Bank of Marin Bancorp 10-Q

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 interest rates, California unemployment rate, 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. Page-33 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 previously reported, 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, Summary of Significant Accounting Policies, in the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021. In addition, as a result of the acquisition of American River Bankshares in the third quarter of 2021, we consider the accounting policies and estimates for the following to be critical for this reporting period. Business Combinations Bancorp accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations . ASC 805 requires assets and liabilities in a business combination to be recorded at their fair values as of the date of acquisition. This method often involves estimates based on third party or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. Business acquisition-related costs, including conversion and restructuring charges, are expensed as incurred. For further information, refer to Note 10, Merger, herein, and Note 1, Summary of Significant Accounting Policies; and Item 1A, Risk Factors, in the Consolidated Financial Statements included in our 2020 Form 10-K filed with the SEC on March 15, 2021. Executive Summary Bancorp completed its merger with American River Bankshares ("AMRB") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m. on August 7, 2021 by the Merger of American River Bank ("ARB") with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving. AMRB shareholders received 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 $36.15 on August 6, 2021 (merger date), the transaction was valued at $124.5 million (with 3.4 million of additional shares of Bancorp common stock issued), or $20.80 per share of AMRB common stock, which includes the value of AMRB options paid in cash. For other important factors regarding the AMRB acquisition, please see Note 10, Merger, and the Forward-Looking Statements section of this Form 10-Q. The following are highlights of our operating and financial performance for the periods presented: • Net income for the third quarter of 2021 totaled $5.3 million, compared to $7.5 million in the third quarter of 2020. Diluted earnings per share were $0.35 in the third quarter of 2021, compared to $0.55 in the same quarter a year ago. Net income for the first nine months of 2021 totaled $23.5 million, compared to $22.1 million in the same period a year ago. Diluted earnings per share were $1.69, compared to $1.62 in the first nine months of 2020. Merger-related one-time and conversion costs reduced net income by $3.9 million, net of taxes, or 26 cents per share in the quarter and by $4.1 million, net of taxes, or 30 cents per share year-to-date. See reconciliation of GAAP to non-GAAP financial measures on page 36. • Loan balances of $2.317 billion at September 30, 2021 increased by $228.5 million compared to $2.089 billion at December 31, 2020. The increase was largely due to $419.4 million in loans from the acquisition of ARB on August 6, 2021 and new non-PPP related loan originations totaling $101.7 million. These increases were partially offset by non-PPP loan payoffs totaling $145.3 million, and a $126.8 million decrease in Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans outstanding. Page-34 • Credit quality remains strong, with non-accrual loans representing 0.36% of total loans as of September 30, 2021, compared to 0.44% at December 31, 2020. The ratio of the allowance for credit losses on loans to total loans was 0.97% at September 30, 2021, compared to 1.10% at December 31, 2020. Excluding SBA PPP loans, the ratio of allowance to loans would have been 1.04% and 1.27% at September 30, 2021 and December 31, 2020, respectively (see Results of Operations for a definition of this non-GAAP financial measure). • The allowance for credit losses increased by $3.3 million in the third quarter and was comprised of a $1.8 million provision, mainly related to purchased ARB loans without credit deterioration, and a $1.5 million merger-date allowance established for purchased credit deteriorated loans. There was no provision for credit losses on unfunded loan commitments in the third quarter of 2021. • Total deposits of $3.728 billion at September 30, 2021 increased by $1.224 billion from $2.504 billion at December 31, 2020, mainly due to the ARB acquisition. Non-interest bearing deposits were 49% of total deposits as of September 30, 2021, versus 54% as of December 31, 2020. The decrease in this ratio was primarily due to an increase in interest bearing deposits from existing customers and a lower ratio of non-interest-bearing deposits acquired from ARB. The cost of average deposits for the quarter and nine months ended September 30, 2021 was 0.06% and 0.07%, respectively, compared to 0.09% and 0.13% for the comparable periods in 2020. • ROA and ROE ratios were significantly impacted by provisions for credit losses on acquired loans and shares issued in conjunction with the Merger. A good indicator of the Merger's positive impact on operating earnings is the efficiency ratio, as it neither includes provisions for losses on loans and unfunded commitments, nor is it impacted by changes in share counts. As shown in the reconciliation of GAAP to non-GAAP financial measures on page 36 the efficiency ratio excluding merger-related one-time and conversion costs of 56.02% for the quarter ended September 30, 2021, improved from 56.88% for the quarter a year ago. The comparable year-to-date non-GAAP efficiency ratio for the first nine months of 2021 was 59.09%, compared to 55.45% in 2020, and was not as good an indicator of the positive effects of the acquisition because it was impacted by a significant decline in interest rates. • All capital ratios were above well-capitalized regulatory requirements. The total risk-based capital ratio for Bancorp was 15.0% at September 30, 2021, compared to 16.0% at December 31, 2020. Bancorp's tangible common equity to tangible assets was 9.1% at September 30, 2021, compared to 11.3% at December 31, 2020 (see Results of Operations for a definition of this non-GAAP financial measure). The Bank's total risk-based capital ratio was 14.4% at September 30, 2021, compared to 15.8% at December 31, 2020. • The Board of Directors declared a cash dividend of $0.24 per share on October 22, 2021, which represents the 66th consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on November 12, 2021, to shareholders of record at the close of business on November 5, 2021. • On October 22, 2021, the Board of Directors approved an amendment to the current share repurchase program which increased the total authorization from $25.0 million to $57.0 million. The July 31, 2023 expiration date of the program remained unchanged. • Effective October 31, 2021, Russell A. Colombo retired as Chief Executive Officer of Bank of Marin and Bank of Marin Bancorp and the Board of Directors named Tim Myers, previously President and Chief Operating Officer, as his successor. Mr. Colombo will remain on the Boards of Bancorp and the Bank, and Mr. Myers will join both Boards. 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. 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 will reinforce the long-term success of the bank and position us well for the remainder of 2021. Page-35 Statement Regarding use of Non-GAAP Financial Measures In this Form 10-Q, Bancorp's financial results are presented in accordance with GAAP and refer to certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of Bancorp's core operating results and comparison of operating results across reporting periods. Management also uses non-GAAP financial measures to establish budgets and manage Bancorp's business. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. Reconciliation of GAAP and Non-GAAP Financial Measures (in thousand, unaudited) Three months ended Nine months ended Net income September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Net income (GAAP) $ 5,282 $ 7,491 $ 23,514 $ 22,125 Merger-related one-time and conversion costs: Personnel and severance 2,668 — 2,668 — Professional services 1,778 — 1,979 — Data processing 433 — 433 — Other 263 — 279 — Income tax benefit of merger-related expenses (1,222) — (1,239) — Total merger-related one-time and conversion costs, net of taxes 3,920 — 4,120 — Comparable net income (non-GAAP) $ 9,202 $ 7,491 $ 27,634 $ 22,125 Diluted earnings per share Weighted average diluted shares 14,993 13,610 13,881 13,617 Diluted earnings per share (GAAP) $ 0.35 $ 0.55 $ 1.69 $ 1.62 Comparable diluted earnings per share (non-GAAP) $ 0.61 $ 0.55 $ 1.99 $ 1.62 Return on average assets Average assets $ 3,743,968 $ 3,029,342 $ 3,280,505 $ 2,876,618 Return on average assets (GAAP) 0.56 % 0.98 % 0.96 % 1.03 % Comparable return on average assets (non-GAAP) 0.98 % 0.98 % 1.13 % 1.03 % Return on average equity Average stockholders' equity $ 420,124 $ 356,230 $ 374,445 $ 348,812 Return on average equity (GAAP) 4.99 % 8.37 % 8.40 % 8.47 % Comparable return on average equity (non-GAAP) 8.69 % 8.37 % 9.87 % 8.47 % Efficiency ratio Non-interest expense (GAAP) $ 22,686 $ 14,990 $ 53,654 $ 44,238 Merger-related expenses (5,142) — (5,359) — Non-interest expense (non-GAAP) $ 17,544 $ 14,990 $ 48,295 $ 44,238 Net interest income $ 27,753 $ 24,566 $ 74,318 $ 73,060 Non-interest income $ 3,565 $ 1,790 $ 7,413 $ 6,723 Efficiency ratio (GAAP) 72.44 % 56.88 % 65.65 % 55.45 % Comparable efficiency ratio (non-GAAP) 56.02 % 56.88 % 59.09 % 55.45 % Page-36 RESULTS OF OPERATIONS Highlights of the financial results are presented in the following tables: (dollars in thousands) September 30, 2021 December 31, 2020 Selected financial condition data: Total assets $ 4,261,062 $ 2,911,926 Loans, net 2,294,605 2,065,682 Deposits 3,727,696 2,504,249 Borrowings and other obligations 451 58 Subordinated debenture — 2,777 Stockholders' equity 458,525 358,253 Asset quality ratios: Allowance for credit losses on loans to total loans 0.97 % 1.10 % Allowance for credit losses on loans to total loans, excluding SBA PPP loans 1 1.04 % 1.27 % Allowance for credit losses on loans to non-accrual loans 2.66x 2.48x Non-accrual loans to total loans 0.36 % 0.44 % Capital ratios: Equity to total assets ratio 10.76 % 12.30 % Tangible common equity to tangible assets 2 9.06 % 11.27 % Total capital (to risk-weighted assets) 14.97 % 16.03 % Tier 1 capital (to risk-weighted assets) 14.10 % 14.82 % Tier 1 capital (to average assets) 10.20 % 10.80 % Common equity Tier 1 capital (to risk weighted assets) 14.10 % 14.69 % Three months ended Nine months ended (dollars in thousands, except per share data) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Selected operating data: Net interest income $ 27,753 $ 24,566 $ 74,318 $ 73,060 Provision for (reversal of) credit losses on loans 1,800 1,250 (2,049) 5,450 Provision for (reversal of) credit losses on unfunded loan commitments — 248 (1,202) 610 Non-interest income 3,565 1,790 7,413 6,723 Non-interest expense 22,686 14,990 53,654 44,238 Net income 5,282 7,491 23,514 22,125 Net income per common share: Basic $ 0.35 $ 0.55 $ 1.70 $ 1.64 Diluted $ 0.35 $ 0.55 $ 1.69 $ 1.62 Performance and other financial ratios: Return on average assets 0.56 % 0.98 % 0.96 % 1.03 % Return on average equity 4.99 % 8.37 % 8.40 % 8.47 % Tax-equivalent net interest margin 3 3.15 % 3.44 % 3.23 % 3.61 % Cost of deposits 0.06 % 0.09 % 0.07 % 0.13 % Efficiency ratio 72.44 % 56.88 % 65.65 % 55.45 % Cash dividend payout ratio on common stock 4 68.57 % 41.82 % 41.18 % 42.07 % 1 The allowance for credit losses on loans 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 on loans. SBA PPP loans at September 30, 2021 and December 31, 2020 totaled $164.8 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 $379 million and $324 million at September 30, 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 $79.8 million and $34.0 million at September 30, 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. Page-37 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 September 30, 2021 September 30, 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 $ 456,405 $ 178 0.15 % $ 184,883 $ 50 0.11 % Investment securities 2, 3 845,127 4,249 2.01 % 527,077 3,481 2.64 % Loans 1, 3, 4 2,189,563 24,229 4.33 % 2,117,679 21,957 4.06 % Total interest-earning assets 1 3,491,095 28,656 3.21 % 2,829,639 25,488 3.52 % Cash and non-interest-bearing due from banks 68,680 55,353 Bank premises and equipment, net 6,468 5,412 Interest receivable and other assets, net 177,725 138,938 Total assets $ 3,743,968 $ 3,029,342 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 237,883 $ 41 0.07 % $ 153,089 $ 41 0.11 % Savings accounts 293,434 26 0.03 % 191,915 17 0.04 % Money market accounts 911,294 417 0.18 % 802,585 377 0.19 % Time accounts including CDARS 124,247 44 0.14 % 97,465 133 0.54 % Borrowings and other obligations 1, 6 3,010 8 1.09 % 113 — 2.51 % Subordinated debenture 1, 5 — — — % 2,751 35 4.97 % Total interest-bearing liabilities 1,569,868 536 0.14 % 1,247,918 603 0.19 % Demand accounts 1,707,142 1,380,708 Interest payable and other liabilities 46,834 44,486 Stockholders' equity 420,124 356,230 Total liabilities & stockholders' equity $ 3,743,968 $ 3,029,342 Tax-equivalent net interest income/margin 1 $ 28,120 3.15 % $ 24,885 3.44 % Reported net interest income/margin 1 $ 27,753 3.11 % $ 24,566 3.40 % Tax-equivalent net interest rate spread 3.07 % 3.33 % Page-38 Nine months ended Nine months ended September 30, 2021 September 30, 2020 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (in thousands) Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits with banks 1 $ 273,045 $ 274 0.13 % $ 152,587 $ 421 0.36 % Investment securities 2, 3 683,600 11,196 2.18 % 544,754 11,632 2.85 % Loans 1, 3, 4 2,117,631 66,665 4.15 % 1,998,456 64,423 4.24 % Total interest-earning assets 1 3,074,276 78,135 3.35 % 2,695,797 76,476 3.73 % Cash and non-interest-bearing due from banks 53,020 44,665 Bank premises and equipment, net 5,353 5,631 Interest receivable and other assets, net 147,856 130,525 Total assets $ 3,280,505 $ 2,876,618 Liabilities and Stockholders' Equity Interest-bearing transaction accounts $ 193,502 $ 119 0.08 % $ 144,784 $ 146 0.13 % Savings accounts 245,374 66 0.04 % 179,288 50 0.04 % Money market accounts 784,313 1,015 0.17 % 786,012 1,731 0.29 % Time accounts including CDARS 105,419 221 0.28 % 96,237 436 0.61 % Borrowings and other obligations 1, 6 1,047 8 1.10 % 208 3 2.14 % Subordinated debenture 1, 5 713 1,361 251.54 % 2,733 124 5.96 % Total interest-bearing liabilities 1,330,368 2,790 0.28 % 1,209,262 2,490 0.27 % Demand accounts 1,531,564 1,278,265 Interest payable and other liabilities 44,128 40,279 Stockholders' equity 374,445 348,812 Total liabilities & stockholders' equity $ 3,280,505 $ 2,876,618 Tax-equivalent net interest income/margin 1 $ 75,345 3.23 % $ 73,986 3.61 % Reported net interest income/margin 1 $ 74,318 3.19 % $ 73,060 3.56 % Tax-equivalent net interest rate spread 3.07 % 3.45 % 1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable. 2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly. 3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the Federal statutory rate of 21 percent in 2021 and 2020. 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 2021 interest on subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. 6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from American River Bank that were redeemed on August 25, 2021. 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 nine months ended September 30,2020. Page-39 Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 (in thousands) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total Interest-earning deposits with banks $ 73 $ 22 $ 33 $ 128 $ 332 $ (267) $ (212) $ (147) Investment securities 1 2,101 (831) (502) 768 2,965 (2,710) (691) (436) Loans 1 745 1,477 50 2,272 3,842 (1,279) (321) 2,242 Total interest-earning assets 2,919 668 (419) 3,168 7,139 (4,256) (1,224) 1,659 Interest-bearing transaction accounts 24 (16) (8) — 49 (57) (19) (27) Savings accounts 10 (1) — 9 18 — (2) 16 Money market accounts 51 (11) — 40 (4) (710) (2) (716) Time accounts, including CDARS 37 (98) (28) (89) 42 (238) (19) (215) Borrowings and other obligations 19 — (11) 8 14 (2) (7) 5 Subordinated debenture 2 (35) — — (35) (92) 5,108 (3,779) 1,237 Total interest-bearing liabilities 106 (126) (47) (67) 27 4,101 (3,828) 300 Changes in tax-equivalent net interest income $ 2,813 $ 794 $ (372) $ 3,235 $ 7,112 $ (8,357) $ 2,604 $ 1,359 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%. 2 Nine months ended September 30, 2021 includes $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021. Third Quarter of 2021 Compared to Third Quarter of 2020 Net interest income totaled $27.8 million in the third quarter of 2021, compared to $24.6 million in the same quarter a year ago. The $3.2 million increase was primarily due to the addition of ARB interest earning balances, higher yield on acquired ARB loans, and higher income from SBA PPP loans. Increases were partially offset by lower yields on acquired ARB investment securities balances. The tax-equivalent net interest margin was 3.15% in the third quarter of 2021 compared to 3.44% in the same quarter of last year. The decrease in tax-equivalent net interest margin was primarily attributed to both $271.5 million increase in low yielding due from banks interest-earning balances and the lower interest rate environment. SBA PPP loans added 13 basis points to the third quarter 2021 net interest margin as compared to a 4 basis points reduction to the net interest margin in the third quarter of 2020 due to higher fee income accretion in the third quarter of 2021 as more PPP loans were forgiven and paid off by the SBA. First Nine Months of 2021 Compared to First Nine Months of 2020 Net interest income totaled $74.3 million in the first nine months ended September 30, 2021, compared to $73.1 million in the same period a year ago. The $1.3 million increase was primarily attributed to the addition of ARB interest-earning assets and higher income from SBA PPP loans. Increases were partially offset by $1.3 million in accelerated discount accretion on the early redemption of a subordinated debenture in the first quarter of 2021 and lower yielding interest-earning assets. We recognized $6.6 million in SBA PPP fees, net of cost in the first nine months of 2021, compared to $2.8 million in the first nine months a year ago. As of September 30, 2021 $4.2 million PPP fees, net of deferred costs remain outstanding and will be recognized into income in future periods. The tax-equivalent net interest margin was 3.23% in the first nine months ended June 30, 2021, compared to 3.61% in the same period a year ago. The decrease was primarily attributed to $1.3 million in accelerated discount accretion from the early redemption of a subordinated debenture in the first quarter of 2021, the lower interest rate environment and higher cash balances, partially offset by higher income from PPP loans. SBA PPP loans added 9 basis points to the first nine months' net interest margin as compared to a 3 basis points reduction to net interest margin in the comparable period in 2020. 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"). Page-40 In response to the evolving risks to economic activity posed by the COVID-19 pandemic, the 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 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 on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off. The following table shows the provision for credit losses activity for the periods presented. Three months ended Nine months ended (dollars in thousands) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Provision for (reversal of) credit losses on loans $ 1,800 $ 1,250 $ (2,049) $ 5,450 The $1.8 million provision for the three months ended September 30, 2021 was mainly related to purchased ARB loans without credit deterioration. The net provision reversal for the first nine months in 2021 was primarily due to continued improvements in the forecasted California unemployment rates over the next four quarters, partially offset by the provision in the third quarter. Our allowance model is particularly sensitive to current and forecasted California unemployment rates, which decreased to 6.4% at September 30, 2021 from 9.1% at December 31, 2020. The provision for credit losses in 2020 calculated 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 are not considered adversely classified, increased year-to-date by $16.6 million to $103.4 million at September 30, 2021 from $86.9 million at December 31, 2020. The increase was largely due to the downgrading from pass to special mention several well-secured commercial real estate loans totaling $41.2 million and one borrowing relationship with three commercial loans totaling $5.4 million, also well collateralized. In addition, we upgraded several borrowing relationships from substandard to special mention totaling $13.2 million because of their improved financial condition and assumed $13.7 million in special mention loans in the Merger. These increases were partially offset by $32.7 million in upgrades to pass due to improved financial condition, $18.8 million in paydowns and payoffs and $5.4 million in downgrades to substandard comprised primarily of one well secured commercial real estate loan. Classified assets (loans with risk ratings of substandard or doubtful) totaled $19.0 million at September 30, 2021, compared to $25.8 million at December 31, 2020. The $6.8 million decrease was primarily due to the upgrading of $13.2 million in loans mentioned above and paydowns and payoffs totaling $1.9 million. These decreases were primarily offset by the $5.4 million in downgrades mentioned above and $2.3 million in substandard loans assumed in the Merger. Classified loans also included one $118 thousand loan acquired from ARB with a doubtful risk rating as of September 30, 2021, which is well-secured by real estate collateral. There were no loans considered doubtful at December 31, 2020. The ratio of allowance for credit losses on loans to total loans was 0.97% at September 30, 2021, compared to 1.10% at December 31, 2020. Non-accrual loans totaled $8.4 million, or 0.36% of total loans at September 30, 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. Page-41 Non-interest Income The following table details the components of non-interest income. Three months ended Amount Increase (Decrease Percent Increase (Decrease) (dollars in thousands) September 30, 2021 September 30, 2020 Earnings on bank-owned life insurance, net 1,402 232 1,170 504.3 % Wealth Management and Trust Services $ 597 $ 450 $ 147 32.7 % Debit card interchange fees 483 383 100 26.1 % Service charges on deposit accounts 464 284 180 63.4 % Dividends on Federal Home Loan Bank stock 179 149 30 20.1 % Merchant interchange fees 129 63 66 104.8 % Gains on sale of investment securities, net 1 — 1 NM Other income 310 229 81 35.4 % Total non-interest income $ 3,565 $ 1,790 $ 1,775 99.2 % NM - not meaningful Nine months ended Amount Increase (Decrease Percent Increase (Decrease) (dollars in thousands) September 30, 2021 September 30, 2020 Earnings on bank-owned life insurance, net 1,892 741 1,151 155.3 % Wealth Management and Trust Services $ 1,615 $ 1,375 $ 240 17.5 % Debit card interchange fees 1,268 1,051 217 20.6 % Service charges on deposit accounts 1,062 1,028 34 3.3 % Dividends on Federal Home Loan Bank stock 505 503 2 0.4 % Merchant interchange fees 247 183 64 35.0 % Gains on sale of investment securities, net 1 915 (914) (99.9) % Other income 823 927 (104) (11.2) % Total non-interest income $ 7,413 $ 6,723 $ 690 10.3 % Third Quarter of 2021 Compared to Third Quarter of 2020 Non-interest income increased by $1.8 million in the third quarter of 2021 to $3.6 million, compared to $1.8 million in the same quarter a year ago. The increase was mostly attributed to the collection of $1.1 million in death benefits on bank-owned life insurance ("BOLI") policies and increases in fee income from deposit accounts and debit card interchange activity. First Nine Months of 2021 Compared to First Nine Months of 2020 Non-interest income increased by $0.7 million in the first nine months of 2021 to $7.4 million, from $6.7 million in the first nine months of 2020. The increase was primarily due to BOLI payments noted above, increases in Wealth Management and Trust Services income generated from new accounts and favorable market performance, and fees from deposit accounts and debit card interchange activity. In March 2020, we implemented temporary waivers for all ATM fees, overdraft fees and early withdrawal penalties for time deposits to help ease the financial burden customers began experiencing due to the pandemic. We reinstituted the fees in May 2021. The increase was partially offset by the absence of gains on investment securities, as $915 thousand in gains were recognized in the comparative period a year ago. Page-42 Non-interest Expense The following table details the components of non-interest expense. Three months ended Amount Increase (Decrease) Percent Increase (Decrease) (dollars in thousands) September 30, 2021 September 30, 2020 Salaries and related benefits $ 13,127 $ 8,638 $ 4,489 52.0 % Occupancy and equipment 1,871 1,776 95 5.3 % Professional services 2,472 655 1,817 277.4 % Data processing 1,613 822 791 96.2 % Depreciation and amortization 431 539 (108) (20.0) % Information technology 496 256 240 93.8 % Amortization of core deposit intangible 334 213 121 56.8 % Directors' expense 255 184 71 38.6 % Federal Deposit Insurance Corporation insurance 236 181 55 30.4 % Charitable contributions 4 481 (477) (99.2) % Other non-interest expense Advertising 189 163 26 16.0 % Other expense 1,658 1,082 576 53.2 % Total other non-interest expense 1,847 1,245 602 48.4 % Total non-interest expense $ 22,686 $ 14,990 $ 7,696 51.3 % Nine months ended Amount Increase (Decrease) Percent Increase (Decrease) (dollars in thousands) September 30, 2021 September 30, 2020 Salaries and related benefits $ 31,223 $ 25,979 $ 5,244 20.2 % Occupancy and equipment 5,373 5,100 273 5.4 % Professional services 4,321 1,749 2,572 147.1 % Data processing 3,252 2,437 815 33.4 % Depreciation and amortization 1,279 1,591 (312) (19.6) % Information technology 1,105 758 347 45.8 % Amortization of core deposit intangible 742 639 103 16.1 % Directors' expense 660 533 127 23.8 % Federal Deposit Insurance Corporation insurance 597 299 298 99.7 % Charitable contributions 497 921 (424) (46.0) % Other non-interest expense Advertising 603 572 31 5.4 % Other expense 4,002 3,660 342 9.3 % Total other non-interest expense 4,605 4,232 373 8.8 % Total non-interest expense $ 53,654 $ 44,238 $ 9,416 21.3 % Third Quarter of 2021 Compared to Third Quarter of 2020 Non-interest expense increased by $7.7 million to $22.7 million in the third quarter of 2021, compared to $15.0 million in the same period a year ago. The increase was primarily due to a $5.1 million increase in merger-related one-time and conversion costs (mostly related to professional services, data processing contract termination, and personnel costs), salaries and benefits for retained ARB employees and other ARB-related operating expenses incurred since the merger date. The increase was partially offset by a $477 thousand decrease in charitable contributions as the bank has transitioned to a more defined contributions disbursement schedule with funding occurring in the second and fourth quarters, and large pandemic-related contributions in 2020. First Nine Months of 2021 Compared to First Nine Months of 2020 Non-interest expense increased by $9.4 million to $53.7 million in the first nine months of 2021, compared to $44.2 million in the first nine months of 2020. Higher salaries and related benefits of $5.2 million included $2.7 million in personnel costs related to the Merger. The increase in salaries and benefits was also attributed to fewer deferred Page-43 SBA PPP loan origination costs. Professional services increased by $2.6 million and data processing expenses increased by $815 thousand, mainly due to merger-related expenses. In addition, FDIC deposit insurance expenses were $298 thousand higher. Charitable contributions were lower than 2020 for the reasons mentioned above. 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 third quarter of 2021 totaled $1.6 million at an effective tax rate of 22.7%, compared to $2.4 million at an effective tax rate of 24.1% in the same quarter last year. The provision for income taxes for the first nine months of 2021 totaled $7.8 million at an effective tax rate of 24.9%, compared to $7.4 million at an effective tax rate of 25.0% for the first nine months of 2020. The decrease in the provision reflected lower pre-tax income for the third quarter of 2021 compared to the same quarter a year ago. The 140 basis point decrease in the effective tax rate in the third quarter of 2021 as compared to the same quarter a year ago was primarily due to higher BOLI and tax exempt loan and investment securities interest income from the ARB acquisition, partially offset by the non-deductible merger expenses incurred in the third quarter of 2021. We file a consolidated return in the U.S. Federal tax jurisdiction and a combined return in the State of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the issuance of this report. At September 30, 2021, neither the Bank nor Bancorp had accruals for interest nor penalties related to unrecognized tax benefits. FINANCIAL CONDITION SUMMARY At September 30, 2021, assets totaled $4.261 billion, an increase of $1.349 billion, from $2.912 billion at December 31, 2020, mainly due to the acquisition of ARB in August 2021, which added approximately $898.4 million in assets, as well as increases in deposit inflows as discussed below. For additional information on the merger, refer to Note 10, Merger, in this Form 10-Q. Cash, Cash Equivalents and Restricted Cash Total cash, cash equivalents and restricted cash were $584.7 million at September 30, 2021, compared to $200.3 million at December 31, 2020. The increase was mainly due to the acquisition of ARB, SBA PPP loan forgiveness and an increase in deposits. Cash and cash equivalents do not include $179.9 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 September 30, 2021 and December 31, 2020, respectively. Investment Securities The investment securities portfolio totaled $1.160 billion at September 30, 2021, an increase of $658.4 million from December 31, 2020. The increase was primarily due to purchases of $508.6 million to deploy excess cash into interest earning assets in a more favorable interest rate environment in 2021, and securities of $297.8 million acquired from ARB, partially offset by paydowns, calls and maturities of $132.5 million. Additionally, the fair value of available-for-sale securities decreased $8.6 million as a result of the higher interest rate environment in the first nine months of 2021. Security sales in the first nine months of 2021 totaled $4.1 million. See Note 4, Investment Securities, for additional information. The following table summarizes our investment in obligations of state and political subdivisions at September 30, 2021 and December 31, 2020. Page-44 September 30, 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 $ 14,975 $ 15,180 9.7 % $ 3,327 $ 3,565 3.1 % Revenue bonds 5,478 5,526 3.6 2,352 2,448 2.2 Tax allocation bonds 1,614 1,624 1.0 2,832 2,876 2.7 Total within California 22,067 22,330 14.3 8,511 8,889 8.0 Outside California: General obligation bonds 109,463 113,444 70.9 78,299 82,100 73.5 Revenue bonds 22,867 23,962 14.8 19,744 21,351 18.5 Total outside California 132,330 137,406 85.7 98,043 103,451 92.0 Total obligations of state and political subdivisions $ 154,397 $ 159,736 100.0 % $ 106,554 $ 112,340 100.0 % The portion of the portfolio outside the state of California is distributed among fourteen states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside of California are in Texas (39.7%), Washington (18.8%) and Maryland (4.4%). 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 health care that are most vulnerable to credit risks posed by the COVID-19 pandemic. Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include: • The soundness of a municipality’s budgetary position and stability of its tax revenues • Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer • Local demographics/economics including unemployment data, largest taxpayers and local employers, income indices and home values • For revenue bonds, the source and strength of revenue for municipal authorities including the obligor’s financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurer’s strength and collateral in escrow accounts) • Credit ratings by major credit rating agencies Loans During the first nine months of 2021, loans increased by $228.5 million and totaled $2.317 billion at September 30, 2021, primarily due to $419.4 million in loans from the acquisition of ARB on August 6,2021. New non-PPP related loan originations totaled $101.7 million in the first nine months of 2021. Non-PPP loan payoffs totaled $145.3 million during the first nine months of 2021. Loan payoffs in the third quarter of 2021 consisted largely of commercial borrower cash paydowns as part of ongoing deleveraging, real estate asset sales and third-party refinancing. A significant portion of the commercial third-party refinancing was attributable to price or structural elements outside the bank's desired credit profile. As of September 30, 2021, there were 871 PPP loans outstanding totaling $164.8 million (net of $4.2 million in unrecognized fees and costs), including 31 loans totaling $9.6 million acquired from ARB. Of the 2,876 PPP loans totaling $444.1 million funded by Bank of Marin, 2,036 loans for $284.7 million have been forgiven and paid off. Of the remaining PPP loans, 580 loans or $25.5 million are less than or equal to $150 thousand and have access to streamlined forgiveness. As of September 30, 2021, 2 borrowing relationships with 5 loans totaling $23.6 million were continuing to benefit from payment relief. We monitor the financial situation of these clients closely and expect the majority to resume payments as the economy continues to recover. Page-45 Liabilities During the first nine months of 2021, total liabilities increased by $1.248 billion to $3.803 billion. Deposits increased $1.223 billion in the first nine months of 2021, primarily driven by the acquisition of ARB and normal fluctuations in some of our larger commercial accounts. Non-interest bearing deposits increased $482.9 million in the first nine months of 2021 to $1.838 billion, and represented 49.3% of total deposits at September 30, 2021, compared to 54.1% at December 31, 2020. The decrease in this ratio was primarily due to an increase in interest-bearing deposits for a large existing customer and a lower ratio of non-interest bearing deposits from the ARB acquisition. The cost of average deposits was 0.06% in the third quarter and 0.07% in the first nine months of 2021, respectively, a decrease of 2 basis points and 6 basis points from the equivalent periods a year ago. 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 September 30, 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 September 30, 2021 and December 31, 2020 are presented in the following tables. The decrease in capital ratios as of September 30, 2021 from December 31, 2020 was largely attributable to shares repurchased totaling $35.2 million during the first nine months of 2021. Tier 1 Capital to average assets was also reduced by an increase in cash driven by deposit growth over and above that attributable to the Merger. In addition, 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 due to NorCal Community Bancorp Trust II. Partially offsetting those factors, the Merger served to increase capital ratios as the proportion of risk-weighted assets to total assets was lower for ARB, and the full effect of the Merger will not reflect in average assets until the fourth quarter. Page-46 Capital Ratios for Bancorp (dollars in thousands) Actual Ratio Adequately Capitalized Threshold Ratio to be a Well Capitalized Bank Holding Company September 30, 2021 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 395,223 14.97 % ≥ $ 277,278 ≥ 10.50 % ≥ $ 264,074 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 372,293 14.10 % ≥ $ 224,463 ≥ 8.50 % ≥ $ 211,259 ≥ 8.00 % Tier 1 Capital (to average assets) $ 372,293 10.20 % ≥ $ 145,976 ≥ 4.00 % ≥ $ 182,470 ≥ 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 372,293 14.10 % ≥ $ 184,852 ≥ 7.00 % ≥ $ 171,648 ≥ 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 September 30, 2021 Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets) $ 378,753 14.35 % ≥ $ 277,156 ≥ 10.50 % ≥ $ 263,958 ≥ 10.00 % Tier 1 Capital (to risk-weighted assets) $ 355,823 13.48 % ≥ $ 224,364 ≥ 8.50 % ≥ $ 211,166 ≥ 8.00 % Tier 1 Capital (to average assets) $ 355,823 9.75 % ≥ $ 145,959 ≥ 4.00 % ≥ $ 182,449 ≥ 5.00 % Common Equity Tier 1 (to risk-weighted assets) $ 355,823 13.48 % ≥ $ 184,770 ≥ 7.00 % ≥ $ 171,572 ≥ 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. 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. Page-47 The most significant source of liquidity during 2021 was an increase in deposits of $433.4 million. The increase was primarily due to SBA PPP loan forgiveness and other increases in customer deposits. Proceeds from loans collected net of loan originations was $193.3 million. Proceeds from principal paydowns and maturities of securities totaled $136.6 million, and $32.3 million in net cash was provided by operating activities. Significant uses of liquidity during 2021 were $488.6 million in investment securities purchased, $35.5 million in common stock repurchases, $9.2 million in cash dividends paid on common stock to our shareholders, and $4.1 million in repayment of a subordinated debenture. 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 $602.6 million at September 30, 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, $99.0 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 $16.2 million of cash at September 30, 2021, which is sufficient to cover Bancorp's operational needs and cash dividends to shareholders through 2022. 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.