  | 10.51 | % | ≥ $ | 117,794 |  | ≥ 4.00 | % | ≥ $ | 147,242 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 309,592 |  | 14.63 | % | ≥ $ | 148,130 |  | ≥ 7.00 | % | ≥ $ | 137,549 |  | ≥ 6.50 | %
December 31, 2020 |  |  |  |  |  |
Total Capital (to risk-weighted assets) | $ | 339,544 |  | 16.03 | % | ≥ $ | 222,393 |  | ≥ 10.50 | % | ≥ $ | 211,802 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 313,891 |  | 14.82 | % | ≥ $ | 180,032 |  | ≥ 8.50 | % | ≥ $ | 169,442 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 313,891 |  | 10.80 | % | ≥ $ | 116,224 |  | ≥ 4.00 | % | ≥ $ | 145,280 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 311,114 |  | 14.69 | % | ≥ $ | 148,262 |  | ≥ 7.00 | % | ≥ $ | 137,672 |  | ≥ 6.50 | %

Capital Ratios for the Bank (dollars in thousands) | Actual Ratio | Adequately Capitalized Threshold | Ratio to be Well Capitalized under Prompt Corrective Action Provisions
March 31, 2021 | Amount | Ratio | Amount | Ratio | Amount | Ratio
Total Capital (to risk-weighted assets) | $ | 312,649 |  | 14.78 | % | ≥ $ | 222,160 |  | ≥ 10.50 | % | ≥ $ | 211,581 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 290,502 |  | 13.73 | % | ≥ $ | 179,844 |  | ≥ 8.50 | % | ≥ $ | 169,265 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 290,502 |  | 9.87 | % | ≥ $ | 117,789 |  | ≥ 4.00 | % | ≥ $ | 147,236 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 290,502 |  | 13.73 | % | ≥ $ | 148,107 |  | ≥ 7.00 | % | ≥ $ | 137,528 |  | ≥ 6.50 | %
December 31, 2020 |  |  |  |  |  |
Total Capital (to risk-weighted assets) | $ | 334,686 |  | 15.80 | % | ≥ $ | 222,391 |  | ≥ 10.50 | % | ≥ $ | 211,801 |  | ≥ 10.00 | %
Tier 1 Capital (to risk-weighted assets) | $ | 309,033 |  | 14.59 | % | ≥ $ | 180,031 |  | ≥ 8.50 | % | ≥ $ | 169,441 |  | ≥ 8.00 | %
Tier 1 Capital (to average assets) | $ | 309,033 |  | 10.64 | % | ≥ $ | 116,224 |  | ≥ 4.00 | % | ≥ $ | 145,280 |  | ≥ 5.00 | %
Common Equity Tier 1 (to risk-weighted assets) | $ | 309,033 |  | 14.59 | % | ≥ $ | 148,261 |  | ≥ 7.00 | % | ≥ $ | 137,671 |  | ≥ 6.50 | %

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 Bank's 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.
T he most significant component of our daily liquidity position is customer deposits. The attraction and retention of new deposits depends upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.
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Since 2020, the banking industry experienced abundant liquidity driven by pandemic-related government programs such as PPP and stimulus checks as well as an elevated savings rate system-wide.
The most significant source of liquidity during 2021 was an increase in deposits of $152.0 million. The increase was primarily due to increases in PPP borrower-related accounts and normal fluctuations in some of our large business accounts. Proceeds from paydowns and maturities of securities totaled $24.7 million, and $12.4 million in net cash was provided by operating activities.
Significant uses of liquidity during 2021 were $193.4 million in investment securities purchased, $36.5 million in loan originations and advances, net of principal collected, $8.8 million in common stock repurchases, $4.1 million in repayment of a subordinated debenture, and $3.1 million in cash dividends paid on common stock to our shareholders. 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 are adequate to fund our operations.
Undrawn credit commitments, as discussed in Note 8 to the Consolidated Financial Statements in this Form 10-Q, totaled $610.8 million at March 31, 2021. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth and liquid assets. Over the next twelve months, $69.9 million of time deposits will mature. We expect to replace these funds with new deposits. Our emphasis on local deposits, combined with our liquid investment portfolio, provides a very stable funding base.
Since Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The primary uses of funds for Bancorp are shareholder dividends and ordinary operating expenses. Bancorp held $18.9 million of cash at March 31, 2021 which is deemed sufficient to cover Bancorp's operational needs, share repurchases, and cash dividends to shareholders through the end of 2021. Management anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
Market risk is defined as the risk of loss arising from an adverse change in the market value (or prices) of financial instruments. A significant form of market risk is interest rate risk, which is inherent in our investment, borrowing, lending and deposit gathering activities. The Bank manages interest rate sensitivity to minimize the exposure of our net interest margin, earnings, and capital to changes in interest rates. Interest rate changes can create fluctuations in the net interest margin due to an imbalance in the timing of repricing or maturity of assets or liabilities.
To mitigate interest rate risk, the structure of our assets and liabilities is managed with the objective of correlating the effects of interest rate changes on loans and investments with those of deposits and borrowings. The asset liability management policy sets limits on the acceptable amount of change to net interest income and economic value of equity in different interest rate environments.
From time to time, we enter into interest rate swap contracts to mitigate the changes in the fair value of specified long-term fixed-rate loans and firm commitments to enter into long-term fixed-rate loans caused by changes in interest rates. See Note 9 to the Consolidated Financial Statements in this Form 10-Q.
ALCO and the Board of Directors review our exposure to interest rate risk at least quarterly. We use simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board of Directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions. At March 31, 2021, 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.
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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 | 8.9 | % | 23.3 | %
up 300 | 6.7 | % | 17.6 | %
up 200 | 4.4 | % | 11.3 | %
up 100 | 1.8 | % | 4.6 | %
down 100 | (1.2) | % | (2.3) | %

Interest rate sensitivity is a function of the repricing characteristics of our assets and liabilities. The Bank runs a combination of scenarios and sensitivities in its attempt to capture the range of interest rate risk including the simulations mentioned above. As with any simulation model or other method of measuring interest rate risk, limitations are inherent in the process and dependent on assumptions. For example, if we choose to pay interest on certain business deposits that are currently non-interest bearing, causing those deposits to become rate sensitive in the future, we would become less asset sensitive than the model currently indicates. Assets and liabilities may react differently to changes in market interest rates in terms of both timing and responsiveness to market rate movements. Important deposit modeling assumptions are the speed of deposit run-off and the amount by which interest-bearing deposit rates increase or decrease when market interest rates change. Further, the actual rates and timing of prepayments on loans and investment securities could vary significantly from the assumptions applied in the various scenarios. Lastly, changes in U.S. Treasury rates accompanied by a change in the shape of the yield curve could produce different results from those presented in the table. Accordingly, the results presented should not be relied upon as indicative of actual results in the event of changing market interest rates.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Bank of Marin Bancorp and its subsidiary (the "Company") conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the 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 March 31, 2021, 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
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Refer to Note 12 to the Consolidated Financial Statements in Item 8 of our 2020 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 2020 Form 10-K. Refer to "Risk Factors" in Item 1A of our 2020 Form 10-K, pages 12 through 21.
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the period covered by this report.
Issuer Purchases of Equity Securities
On January 24, 2020, Bancorp Board of Directors approved a new Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through February 28, 2022. Bancorp repurcha sed 224,013 shares totaling $8.5 million in the first quarter of 2021 for a cumulative total of 393,584 shares amounting to $14.3 million.
The following table reflects repurchases under the Share Repurchase Program for the period 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
January 1-31, 2021 | 54,815 |  | $ | 37.64 |  | 54,815 |  | $ | 17,198 |
February 1-28, 2021 | 109,964 |  | 37.35 |  | 109,964 |  | 13,085 |
March 1-31, 2021 | 59,234 |  | 39.32 |  | 59,234 |  | 10,753 |
Total | 224,013 |  | 37.94 |  | 224,013 |  |

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 Merge And Plan Of Reorganization, dated as of April 16, 2021 by and among Bank of Marin Bancorp and American River Bankshares | 8-K | 001-33572 | 2.1 | April 19, 2021 |
3.01 | Articles of Incorporation, as amended | 10-Q | 001-33572 | 3.01 | November 7, 2007 |
3.02 | Bylaws | 10-Q | 001-33572 | 3.02 | May 9, 2011 |
3.02a | Bylaws Amendment | 8-K | 001-33572 | 3.03 | July 6, 2015 |
4.01 | Rights Agreement, dated July 6, 2017 | 8-A12B | 001-33572 | 4.1 | July 7, 2017 |
4.02 | Description of Capital Stock | 10-K | 001-33572 | 4.02 | March 13, 2020 |
10.01 | Employee Stock Ownership Plan | S-8 | 333-218274 | 4.1 | May 26, 2017 |
10.02 | 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 | 2020 Director Stock Plan | S-8 | 333-239555 | 4.1 | June 30, 2020 |
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, revised 2019 | 10-K | 001-33572 | 10.07 | March 15, 2021 |
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 Tani Girton, Chief Financial Officer, dated October 18, 2013 | 8-K | 001-33572 | 10.2 | November 4, 2014 |
10.10 | Salary Continuation Agreement for executive officer Elizabeth Reizman, Chief Credit Officer, dated July 20, 2014 | 8-K | 001-33572 | 10.3 | November 4, 2014 |
10.11 | 2007 Form of Change in Control Agreement | 8-K | 001-33572 | 10.1 | October 31, 2007 |
10.12 | Salary Continuation Agreement for executive officer Timothy Myers, Commercial Banking Manager, dated January 1, 2016 | 10-Q | 001-33572 | 10.12 | November 6, 2020 |
10.13 | Director Deferred Fee Plan, dated December 17, 2020 | 10-K | 001-33572 | 10.13 | March 15, 2021 |
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)
| May 7, 2021 |  | /s/ Russell A. Colombo
| Date |  | Russell A. Colombo
|  |  | President &
|  |  | Chief Executive Officer
|  |  | (Principal Executive Officer)
| May 7, 2021 |  | /s/ Tani Girton
| Date |  | Tani Girton
|  |  | Executive Vice President &
|  |  | Chief Financial Officer
|  |  | (Principal Financial Officer)
| May 7, 2021 |  | /s/ David A. Merck
| Date |  | David A. Merck
|  |  | Vice President &
|  |  | Financial Reporting Manager
|  |  | (Principal Accounting Officer)

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